US: NYC Fair Chance Act updates challenge finance employers

In July, amendments to New York City’s Fair Chance Act took effect. They impose additional restrictions on how and when employers may request, review and use criminal background check information for hiring and employment decisions.

Many of these restrictions are either in direct or indirect conflict with regulations that require financial institution employers to conduct background check inquiries into a large majority of their employees. These regulations include Financial Industry Regulatory Authority background check requirements, Federal Deposit Insurance Corporation regulations and regulations relating to mortgage loan originators.

Although Fair Chance Act guidance advises that banking employers are exempt from complying with provisions that are directly in conflict with financial industry regulations, the line between direct and indirect conflict is not clear.

Moreover, New York City’s guidance also states that all exemptions will be construed narrowly.

Accordingly, these new amendments have left open questions for financial institutions on:

  1. Whether the Fair Chance Act applies to their background check process; in most cases, the answer is yes — at least some of the provisions will apply; and
  2. If the Fair Chance Act does apply, which specific provisions will be preempted by industry regulations.

In this article, we provide early best practices that have developed to address the second question, with the strong caveat that until there is further guidance and/or case law defining the scope of these exemptions, many of these questions will remain subject to interpretation.

Fair Chance Act Process and Amendments

The Fair Chance Act prohibits the majority of employers in New York City from making any inquiries about an applicant’s or employee’s arrest or criminal record before making a conditional job offer, and restricts when an employer can first seek criminal background information.

It also requires employers that wish to withdraw a conditional offer of employment based on an individual’s criminal record to partake in a multistep fair chance process before making a final determination.

The fair chance process involves providing the applicant or employee with notice and undertaking an individualized analysis that addresses seven relevant factors, including the public policy of New York state, the specific duties necessarily related to the position sought or held, the seriousness and age of the offense(s), and the employer’s interests. Then, the employer must provide the applicant/employee with the employer’s written analysis.

The July 2021 amendments significantly expand the scope of the statute’s protections by extending the fair chance process to cover decisions based on pending arrests and adverse actions against existing employees. The amendments also extend protections to independent contractors and freelancers.

In addition, the amendments expand the type of criminal history that employers are prohibited from asking about, restrict information that may be placed on job solicitations relating to background checks and require employers to affirmatively solicit applicant/employee input on the relevant fair chance factors.

Finally, the amendments clarify that an employer must conduct all other noncriminal preemployment screenings before a criminal background check is conducted — thus creating a bifurcated system for criminal and noncriminal background check information.

Financial Institution Employment Regulations

The Fair Chance Act requirements, including the bifurcated process, have led to questions on whether this impacts background checks in regulated industries.


FINRA requires that regulated members investigate the good character, business reputation, qualifications and experience of an applicant before the employer seeks to register the applicant with FINRA, and this requirement has been interpreted to necessitate a national criminal background check.

FINRA also requires that applicants make specific disclosures relating to criminal convictions on the required Form U4, and that employers verify this information within 30 days after the Form U4 is filed.

Directly conflicting with the fair chance process, FINRA has listed disqualifying convictions, including any felony conviction within the past 10 years, as well as certain specified felony and misdemeanor convictions.

Clerical or ministerial employees are exempt from this background check requirement.

FDIC-Insured Banks

Institutions insured by the FDIC are prohibited from employing any person who has been convicted of a criminal offense involving dishonesty or breach of trust, unless specific consent is obtained from the FDIC.

Further, individuals convicted of certain financial crimes are subject to an outright prohibition of working in, owning or controlling an insured depository institution for 10 years.

FDIC institutions are required to perform a reasonable inquiry into an applicant’s history to avoid hiring someone with a covered conviction.

The FDIC does not mandate that employers conduct background checks as part of this inquiry, but most employers do conduct background checks to comply with this reasonable inquiry requirement.

Other restrictions on criminal history also apply to those individuals directly involved in mortgage loan origination.

Uncertainty for Employers

Most financial institutions have taken the defensible position that the fair chance process — which consists of the multistep analysis of whether a certain crime can be used to disqualify an applicant — need not be followed if the crime fits within one of the disqualifying convictions mentioned in applicable banking regulations.

The more difficult question becomes what other provisions of the Fair Chance Act do apply, with the understanding that any provisions not in direct conflict with the banking regulations must be followed, and that any exemption will be construed narrowly.

Based on early experiences, and again keeping in mind the uncertainty noted above, we recommend that financial industry employers comply with the following provisions of the Fair Chance Act to the extent possible:

  • Do not deny employment based on a non-conviction, although pending arrests may be considered assuming compliance with the fair chance process. Before rescinding any an offer due to a pending arrest, conduct a full fair chance analysis.
  • Do not ask about criminal history until after a conditional offer has been made, and make a conditional offer of employment subject to review of the criminal history information in the Form U4 and/or background check. Based on timing, this may not be feasible, and this potential risk must be weighed against conducting the check in a timely manner.
  • Engage in the fair chance process for a conviction that is not specifically disqualifying under banking regulations if there are plans to deny an offer based on that conviction.
  • Comply with all steps of and terms of the Fair Chance Act — including the fair chance process — for clerical or ministerial employees.

In any event, employers claiming an exemption from the Fair Chance Act should carefully document their decision-making process and their conclusion that an exemption applies.

Tyler Hendry
Tyler Hendry
Senior Associate, New York
+1 917 542 7866
Pamela Terry
Pamela Terry
Associate, New York
+1 917 542 7825

This article was first published by Law360 Employment Authority, here.

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