If your client requests a credit check on a candidate for a professional contract assignment, you should do it, right? Not necessarily. You could actually be breaking the law if you comply with this simple client request!

Nine states (California, Connecticut, Hawaii, Illinois, Maryland, Oregon, Vermont, Washington, and Colorado) have laws restricting the use of credit information in employment decisions. Colorado is the latest to pass legislation, which goes into effect on July 1, according to Littler.

In general, these state laws restrict what types of positions can be subject to a credit check (usually those in financial, executive, or law enforcement roles) and how that information can be used once obtained.  It is important that you read and understand the specific requirements in any state in which you place contractors. If you run your own back-office, you are responsible for complying with these laws as the W-2 employer of your contractors. If you outsource your back-office, you should make sure your contract staffing back-office provider is aware of the laws and is in compliance.

Even if the states in which you place don't currently have laws restricting credit checks, that doesn't mean they won't in the future.  The recession damaged the credit scores of many Americans, and the concern is that credit checks could keep them from finding jobs to help them dig out of their financial problems.  Several states, including New Jersey, New York, and Pennsylvania, are considering legislation limiting the use of credit checks, according to Littler. The Equal Employment Opportunity Commission (EEOC) has also been investigating employers' use of credit checks and is expected to issue updated guidance on the issue.

And remember, no matter where you are placing contractors, you must comply with the federal Fair Credit Reporting Act (FCRA) when conducting credit checks. Credit checks are subject to the FCRA because the information for those checks comes from consumer reports. The FCRA requires that:

• The candidate sign a written authorization allowing their credit to be checked. The candidate must also be provided with a notification stating that a consumer report will be used. The notice and authorization can be electronic.  
• A pre-adverse action disclosure is provided to the candidate if you plan to rescind a job offer due to the findings of a credit check.  If the candidate doesn't take steps to correct inaccurate information in a reasonable amount of time (usually seven days), you can then withdraw the job offer.
• An adverse action notice be provided to the candidate once the offer has been rescinded. The notice must include the name and contact information of the vendor that provided the report, a statement that the reporting agency did not make the decision for adverse action, and a notice of the individual’s right to dispute the information from the background check. 

It is also best practice to wait until a job offer has been extended before you conduct a credit check. Additionally, the Society for Human Resource Management (SHRM) recommends that credit checks are only conducted if they are job related.  This is to protect against possible discrimination claims. So while you may not be in a state that limits credit checks, you may want to institute a policy that you will only check the credit of potential workers in certain types of positions.

The bottom line: proceed with caution when it comes to credit checks. Make sure you are following all state and federal laws and that you are not at risk for discrimination claims. Remember, if you are running your own back-office for contractors, you will be the one held liable in an employment lawsuit.

This article is for informational purposes only and should not be construed as legal advice.

Debbie Fledderjohann is the President of Top Echelon Contracting, Inc.