New Maryland Law Restricts Use of Credit Checks

By David M. Stevens

During its 2011 legislative session, the Maryland Legislature passed the Job Applicant Fairness Act, which was signed into law by Governor Martin O’Malley on April 12. The law imposes significant restrictions on employers’ ability to perform credit checks on job applicants and employees. It goes into effect October 1.

For many employers, obtaining a credit report on prospective employees has become a routine part of the hiring process. However, the new law will require Maryland employers to reevaluate and in some cases limit use of credit reports.

The Act creates a general rule prohibiting employers from obtaining or using credit reports to deny employment to an applicant, terminate an employee, or set the terms or conditions of an individual’s employment. It also provides exceptions to the general rule allowing the continued use of credit checks for employment in certain positions.

The first major exception is a complete exemption for financial institutions (and their affiliates and subsidiaries) that accept deposits insured by the federal government. Similar total exemptions apply to credit unions, certain investment advisers, and entities required by state or federal law to obtain credit reports as part of mandated background checks for their employees.

For all other Maryland employers, the Act bans the use of credit reports in employment decisions unless the employer has a bona fide job-related reason for doing so. Even then, the reason must be disclosed in writing to the employee.

The “job-related” requirement is in many ways the central focus of the Act. In defining what constitutes a job-related basis for obtaining a credit check, the Maryland Legislature determined what could be a valid reason for seeking information about an applicant’s credit history and prohibited the use of credit reports in employment decisions in all other circumstances.

The Act provides that a job-related reason for obtaining a credit report exists when the position for which an applicant has applied meets one of five criteria:

1. The position is at the managerial level and involves setting the direction of the business or a department or unit within a larger business.
2. The position involves access to certain personal information (e.g., social security numbers or financial account numbers) of customers or employees. However, the personal information must be more detailed than what is customarily provided in a retail transaction.
3. The position involves a fiduciary responsibility to the employer, including the authority to make payments, transfer money, or enter into contracts.
4. The position requires that the employee hired will be provided with an expense account or a corporate debit or credit card.
5. The position involves access to the employer’s trade secrets or other confidential business information.

The Act also contains a provision explicitly stating that it is not to be construed as prohibiting employers from obtaining consumer reports or investigative consumer reports during the hiring process. However, the reports cannot contain credit information. The use of credit reports, of course, remains subject to the terms and restrictions of the federal Fair Credit Reporting Act.

The Act creates a procedure by which applicants or employees who believe that a violation has occurred may file a complaint with the Maryland Department of Labor, Licensing and Regulation (DLLR). The DLLR is authorized to conduct investigations into alleged violations and may assess a civil penalty of up to $500 for an initial violation of the Act, with a $2,500 maximum penalty for repeat violations. The Act does not, however, create a statutory right of action for individuals to file a lawsuit based on a violation of the Act.

Keep up with the latest developments in employment laws and regulations affecting Maryland with the Maryland Employment Law Letter, one of the 50 State Employment Law Letters.