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Credit Reports

Is It Discriminatory For Employers To Use Credit Reports for Employment Screening?

November 07, 2013

By Lester Rosen, Employment Screening Resources (ESR) President & Thomas Ahearn, ESR News Editor

A great deal of misinformation about credit reports and job hunting exists in the current economic climate. Most employers are not using credit reports to find ways to eliminate people from jobs. A background check that includes a credit report is usually run only after an employer has gone through the time, cost, and effort to find the right candidate. Employers initiate background checks because they are interested in hiring the applicant and are conducting due diligence to make sure there is no reason not to hire. Under the rules of the federal Fair Credit Reporting Act (FCRA), a credit report is only obtained after the applicant has given consent and after a legally required disclosure has been given. If the employer utilizes the credit report in any way not to hire, applicants are entitled to a copy of their credit report, a pre-adverse action notice, as well as a statement of their rights. Before any employment decision becomes final, applicants also have the right to challenge the credit report before any denial of employment is made final.

However, employers should approach credit reports with caution when using them for employment background checks, and must articulate a clear rationale as to why a credit report is related to a particular job. Employers should also be aware of the potential for errors in credit reports. A debt may be reported incorrectly for various reasons or the applicant could be the victim of identify theft which can also lead to incorrect data. In addition, negative entries may well not be a valid predictor of job performance especially since many job applicants have faced a long period of unemployment that may lead to larger debts.  An overly broad use of credit reports by employers could lead to claims of discrimination from a disparate impact on protected groups such as Blacks and Latinos.

The idea that credit reports can be used in a discriminatory manner in the eyes of the U.S. Equal Employment Opportunity Commission (EEOC) means employers will continue to face controversy with discrimination over using credit reports for employment screening.

Credit checks for employment purposes have become a very controversial subject. Job applicants look for work in a tough economy are caught in a “Catch-22” situation where they have bad credit because they cannot get a job but cannot get a job because they have bad credit. As a result, the EEOC held a public Commission meeting on October 20, 2010 to hear testimony on the growing use of credit histories of job applicants as selection criteria during employment background screening to see if the practice is discriminatory.

At that same meeting, a representative of the Society for Human Resource Management (SHRM) told the EEOC that the federal government should not eliminate an employer’s use of credit histories to help make decisions about job candidates since credit history is one of many factors – including education, experience, references, certifications, and past criminal history – that employers use to narrow that applicant pool to the most qualified.

A 2010 survery from SHRM on the use of credit reports for employment screening revealed that:

  • 13 percent of employers surveyed conducted credit checks on all job candidates.
  • 40 percent of employers did not conduct any credit checks on job candidates.
  • 47 percent of employers considered credit history for candidates of selected jobs.
  • 91 percent of employers that conducted credit checks did so for jobs of financial or fiduciary responsibility such as handling cash, banking, and accounting.

Overall, SHRM found that 60 percent of employers ran a credit check on at least some applicants, an increase from the 42 percent in 2006 and 25 percent in 1998. The EEOC heard public comment from SHRM and others to determine the extent of the practice of using credit checks during the background screening of job candidates, the effectiveness of its intended purpose, and its potential impact on different populations. The EEOC works to ensure all U.S. workplaces are made free of all barriers to equal opportunity. For more information, visit http://www.eeoc.gov/eeoc/meetings/10-20-10/index.cfm.

For employers, hiring an applicant that will handle money or assets, make fiduciary decisions, or has access to private data without running a credit report could result in allegations of negligent hiring if embezzlement or identity theft occurs and a credit report as part of a background check would have lead to relevant information. It is an urban myth that employers receive credit scores of the applicant. Employment credit reports are much different than credit reports used for lending and do not contain a credit score since there is no evidence of a connection between credit scores and successful employment. 

A recent article, ‘How to Run a Credit Check,’ revealed best practices from experts – including Jared Callahan, Director of Client Relations for Employment Screening Resources (ESR) – for every step of the credit check process during employment screening so that employers may check the financial stability of potential employees. The following five basic steps should be followed to get the most out of credit checks:

  • Step #1 – Have a Permissible Use
  • Step #2 – Get Permission
  • Step #3 – Find a Service to Use
  • Step #4 – Interpreting the Results
  • Step #5 – Do a Test Run

As for permissible use of credit reports for employment purposes, Callahan said only potential employees seeking jobs related to financial responsibilities should be subjected to a credit check: “If you’ve got ditch diggers out in the middle of nowhere, a credit check might not be relevant.” Employers also need to make sure the credit report is for a relevant purpose and that they are not arbitrarily digging into someone’s financial history. Federal law also requires employers always disclose when they seek to run a credit check on job applicants and need to get their permission in writing too. “The candidate’s rights are absolutely bulletproof protected by the Fed and the state you are in,” Callahan said.

