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Check, Please: Using Credit Checks as Part of the Hiring Process

March 21, 2011
KEYWORDS management
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Richard D. Alaniz

Information is power, particularly when hiring new workers. But, many previous employers are reluctant to offer honest critiques of past employees for fear of being sued. Without this information, employers are left to make important hiring decisions with only some of the pertinent facts. For instance, job applicants who look good on paper or who interview well may have some troubling financial histories or ongoing money problems.

Would-be employees with financial troubles can represent a serious threat to companies. According to a 2010 survey by the Association of Certified Fraud Examiners, organizations lose 5 percent of their annual revenues to fraud, and employees who commit fraud often have a history of struggling to make ends meet. The survey found that more than 40 percent of fraud perpetrators - 43 percent - were living beyond their means, while in 36 percent of cases, perpetrators were experiencing financial difficulties.

For many employers, running credit checks on job applicants is a regular part of the hiring process. According to a recent survey by the Society for Human Resource Management, 13 percent of respondents conduct credit checks for all job applicants. Nearly half, 47 percent, conduct credit checks for some job candidates, and 40 percent don’t conduct any type of credit checks on job applicants.

But employers also need to be very careful when they use background credit checks for job applicants. They must weigh their need to know with a person’s right to privacy. Employers who use credit checks may also find themselves accused of discrimination. Last December, the U.S. Equal Employment Opportunity Commission (EEOC) filed suit against Kaplan Higher Education Corp., claiming that Kaplan’s use of credit checks was unlawful because it discriminated against black job applicants.

According to the EEOC, since at least 2008 Kaplan has refused to hire job applicants based on their credit history, which constitutes unlawful discriminatory impact because of race, and that the use of such checks was not job-related or justified by business necessity.

“Title VII of the Civil Rights Act of 1964 was intended to eliminate practices that serve as arbitrary barriers to employment because of a job applicant’s race,” said Regional Attorney Debra Lawrence of the EEOC’s Philadelphia District Office in a statement. “Employers need to be mindful that any hiring practice be job-related and not screen out groups of people, even if it does so unintentionally.”

In another discrimination lawsuit filed in 2010, an African-American woman sued the University of Miami and the Leonard M. Miller School of Medicine, alleging that the university and the medical school discriminate against African Americans and Latinos through the use of credit checks. In her lawsuit, the woman, whose job offer as a senior medical collector was withdrawn because of the information in her credit report, claims that credit backgrounds do not accurately predict job performance or workplace crime. Therefore, according to her lawsuit, the schools’ use of credit checks is discriminatory. The lawsuit seeks class-action status.

Despite the potential pitfalls, credit checks can be extremely valuable resources for employers. Credit histories can offer insights into how people handle money, whether they are under financial pressure and how mature and trustworthy they may be.

In order to ensure that the use of credit checks during the hiring process is legal, fair, and useful, employers need to carefully consider how they use such background information and develop thorough processes that comply with all relevant federal and state laws. They must also create clear-cut policies that determine which applicants are subject to credit checks and how that information is to be used when making a hiring decision.

REGULATIONS THAT GOVERN CREDIT CHECKS

Federal regulations govern the use of credit checks during employment and pre-employment screening, and many employers are impacted by state regulations as well.

Companies that plan to delve into a job applicant’s financial background need to be aware of the Fair Credit Reporting Act (FCRA). Under the FCRA, employers must have an employee’s written permission to run a credit check through a third party, such as a consumer reporting agency. This written request can’t be buried with other forms - the release must be clear and obvious, so job candidates understand exactly what they are signing.

Employers who use their own staff to research a candidate’s credit history are not governed by FCRA. However, many employers don’t have the expertise in-house to run thorough credit checks, or they don’t have enough job applicants to make it worthwhile to have their own employees conduct the research.

