The more you know about a potential new employee, the better equipped you will be to make the right hiring decision. Pre-employment background checks have become quite common, made easier by the Internet, but checking a prospective employee's credit information could present legal problems if done improperly or in a state that bars the practice.

Both federal and state laws dictate how and when an employer may inquire about a job applicant's credit information. The following overview covers the basics of these laws and practical tips for employers. See FindLaw's The Hiring Process section for more articles about pre-employment testing and related information.

Pre-Employment Credit Checks: Federal Law

The Fair Credit Reporting Act (FCRA) establishes federal standards for employers, but they only apply to credit information inquiries conducted by third-party consumer reporting agencies. While employers that perform credit checks in-house are exempt from the FCRA, such credit information is difficult to procure without the help of consumer reporting agencies (such as Experian, TransUnion, and Equifax).

Federal requirements under the FCRA provide the following protections to prospective employees:

1. Employers must certify their compliance with FCRA requirements, including the assurance that the report will not violate state or federal equal opportunity laws, before a consumer reporting agency may furnish a credit report.
2. Employers must obtain a "clear and conspicuous" disclosure from the applicant or employee, which may not be part of another document (to avoid being hidden or overlooked), before a consumer reporting agency may furnish a credit report.
3. Applicants or employees must give prior written authorization to an employer before a consumer report is procured.
4. Employers must provide the applicant or employee a copy of the credit report and a written description of his or her rights under the FCRA before any adverse action is taken (such as not hiring an individual as a result of the credit check).

Additionally, consumer reporting agencies may not include the following in a credit report:

• Bankruptcies after 10 years
• Civil lawsuits, judgments, and arrest records after seven years (from date of entry)
• Tax liens (if paid) after seven years
• Accounts targeted for collection after seven years
• Any additional negative information after seven years (except criminal convictions)

For more information, see "Using Consumer Reports: What Employers Need to Know," provided by the Bureau of Consumer Protection's Business Center.

Credit Checks and the EEOC

The Equal Employment Opportunity Commission (EEOC) has filed lawsuits against employers that conduct pre-employment credit checks alleged by the agency to have a disparate impact on protected classes. For example, the EEOC sued Kaplan Higher Education for the use of credit checks that excluded a disproportionate number of African-Americans. Attorneys typically advise their business clients to only use credit checks where there is a "business necessity," such as certain positions involving financial management.

While there is no federal law banning the use of pre-employment credit checks, the EEOC released the following guidance on the matter:

Inquiry into an applicant's current or past assets, liabilities, or credit rating, including bankruptcy or garnishment, refusal or cancellation of bonding, car ownership, rental or ownership of a house, length of residence at an address, charge accounts, furniture ownership, or bank accounts generally should be avoided because they tend to impact more adversely on minorities and females. Exceptions exist if the employer can show that such information is essential to the particular job in question.

Pre-Employment Credit Checks: State Laws

A handful of states (including Hawaii, Illinois, Oregon, and Washington) have passed laws limiting employers' ability to conduct pre-employment credit checks, with more states sure to follow.

Below are summaries of select state laws limiting the use of pre-employment credit checks:

• Washington: Employers may only use a credit report in a hiring decision if such credit information is "substantially related" to the job or required by law and must provide applicant or employee its reasons for the credit check in writing.
• Illinois: Credit checks on applicants and employees are allowed in limited circumstances, including positions involving unsupervised access to more than $2,500; access to financial information; or signatory power over business assets greater than $100.

Since this is a rapidly developing area of law, and states differ in their approach to credit check laws, you should consult with a local employment attorney before you check the credit information of applicants or employees.