After attaining the permission of applicants, employers running credit checks on potential employees may use services such as Employment Screening Resources (ESR) that provide special employment-only credit checks with background check information.  However, regarding results, Callahan warns employers against jumping to a conclusion no matter what the credit report says since up to 75 percent of all credit reports contain incorrect information, including wrong home addresses and inaccurate bankruptcy details. “You really have to take a credit report with a grain of salt,” says Callahan, who also suggests that employers give subjects of credit reports a chance to respond and produce authentication for any financial points on the credit report. ‘How to Run a Credit Check’ is at http://www.inc.com/guides/2010/12/how-to-run-a-credit-check.html.

In addition to federal laws, some states are considering, or have passed, legislation to restrict the use of credit reports for employment purposes. For example, effective January 3, 2011, the State of Illinois restricts employers from using credit reports for employment purposes. Under Illinois House Bill 4658 ‘The Employee Credit Privacy Act,’ employers in Illinois may not use a person’s credit history to determine employment, recruiting, discharge, or compensation.

As reported on ESR News, several states have passed laws regulating the use of credit reports for employment purposes and more states are apparently looking at similar rules. For example, effective January 3, 2011, under Illinois House Bill 4658 ‘The Employee Credit Privacy Act,’ the State of Illinois restricts employers from using a person’s credit history to determine employment, recruiting, discharge, or compensation. Other examples of stories about the limiting the use of credit reports for employment purposes include:

Employers argue that credit checks during employment screening are done responsibly, and are not barriers to employment. They may check credit history during background checks to help them determine whether a prospective employee is a possible risk to the financial health of a business or to its customers. Prohibiting credit checks in screening makes employers, other employees, and customers vulnerable to fraud and identity theft.

Unfortunately, personal financial health can be an indictor of potential employee fraud. The Association of Certified Fraud Examiners (ACFE) reviewed occupational fraud between 2006 and 2008, and found that the top two “red flag” warnings exhibited by perpetrators of fraud leading to the crime were instances of living beyond their financial means (39 percent of cases) or experiencing financial difficulties (34 percent of cases). To learn more, visit http://www.acfe.com/occupational-fraud/occupational-fraud.asp.

While it is wrong to say all financial difficulties lead to fraud, some employers believe it is also wrong to undercut fraud prevention by outlawing the use of credit report information that may show a correlation between past behavior and future fraud. Credit checks of potential employees protect companies – particularly small businesses – from fraud. According to ACFE, the median loss suffered by organizations with fewer than 100 employees was $190,000 per incident, higher than median losses in large organizations. Overall, employee theft accounted for over $15 billion in losses annually, with companies losing a median of 5 percent of their annual revenue to employee fraud.

Consumers have significant protections when employers use credit reports during background checks as part of their hiring process, as the use of consumer reports in employment situations is tightly regulated:

  • Prior to requesting a consumer credit report, an employer must provide to the prospective employee a written notice stating the source of the information and how it will be used.
  • The employer must also provide a copy of the consumer credit report to the consumer upon request, and prior to taking an adverse action.
  • If an adverse employment action is taken against a prospective employee due to the information contained in a consumer credit report, the user must provide the name and contact information for the reporting agency to the consumer and explain the reasons for the action.
  • Under the FCRA, any person who willfully fails to comply is liable to that consumer in an amount equal to the sum of (1) (A) any actual damages sustained by the consumer as a result of the failure or damages of not less than $100 and not more than $1,000; or (2) such amount of punitive damages as the court may allow; and (3) in the case of any successful action to enforce any liability under this section, the costs of the action together with reasonable attorney’s fees as determined by the court.

Because many myths surround credit reports and employment and to get to the bottom of how credit reports are really being used, Lester Rosen, founder and President of San Francisco area Employment Screening Resources (ESR), commented in a local blog about credit reports of job applicants being used for employment purposes:

  • Employers don’t randomly access credit reports from all job applicants. They only do so for those who are solid candidates.
  • If they are pulling a credit report, congratulations! They are doing a background check, and that is good news, as they are seriously considering the applicant for the position. They won’t run it before the applicant is a finalist.
  • Credit reports aren’t checked for all occupations or industries. Most employers are looking at credit reports for people applying for positions that are clearly related to finance or have access to cash or credit. They usually don’t access credit reports for people applying for minimum wage jobs.
  • The only way an employer can pull an applicant’s credit report is with the applicant’s permission. Therefore, if the employer asks, the applicant should head over to the human resources department and explain his or her particular situation.
  • A potential boss does not have access to the same type of reports that lenders do. The credit reports employers can see never include credit scores or list dates of birth. All they can view is an applicant’s credit history.
  • If applicants are concerned about how these credit report pulls may harm their credit report further, they can relax. Unlike when a prospective creditor checks it, no “inquiry” will be listed.

