United States: New Legislation Limits NYC Employers' Use Of Credit And Criminal History

The New York City Council recently passed two pieces of legislation that will change the way many employers conduct and use background checks with respect to applicants and employees. First, the City Council approved a bill amending the New York City Human Rights Law, NYC Administrative Code, § 8-101 et seq. ("NYCHRL") to prohibit most employers from making employment decisions based on an applicant's or employee's consumer credit history. The law went into effect on September 3, 2015. Second, the Council passed a bill to amend the NYCHRL to further limit employers from inquiring into or considering an applicant's or employee's criminal history in employment decisions. This law went into effect on October 27, 2015.

Credit History Discrimination Ban

On April 16, 2015, the NYC Council passed the "Stop Credit Discrimination in Employment Act" by a vote of 47-3, and on May 6, 2015, the Mayor signed that bill into law. The law adds a new provision to the NYCHRL making it an "unlawful discriminatory practice" for employers to request or use for employment purposes the consumer credit history of an applicant or employee, except in limited circumstances, such as:

• When required by state or federal law or regulations;
• When required by a self-regulatory organization as defined by the Securities Exchange Act of 1934. The term "self-regulatory organization" means any national securities exchange, registered securities association, or registered clearing agency, such as FINRA. Broker-dealer firms subject to FINRA's regulatory authority may request certain credit check information from registered job applicants under FINRA Rule 3110(e), which became effective on July 1, 2015. That rule requires FINRA members to verify information provided on the applicant's Form U-4, such as disclosures about bankruptcies and outstanding judgments or liens;
• For employment as a police officer or certain positions with the New York City Department of Investigation;
• For positions in which an employee is required to be bonded under city, state or federal law;
• For positions in which an employee is required to possess security clearance under federal or state law;
• For nonclerical positions having regular access to "trade secrets" (which is defined under the law and specifically excludes client, customer or mailing lists);
• For positions that have signing authority over third-party funds or assets of $10,000 or more or that involve fiduciary responsibility to the employer with authority to enter financial agreements on behalf of the employer for amounts of $10,000 or more; or
• For computer security positions where the regular duties allow the employee to modify digital security systems established to prevent the unauthorized use of an employer's or client's networks or databases.

In addition, employers may request or receive consumer credit history information pursuant to subpoena, court order or law enforcement investigation.

On September 1, 2015, the New York City Commission on Human Rights ("NYC Commission"), the city agency charged with enforcing the law, published on its website Legal Enforcement Guidelines concerning the new law. In addition, the NYC Commission published separate fact sheets for employees and employers, aimed at providing basic information about the law. The Guidelines confirm that the NYC Commission views credit checks as "rarely relevant to employment positions." Importantly, the Guidelines state that "all exemptions to coverage under the [law's] anti-discrimination provisions are to be construed narrowly" and that employers who claim an exemption as a defense to liability have the burden of proving the exemption by a preponderance of the evidence.

The NYC Commission further recommends (but does not require) that employers wishing to avail themselves of an exemption inform the applicant or employee of the claimed exemption and keep a log of all exemptions utilized for five years from the date the exemption is used. The log should include details regarding (i) the exemption claimed; (ii) why the exemption is applicable; (iii) the name and contact information for all individuals considered for the exempted position; (iv) the job duties of the position; (v) the qualifications necessary to perform the position; (vi) a copy of credit history obtained for the individual for whom the exemption was claimed; (vii) how the credit history was obtained; and (viii) how the credit history resulted in the employment action taken. Employers are required to provide the above information to the Commission upon request.

Finally, the Guidelines remind employers that there are substantial penalties for violations of the law (up to $250,000 for willful, wanton, or malicious violations, and up to $125,000 for other violations) in addition to other remedies available under the NYCHRL.

"Ban the Box" Legislation

On June 10, 2015, by a 45-5 vote, the New York City Council passed a bill called the "Fair Chance Act," which puts significant restrictions on employers' ability to request or use criminal history in hiring and other personnel decisions. Mayor de Blasio signed the bill into law on June 29, 2015 and it went into effect on October 27, 2015.

