If an employer checks credit reports when hiring employees, it must follow the legal rules set out in the federal Fair Credit Reporting Act (FCRA). The FCRA requires employers to:

• get the applicant’s consent before pulling the report
• give the applicant a warning (along with a copy of the report received) if the employer plans to reject the applicant on the basis of the report, and
• give the applicant an official adverse action notice if the employer does not hire him or her because of the contents of the report.

This article explains each of these requirements. But, before you check any applicant’s credit, you need to make sure that your state allows you to do so. Read on to learn more. (Employers can learn more about keeping all their legal bases covered during the hiring process in Nolo’s Hiring Employees section.)

State Law Restrictions

The economic downturn of the last few years — and the resulting damage to credit reports and scores — have led many politicians to reconsider whether it’s really appropriate for employers to use credit reports in making hiring decisions. At least seven states (California, Connecticut, Hawaii, Illinois, Maryland, Oregon, and Washington) have passed laws prohibiting employers from pulling credit reports or limiting how employers may use them to make hiring or other job decisions. According to the National Conference of State Legislatures (NCSL), more than 20 states are currently considering similar legislation. To find out whether your state is among them, go to the NCSL’s detailed chart on www.ncsl.org.

If your state prohibits you from checking applicants’ credit reports or using their credit histories in your hiring decisions, you can’t do it. Even though the federal FCRA allows employers to consider credit reports, state laws that are more protective of employee rights trump the federal law.

Following the FCRA

If your state allows you to consider an applicant’s credit report in the hiring process, and you plan to do so, you must abide by the FCRA by getting the applicant’s consent, warning the applicant if you plan to reject him or her based on the report, and giving the applicant a final notice if you ultimately follow through with those plans.

The purpose of these rules is to ensure the accuracy of credit reports by letting consumers know when these reports are checked, whether the reports include disqualifying information, and how consumers can challenge incorrect entries. Investigations by public interest groups reveal that one-quarter to one-third of all credit reports include significant errors. Given these numbers — and how often credit reports are consulted by lenders, employers, and landlords — it makes sense that the law builds in a few consumer protections.

Get Written Consent

Before you request an applicant’s credit report, you must notify the applicant that you plan to do so and get the applicant’s written authorization. This notice and authorization must be set forth in a separate document that doesn’t include other information. In other words, it can’t be a section of your employment application.

Send a Pre-Adverse Action Disclosure

Once you get the report, you may decide not to hire the applicant based on something in the report. In this situation, you must first send the applicant a notice stating that you plan to take this “adverse action” (deciding not to hire him or her). With your notice, you must include two documents: (1) a copy of the credit report, and (2) a copy of a notice from the Federal Trade Commission entitled “A Summary of Your Rights Under the Fair Credit Reporting Act,” which tells the applicant how to challenge any incorrect information in the report, among other things.

(The credit reporting agency that sent you the report should also give you a copy of the FTC’s Summary of Rights; if it doesn’t, you can find a copy at the FTC’s website.)

Send an Adverse Action Notice

Once you have made a final decision not to hire the applicant based on information contained in the credit report, you must send the applicant another document called an “adverse action notice.” This notice explains that you are not hiring the applicant and provides some information on the applicant’s rights, including the right to dispute the accuracy of the report and the right to obtain an additional copy.