Changes to New York City Law on Credit and Criminal Background Checks

August 10, 2015

There are several significant pending changes to New York City law concerning the use of background checks that will affect how employers conduct their hiring process. Mayor Bill de Blasio has signed two bills into law that go into effect in the coming months. The first is a ban on credit checks of most job applicants. The second is “ban the box” legislation that restricts an employer’s ability to inquire into an applicant’s criminal history until after a conditional offer of employment is made unless otherwise required by law. Both laws are amendments to the New York City Human Rights Law which applies to both public and private employers in New York City with four (4) or more employees.

New York City to Limit Use of Credit History in Employment Decisions

On May 6, 2015, Mayor de Blasio signed the credit check amendment into law limiting the use of credit checks in employment decisions by designating certain uses of credit history in hiring, compensation and other employment decisions an unlawful discriminatory practice. The credit check amendment takes effect on September 3, 2015. New York City joins a growing number of states and municipalities that have enacted and are poised to enact similar legislation to address concerns that credit history is not an appropriate indicator for measuring job performance, and that continued use of credit history adversely affects certain groups.

About the Credit Check Amendment

Under the new amendment, it is an unlawful discriminatory practice for an employer to require or use for hiring or other employment purposes the “consumer credit history” of an employee or applicant. The amendment defines “consumer credit history” as:

an individual’s credit worthiness, credit standing, credit capacity, or payment history, as indicated by: (a) a consumer credit report; (b) credit score; or (c) information an employer obtains directly from the individual regarding (1) details about credit accounts, including the individual’s number of credit accounts, late or missed payments, charged-off debts, items in collections, credit limit, prior credit report inquiries, or (2) bankruptcies, judgments or liens.

However, employers are permitted to request and use consumer credit history in certain situations. For example, the amendment does not apply to an employer that is required by state or federal law or regulations or by a self-regulatory organization as defined in section 3(a)(26) of the Securities Exchange Act of 1934 to use a consumer’s credit history for employment purposes. This exception is particularly notable as, effective as of July 1, 2015, FINRA now requires all broker-dealers to conduct background checks on applicants for FINRA registration and verify the information on applicants’ Form U-4. Employees obligated by §12-110 of the New York City Administrative Code or by Mayoral Executive Order to disclose information to the Conflicts of Interests Board regarding creditors or debtors are also not covered by the amendment.

The amendment does not apply to persons applying for or employed in positions:

  • as police officers or peace officers, or in a position with a law enforcement or investigative function at the NYC department of investigation;
  • that are subject to a background investigation by the NYC department of investigation, provided the appointing agency may not use the consumer credit history for employment purposes unless the position is an appointed position in which a high degree of public trust has been reposed;
  • that are required to be bonded under city, state or federal law;
  • in which an employee is required to possess security clearance under federal law or the law of any state;
  • that are non-clerical having regular access to “trade secrets” (as defined in the amendment), intelligence information or national security;
  • (i) having signing authority over third party funds or assets valued at $10,000 or more or (ii) that involve a fiduciary responsibility to the employer with authority to enter financial agreements on behalf of employer valued at $10,000 or more; or
  • with regular duties that allow the employee to modify digital security systems established to prevent the unauthorized use of the employer’s or client’s networks or databases.

For purposes of the credit check amendment, “trade secrets” are defined as:

Information that (a) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use; (b) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy; and (c) can reasonably be said to be the end product of significant innovation.

The amendment also expressly states that trade secrets do not include handbooks and policies, and having “regular access to trade secrets” does not include access to or the use of client, customer or mailing lists.

Enforcement and Remedies

The amendment does not have a separate enforcement mechanism. Individuals with potential claims under this new amendment have the same rights and remedies as any other individual claiming discrimination under the New York City Human Rights Law. Discrimination complaints may be filed with the New York City Commission on Human Rights within one year, or directly in court within three years. Available remedies include back pay, reinstatement, compensatory and punitive damages, and attorneys’ fees and costs.

New York City to “Ban the Box” on Criminal History Inquiries

On June 29, 2015, Mayor de Blasio signed the amendment that restricts employers from inquiring into or considering an applicant’s or employee’s criminal history in employment decisions. Specifically, the NYC Fair Chance Act amends the New York City Human Rights Law, to prohibit employers from asking applicants about criminal history at any time prior to extending a conditional offer of employment, including on an initial employment application (i.e., “banning the box”), unless otherwise required by law. This amendment goes into effect on October 27, 2015.

“Ban the Box” Details

The NYC Fair Chance Act expands existing legislation which previously applied only to city agencies and human services contractors. The NYC Fair Chance Act applies to both public and private employers and prohibits employers from asking an applicant about his criminal history on an application or in an interview, and from conducting a criminal history search of public records or consumer reports, prior to a conditional offer of employment.

Once an employer extends a conditional offer of employment, the employer may conduct a criminal history inquiry. However, if an employer discovers information on the criminal background check and wishes to retract the offer or take other adverse employment action, the employer must follow a specific notification and disclosure procedure. First, the employer must undertake a multi-factor analysis to determine whether the criminal history at issue bears a direct relationship to the job being sought or whether hiring the applicant would create unreasonable safety risks. This analysis is the same as that required under New York State Correction Law Article 23-A, which prohibits employment discrimination on the basis of criminal convictions. Second, the employer must provide a copy of the relevant criminal background check to the applicant as well as the Article 23-A analysis, including the reasons for the employer’s decision and any supporting documentation. Finally, the employer must allow the applicant three (3) business days to review and respond to the materials, during which time the employer must hold open the position.

Exceptions and Enforcement

There are certain exceptions to the NYC Fair Chance Act. For example, the Act does not apply where employers are required to conduct criminal background checks by local, state or federal law, or where the law prohibits employers from offering employment to applicants with criminal histories. This includes any rules or regulations of self-regulatory organizations promulgated pursuant to the Securities Exchange Act of 1934, Section 3(a)(26).

The New York City Commission on Human Rights has the power to enforce the amendment against private employers through an administrative procedure.

What Employers Need to Know and Do

Employers first need to review their application materials and interview procedures to ensure they are not inquiring in any way about an applicant’s criminal history. Further, employers must ensure that no criminal background checks are requested until after the applicant has been extended a conditional offer of employment. Before an employer revokes a job offer on the basis of the criminal background check, the employer must undergo the required multi-factor analysis and be prepared to provide the required materials, including its reasons for revoking the offer, to a candidate.

What These Amendments Mean for New York City Employers

To the extent employers in New York City require successful completion of background checks as a condition of employment, they should review their policies and procedures in respect of such checks to ensure they do not run afoul of these amendments. Further, they should ensure they are not requesting background and criminal history checks too early in the hiring process.

As an initial matter, background checks are broader than credit checks, and employers should keep in mind that even if they can no longer seek and use employee consumer credit history under the credit check amendment, the information generated by a background check may otherwise be valuable and/or required in an employment decision-making context. Employers can also consider the applicability of the exceptions under the amendment, although the interpretation of these exceptions has not yet been developed.

Lastly, employers should make sure that any checks and reports are generated in accordance with not only these amendments, but the Fair Credit Reporting Act, as well as applicable federal and state notice and consent requirements. To the extent employers use background checks (including credit checks to the extent allowed under the credit check amendment), such employers should take care to use such reports carefully and consistent with Article 23-A of the New York Corrections Law and the guidance issued by, among others, the Equal Employment Opportunity Commission.

If you have any questions or concerns about this alert, please contact Anne C. Patin (212-574-1516), or Julia C. Spivack (212-574-1373) at Seward & Kissel.