Even before the Fair Chance Act was enacted, under New York State and City law, employers could not ask about or take adverse action based upon any arrest or criminal accusation of an employee or candidate not then pending against that person which was followed by a termination of that criminal action or proceeding in favor of such person — that is, an accusation or arrest that resulted in acquittal or dismissal of charges may not be the subject of an inquiry or the basis for taking an adverse action. In addition, before denying employment based on an individual's conviction record, the law requires employers to consider multiple factors, listed in Article 23-A of the New York State Correction Law, to determine whether (a) there is a direct relationship between the criminal offense and the employment sought or held by the individual, or (b) employing the individual would involve an "unreasonable risk to property or to the safety or welfare of specific individuals or the general public."

The Fair Chance Act prohibits employers from asking about criminal history at any time prior to extending a conditional offer of employment, such as in an initial employment application or interview or otherwise (referenced commonly as a "ban the box" provision). In addition, the law bars employers from stating on any job advertisement or publication that employment is dependent on an applicant's arrest or conviction history. Before taking any adverse action on the basis of criminal history, the law requires employers to:

• Provide a written copy of the criminal history inquiry to the applicant;
• Provide an Article 23-A analysis to the applicant in writing, which must include "supporting documents" that formed the basis of and reasons for the adverse action; and
• After providing the applicant with all of the required documentation, allow the individual at least three business days to respond and, during that time, hold the position open for the applicant.

The NYC Commission has prepared a Fair Chance Notice, available on its website, that employers may use to comply with the requirement. The Commission has stated that the form may be adapted to an employer's preferred format, as long as the material substance does not change.

Finally, the law does not apply to any actions taken by an employer pursuant to any federal, state, or local law requiring criminal background checks for employment purposes or barring employment based on criminal history. For this purpose, "federal law" includes the rules or regulations of a self-regulatory organization as defined by the Securities Exchange Act of 1934 (such as FINRA). Employers in the financial services industry, to the extent they must assess whether employees are subject to statutory disqualification due to certain criminal convictions, will be exempt from the requirements of the law. Further, to the extent employers must comply with FINRA Rule 3110(e), which requires member firms to conduct background investigations of applicants for FINRA registration, the law does not apply to such actions. The law also appears to exempt banking institutions subject to the Federal Deposit Insurance Act, which prohibits the employment of individuals convicted of certain offenses without FDIC consent and requires covered employers to inquire into a job applicant's conviction record. The law also provides exceptions for certain public positions.

The Commission has also published on its website Legal Enforcement Guidelines concerning the Fair Chance Act. The Guidelines confirm the goal of the new law: to "ensure[] that individuals with criminal histories are considered based on their qualifications before their conviction histories" and states that "[i]f the employer wishes to nevertheless withdraw its offer it must first give the applicant a meaningful opportunity to respond before finalizing its decision." The Guidelines provide the following suggested language for employers that wish to inquire about criminal histories after a conditional offer is made:

The Guidelines also provide specific suggestions concerning the proper methods of evaluating the applicant using the Article 23-A factors, providing the applicant an opportunity to respond to the employer's inquiry and written notice, and addressing background report errors or misrepresentations with applicants.

Like the credit history law, exemptions to coverage under the Fair Chance Act will be construed narrowly, and employers that assert an exemption will have the burden of proving the exemption by the preponderance of the evidence. Here too, the Commission suggests, but does not require, that employers maintain an "exemption log" so that they may promptly respond to inquiries by the Commission. The suggested log should contain (1) the exemption that is claimed; (2) how the position fits into the exemption and, if applicable, the law or rule allowing the exemption; (3) a copy of the inquiry and the name of the employee who made it; (4) a copy of the Article 23-A analysis and the names of any employers that participated in it; and (5) the final employment action that was taken based on the applicant's criminal history.

Importantly, the Guidelines also contain the Commission's recommendation that the results of any criminal history inquiry be collected and maintained on separate forms and kept confidential so that they are used only by those involved in making an employment decision.

With regard to enforcement of the law, the Commission has stated that it will presume, unless rebutted, that an employer was motivated by an applicant's criminal history records if it revokes a conditional offer of employment. In addition, the Commission will presume that "any reason known to the employer before its conditional offer is not a legitimate reason to later withdraw the offer" — that is, if an employer makes a conditional offer of employment after learning negative information regarding an applicant, it almost certainly would not be able to withdraw the offer based upon that same information.

Violation of the new laws could expose employers to potential damages and penalties available under the NYCHRL, including punitive damages and attorney's fees. Employers should review and revise their background check policies and practices to comply with the new laws. In particular, many employment applications include questions about past convictions — a practice that will be prohibited once the new law goes into effect.

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