As for the real impact of a job applicant’s credit damage, Rosen recommends in the blog that they should not worry about even that too much. “Our experience is that employers are very sensitive to the fact that credit reports are not perfect. And everyone in the world knows there is a recession, and employers take that into consideration,” says Rosen, author of ‘The Safe Hiring Manual - The Complete Guide to Keeping Criminals, Terrorists, and Imposters Out of Your Workplace.’ “It’s a misconception that people are being blacklisted because of their credit reports. However, if the employer does make an adverse decision based on your report, you have a right to know about it and get a copy of the report they used.”

Another article ‘Job Candidates Undergoing Credit Scrutiny’ quoted Rosen as saying employers are “looking at the debt level compared to the potential income from the job”  and added that “if someone is under water financially as shown by the credit report, the thought is perhaps there could be a motive to embezzle or steal.” However, while Rosen says credit checks are one method employers may use to hire honest and trustworthy employees that also provide some legal cover if that employee turns out to be dishonest, ESR does not encourage routine credit checks on all candidates since credit checks often contain errors and can feel like an invasion of privacy to applicants. Rosen’s advice for employers is to limit credit checks to relevant positions such as those that involve money. In fact, with many states recently passing laws limiting the use of credit checks for employment purposes, employers need to be careful when, to whom, and how they perform credit checks on prospective job applicants.

However, job applicants and the EEOC are taking matters into their own hands regarding use of credit reports during background checks. Workplace discrimination charge filings with the federal agency nationwide rose to an unprecedented level of 99,922 during fiscal year 2010, according to an EEOC press release. In response to seeing an increase in claims of discrimination based upon criminal records and credit reports, the EEOC began the E-RACE (Eradicating Racism And Colorism from Employment) Initiative. Most recently, the EEOC filed a nationwide hiring discrimination lawsuit against a nationwide provider of postsecondary education charging the company engaged in a pattern of unlawful discrimination by refusing to hire a class of black job applicants nationwide by rejecting job applicants based on their credit history, a practice that has an unlawful discriminatory impact because of race and is neither job-related nor justified by business necessity. As a result of these practices, the company has violated Title VII of the Civil Rights Act of 1964. To read the EEOC press release, visit http://eeoc.gov/eeoc/newsroom/release/12-21-10a.cfm.

Another federal agency, the Federal Trade Commission (FTC), issued a notice in May 2010 explaining ‘Credit Reports and Employment Background Checks’ to consumers who have applied for jobs. To see the FTC notice, visit http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre36.pdf. The FTC enforces the Fair Credit Reporting Act (FCRA), a law that protects the privacy and accuracy of the information in a credit report. The FCRA also spells out the rights of job applicants and the responsibilities of employers when using credit reports and other background check information to assess an application for employment. The FTC warns that there are legal consequences for employers who don’t comply with the FCRA if they:

  • Fail to get an applicant’s okay before getting a copy of their credit report or background check report;
  • Fail to provide the appropriate disclosures in a timely way; or
  • Fail to provide adverse action notices to unsuccessful job applicants. 

To help both employers and job applicants better understand use of credit reports during background checks Employment Screening Resources (ESR) President Lester Rosen has written articles on using credit reports during background checks:

In addition, Employment Screening Resources (ESR) also co-authorized a white paper with LexisNexis, “The Use of Credit Reports in Employment Background Screening – An Overview for Job Applicants,” on the protections applicants have for credit reports and the fact that credit reports do not contain credit scores. To read the white paper, visit: http://www.napbs.com/files/public/Consumer_Education/Credit_Reports_for_Background_Screening.pdf

ESR also provides information – at no charge – to job applicants on background checks and credit check reports can help job applicants navigate the background check process and maximize their chance at employment. The information is available on ESR’s ‘Applicant Resources’ page at: http://www.esrcheck.com/Applicant-Resources.php.

Whether the use of credit checks for employment purposes is discriminatory to certain job applicants – which ESR also named Trend Number One in its Third Annual Top Ten Trends in the Background Screening Industry for 2010 – is a question that will be asked as long as employers run credit checks on job applicants with money troubles. See: http://www.esrcheck.com/wordpress/2010/01/04/2010-trend-on-increased-focus-on-whether-credit-reports-and-criminal-records-are-discriminatory/.

For more information about the use of credit reports during background checks, please visit Employment Screening Resources (ESR) at http://www.esrcheck.com.

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