Curbing Credit Checks

The House Financial Services Committee recently held a hearing to discuss legislation that would severely limit the use of credit checks by employers. While most companies don't perform credit checks on all job applicants, experts say, there are special cases in which HR should be able to take candidates' credit histories into consideration.

Tuesday, October 5, 2010
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For many companies, performing extensive background checks of prospective employees has become a standard part of the hiring process.

With information on job applicants' criminal and credit histories, and other personal records readily available, many hiring managers can now look at candidates' past transgressions as indicators of a propensity for irresponsible behavior on the job.

New federal legislation, however, may greatly limit how employers can use the information a routine background check uncovers.

A handful of states have already taken significant steps to eliminate the use of credit checks to evaluate job applicants.

Illinois and Oregon, for example, recently passed laws that prohibit employers in those states from using credit records as a factor in hiring, firing, demoting or suspending employees.

New Jersey legislators have proposed two bills that would bar employers in the state from inquiring about an applicant's credit history in most cases, allowing a credit check only if the employer believes an employee has violated a law governing financial activities.

Employers throughout the United States may soon be obliged to follow similar procedures.

On Sept. 23, the House Financial Services Committee held a hearing to discuss the Equal Employment for All Act, a bill that would make it unlawful, with certain limited exceptions, to base adverse-employment decisions against prospective and current employees on consumer credit reports.

The proposed legislation, authored by Rep. Steve Cohen, D-Tenn., is gaining support, says Sarah Crawford, senior counsel of the employment-discrimination project with Washington-based Lawyer's Committee for Civil Rights Under Law.

"Congressman Cohen has been joined by 56 co-sponsors in the House, and we expect more will join him as awareness is raised on this important issue."

If passed, the bill could include provisions that would significantly impact how HR professionals approach the process of evaluating job applicants, Crawford says.

"This legislation would prohibit employers from running credit checks for most types of jobs, with certain exceptions," she says. "Currently, the bill would permit employers to use credit information in hiring for positions that require national security or FDIC clearance; state or local jobs that otherwise require a credit check; supervisory, managerial, professional or executive positions with financial institutions; and when otherwise required by law."

There are positions for which a credit check would not only be appropriate, but prudent, according to Colleen Parker Denston, director of human resources at the Berlin, Md.-based Worcester Preparatory School, who spoke at the House hearing on behalf of the Society for Human Resource Management.

Parker Denston noted in her testimony that the exceptions allowed by the Act appear to concede that credit history is indeed relevant in cases where an individual would manage sensitive material such as financial and security information.

Generally speaking, "[SHRM] believe[s] that employment decisions should be made on the basis of an individual's qualifications -- such as education, training, professional experience, demonstrated competence, reliability, integrity -- and not on factors that have no bearing on one's ability to perform job-related duties," Parker Denston testified.

Still, there are positions in "myriad industries" where ensuring employee integrity is "in the public interest," she said.

Parker Denston cited examples such as managerial positions at higher-education institutions that manage significant endowments, including taxpayer-funded federal and state grants and appropriations; real-estate professionals who process financial transactions; nearly all positions within airlines, from customer-service representatives to maintenance workers who may have access to financial information; private-security professionals; and human resource practitioners who have access to Social Security numbers and other personal data.

Special circumstances aside, organizations that conduct credit checks of all prospective employees remain the exception, Parker Denston said, citing a 2010 SHRM survey that polled 433 HR professionals at companies of all sizes across the private and public sectors.

The survey found that only 13 percent of organizations perform credit checks on all job candidates. Another 47 percent said they consider credit history, but only for candidates for selected jobs, such as senior-executive positions and/or those with financial or fiduciary responsibilities.

Four of 10 organizations surveyed said they do not conduct credit checks at all.

By and large, credit information "does not predict job performance," says Crawford, who described pre-employment credit checks as "an unnecessary, unjustified obstacle for those seeking gainful employment."

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In addition, credit reports can provide limited or flawed information, she says.

"Credit reports often include errors and do not provide context. A credit report would not explain that the individual lost a job, developed a medical illness, went through a divorce, was the victim of identity theft, etc."

The National Association of Professional Background Screeners, which was also represented at the House hearing, agrees that credit reports are not appropriate for most jobs, says Tracy Seabrook, executive director of the Morrisville, N.C.-based nonprofit trade association.

In its present form, however, the Equal Employment for All Act may inadvertently overlook circumstances that warrant conducting a pre-employment credit check, she says.

"As drafted, the legislation significantly limits the use of credits reports for employment checks to all but a few instances," Seabrook says.

"This is so limited in its approach that the practical effect will be that private-sector jobs are cut out, even for those private-sector jobs for which a credit report should be required -- lawyers, mortgage lenders, property managers, cashiers, asset management and financial planners, jewelers, academic/financial-aid employees, executives in nonfinancial institutions and so on," she says.

"Even human resources employees who have access to a wealth of personal/sensitive information about employees -- date of birth, Social Security numbers, bank-account numbers -- would be hired without the ability of the employer to request a background check which includes a credit report."

Ultimately, HR and hiring managers should be able to request a credit report in cases of "business necessity," Seabrook says.

"Certain jobs should require that the employer have an understanding of the individual's credit background, particularly if that employee has fiduciary duties, has access to the company's money and/or assets, prepares or signs contracts on behalf of the company, has access to valuable trade secrets or sensitive information.

"We would never advocate that the credit report itself be used as a disqualifier," Seabrook adds, "but it may lead to questions that may need to be answered.

"It is a balancing act," she says. "Employers have to protect against identity theft, employee theft or negligent-hiring claims should they hire someone where their credit report could have served as one indicator of their performance on the job.

"Just as consumers are protected by federal law and must give their consent for a background check to be conducted, so must employers protect themselves, their assets and their customers."

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