US: NYC Fair Chance Act updates challenge finance employers

11 October, 2021

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

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.

UK: new resources on criminal record checks, mental health and dyslexia

7 November, 2018
  • Unlock has published new guidance for employers on criminal record checks, to which the ICO has contributed. The guidance states that checks at the application stage are unlikely to be necessary for most jobs and therefore likely to be a breach of the GDPR. In relation to checks at the job offer stage, the guidance emphasises the need to think carefully whether these are necessary and whether there is a lawful ground and condition for processing. The guidance also discusses the use of personal social media and data in the public domain.
  • New resources on mental health in the workplace include guidance from the CBI, the CIPD and Mind, and new online gateway linking to many more resources at Mental Health at Work.
  • The charity Made in Dyslexia and EY have published a Value of Dyslexia report highlighting the huge value in dyslexic thinking and the unique set of skills that people with dyslexia can offer to an organisation.

Hong Kong: The Requirement of Being ‘Fit and Proper’

26 April, 2018

In many industries, it is a requirement that certain individuals performing regulated activities are, and remain, fit and proper. For example, these requirements will apply to certain individuals who are subject to the oversight of financial services regulators such as the Hong Kong Monetary Authority, the Securities and Futures Commission (SFC) or the Insurance Authority. Assessing whether an individual is fit and proper however, is not always straightforward. Issues which, on their face, may not seem to be compliance risks could in fact be so when viewed through the lens of the fit and proper test.

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Hong Kong: Disclosure of Criminal Convictions

29 January, 2018

Employers often seek to carry out criminal and other background checks on new employees as part of their pre-hire processes. The discovery of a prior criminal conviction may in some cases result in an offer being withdrawn, or at least another look at the business’ decision to hire a particular candidate.

There is a clear and obvious tension between the needs of an employer to have sufficient information to ensure they are hiring the right person for the role and the public interests in protecting an individual’s right to privacy and the rehabilitation of offenders.

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Australia: Dismissal for criminal convictions – The importance of proper identification of inherent requirements and considering mitigating factors

8 February, 2017

A recent report by the Australian Human Rights Commission (AHRC) reinforces the risks in dismissing an employee on the basis of past criminal convictions. Employers should exercise caution in dismissing an employee on the basis of their criminal record. It cannot be assumed that antisocial criminal conduct will be regarded as depriving an employee of the ability to perform the inherent requirements of a role, even where the job necessitates close contact with customers. The inherent requirements of a role must be properly identified and an assessment made against the circumstances surrounding the offending and sentencing, including any mitigating factors that may cause a tribunal to find the employee capable of performing the role.

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UK: Review of tribunal fees; prohibition on enforced subject access requests for criminal records; FCA/PRA whistleblowing proposals

5 March, 2015
  • The Business Secretary is reported to have launched a review of employment tribunal fees in light of inaction from the Ministry of Justice (see here). The findings are to be published 'in a few weeks'.
  • Section 56 of the Data Protection Act 1998 will come into force on 10 March 2015. It will be a criminal offence (punishable by an unlimited fine) for an employer to require job applicants or existing employees to obtain a copy of their criminal records by making a subject access request and supply it to the employer (known as enforced subject access).

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UK: Employment law reform – timetable for tribunal reform, Queen’s speech, DBS certificates, consultation on equal pay audits

14 June, 2013
  • The Government has confirmed that revised employment tribunal rules and fees for employment tribunal claims will apply from 29 July 2013. The new rules are available here. We are preparing a briefing on the new rules which will be available shortly.
  • The Queen's Speech included only a few proposals relevant to employment law: increased fines for employing illegal workers, a £2,000 employment allowance to set against the NIC bill, stronger legislation to prevent the use of offshore employment payroll companies, the removal of the presumption of self-employment for LLP members, and the removal of employment tribunal powers to make wider recommendations (for example to update diversity policies or provide staff training) where a claimant brings a successful discrimination claim but is no longer employed.
  • The Disclosure and Barring Service has announced that from 17 June 2013 individuals can subscribe to a service that will keep their criminal record certificate up to date, so that when they move jobs they can provide their previous DBS certificate to the new employer, who can then carry out a free online check to find out whether there have been any changes. DBS certificates will initially be sent only to the individual applicant to enable them to challenge the contents before the certificate is released to a potential employer. DBS guidance is available here.

The Government is consulting until 18 July 2013 on the proposed scope of regulations to allow tribunals to order equal pay audits where an employer loses an equal pay case, planned for 2014. The consultation seeks views on a number of areas, including the government's decision not to require employers to publish the results of their audits generally (although they will be disclosed to the employees subject to the audit) and whether the EHRC good practice guidance on how to carry out an equal pay audit will be adequate.