Credit history checks are used by many employers as a means to protect the integrity of the company, its employees, and customers.
Employment background credit checks aren't necessary for all employees, but they're strongly advisable, even essential, for those who will handle large amounts of cash or other kinds of financial transactions, bookkeeping, or the management of company accounts.
Many companies will also turn to employment background credit checks for middle or senior management positions in general. You may wonder, what are they looking at when they run an employee credit check? Employee credit checks can provide employers with insight into a candidate’s sense of financial responsibility (say, if they're managing a department budget) and their personal stability.
For example, a candidate whose credit history includes a bankruptcy could suggest that the candidate lacks responsibility by not meeting past financial obligations.
Some employers choose to conduct background checks which include employee credit checks in order to protect against internal fraud and theft. Someone who is swimming in debt or facing an untenable balloon mortgage payoff, for example, could be susceptible to unlawful temptations.
An employer may choose to conduct a risk assessment to determine a candidate’s potential proclivity to commit fraud based on their financial status. This information could be used as a differentiator between two candidates with similar qualifications when assessing risk to the employer.
According to the Association of Certified Fraud Examiners’ 2014 Report to the Nations, the median fraud loss in their study was $145,000 with 22 percent of the cases losing at least $1 million. Since the nature of fraud is concealment, this statistic could be just the tip of the iceberg.
Employer Credit Check Law: Is it legal to view a credit report on job applicants?
Employment credit checks are legal under federal law. As is the case with all types of background screening, employee background credit checks should be conducted in strict compliance with the Fair Credit Reporting Act (FCRA). In a hiring context, FCRA rules are enforced by the US Equal Employment Opportunity Commission.
The FCRA broadly permits employers to request a credit history report on job applicants as well as existing employees. These are the basic steps an employer must follow for obtaining employment background credit checks:
- Employers must first obtain written permission from the individual on a standalone disclosure form.
- The employer is required to offer a copy of the credit report and a written summary of the consumer’s rights along with this notification.
- After providing a job applicant with a short period of time to identify and begin disputing any errors in their credit report, (typically three to five business days) the employer may then take action based on the report and must once again notify the job applicant in writing of the reasons for the action (though only if it is an "adverse" one such as choosing not to hire, promote or retain the employee/applicant).
State Laws on Employment Credit Checks
The Society for Human Resources Management (SHRM) reports that 47 percent of employers conduct credit checks on some or all job applicants. So if nearly half of employers are using the practice, they had best check whether there are legal limits on it in states where they operate.
Following the 2008 financial crisis and the Great Recession which followed, several states passed laws restricting or prohibiting an employer from considering credit history in making job decisions. Their rationale was that it’s neither fair nor sensible to punish people for past credit mistakes, especially if the penalty affects their ability to earn money in the future.
Several states and cities have laws prohibiting employer credit checks or restricting how the information from reports can be used. Check with your state’s labor department or your city government to find out if you are covered by the laws.
Currently, eleven states limit the use of credit checks/reports for employment screening purposes: California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont and Washington.
The State limits on employment background credit checks aren't universal prohibitions- they come with some practical exemptions. Many of the states’ credit check laws include broad exemptions for employees handling cash or goods, with access to financial information, for management positions, and for law enforcement positions. So, if your company is in one of those states (or cities, like New York) that limit credit checks, check with your local or state labor laws to see if the position you're hiring for is covered by a listed exemption. More than likely, if a credit check is highly relevant to the job then it's still okay to do it.
Best Practices: How to Run a Credit Check on Potential Employees
The most prudent thing you can do is to have policies and procedures in place which ensure that any use of credit checks and history reports is both relevant and fair.
Ask if there’s a sound business reason to do a credit check on a prospective employee. If it’s not directly job-related, running a credit check might be considered discriminatory and risk running afoul of the EEOC, or leave you vulnerable to lawsuits where civil actions have been authorized.
Conversely, hiring a person for fiduciary responsibilities without running a credit check could expose your company to liability, and be used as grounds for allegations of negligent hiring.
Another step is to assess collateral materials such as employment applications, consent forms, interview guidelines, etc. so you can ensure that only those credit checks allowed by EEOC guidelines and state laws are conducted and that no illegal questions are asked.
Disclaimer: These summaries are the latest information available on the use of credit information in employment for 2017, based on legislative enactments in all 50 states as of the last full session year for which data was available (2015). It is not intended as legal advice, only as a general guide. If you have questions regarding the applicability of these laws to your situation in the state where you operate, you should contact your state department of labor.
Laura Greene is one of the content managers for TrustedEmployees – creative people who provide businesses, non-profits, and volunteer organizations with a tailored and compliant approach to background screening through personalization, innovation, and dedication.