When worrisome signs emerge from a credit check, employers have to decide if those signs are serious enough to deny someone a job. When an employer chooses not to hire or promote someone based on information from a credit report, the employer must provide a copy of that report, including a notice of the job applicant’s rights under the FCRA. Applicants have a right to challenge the information in the report.

Under the FCRA, employers can only obtain a consumer report from a consumer reporting agency for “employment purposes,” including hiring purposes. (More information about employers’ rights and responsibilities can be found at the Federal Trade Commission website at http://business.ftc.gov/documents/bus08-using-consumer-reports-what-employers-need-know.)

According to the FCRA, a credit check (known as a “consumer report”) can’t include certain types of information, including:

• Bankruptcies after 10 years;

• Civil suits, civil judgments and arrest records after seven years;

• Paid tax liens after seven years;

• Accounts placed for collection after seven years; and

• Any other negative information, except criminal convictions, after seven years.

Not every position is governed by the FCRA, though. For example, the regulations don’t apply to jobs with an annual salary of $75,000 or more.

Several states also have laws regarding the use of credit checks. Four states have laws in place to limit how employers use credit information in employment: Hawaii, Illinois, Oregon, and Washington. The California Consumer Credit Reporting Agency Act also affects how Golden State companies can use consumer credit reports in hiring decisions. Many states are also considering the issue. According to National Conference of State Legislatures, a total of 18 states and the District of Columbia considered similar legislation in 2010.

WHAT EMPLOYERS SHOULD DO

Despite the complications, background financial checks can be very useful tools. But employers need to think carefully about how and when they run these types of checks on would-be employees. Blanket policies are almost never the right approach. Employers should also look at each job description and decide whether a poor history of managing money will impact how an employee will perform in that particular job.

There are several steps employers should take to develop clear, consistent policies for situations where credit checks are appropriate and useful.

Review Your Current Policies
It’s important for employers to understand the types of background information being sought throughout the company. Particularly in large companies or those that operate in several states, different hiring supervisors or divisions may be taking different approaches to credit checks. The company needs to develop a consistent approach at every level in every location. This will ensure that employees are not inadvertently discriminated against by managers who may not understand all the issues involved with credit checks.

When developing credit check policies, employers should consult with human resources staff and legal counsel to be sure they have considered all the relevant federal and state laws.

Everything Is Relative
Not every job position needs a credit check. Obviously, a person’s financial background would be relevant for someone who handles cash or who has a high-ranking position in the company. But for many positions, a credit check may not be relevant or help predict how someone will do in a particular job. By carefully considering which positions would benefit from a credit check, employers can save themselves time, money, and potential legal hassle.

Spreading the Word
Once policies have been reviewed and updated as necessary, the next step is education. Hiring managers and human resources personnel need to understand the company’s rules regarding credit checks. And job applicants must receive the proper notifications in writing whenever a credit check is to be used.

Remember, No One Is Perfect
People can make mistakes, and so can credit agencies.

Under the FCRA, job applicants who have been denied a job based on their credit report have a legal right to respond. And considering the current economy, even extremely responsible, trustworthy people may have blemishes on their credit report. It’s good business sense to make credit checks only one part of a hiring decision.

Credit agencies also make mistakes, although experts disagree on how often those mistakes occur. Estimates of errors on credit reports range from 12 percent to 37 percent. In testimony before the EEOC in 2010, Chi Chi Wu, counsel for the National Consumer Law Center, insisted, “The use of credit reports in employment is a growing practice that is harmful and unfair to American workers.” According to Wu, “Americans should not be put at risk of being shut out of the job market by a system that is flawed enough to harm as many as one in three workers.”

Credit checks can be controversial, particularly when hiring for positions that don’t directly involve money. The improper use of credit checks can also lead to serious charges of discrimination and leave employers vulnerable to lawsuits. But with the right guidelines and approaches, employers can successfully use credit checks to gain valuable insights into would-be employees, ensuring they hire the best people for the job.

Publication date: 03/21/2011

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