You're looking to hire a new employee and need to run a pre employment background check. You know for certain a criminal history report is necessary, but what about a credit report? Do you need to run one for every position you are filling? Are you even allowed to use credit reports in your hiring process? Good questions. Let's try and take a rather complicated topic and make it easy to understand so you can learn what you can and can't do with credit reports.
You and I both know credit reports are extremely revealing when it comes to our telling our personal financial story. And in order to get a loan, purchase a car or house for example, credit reports are normally required as part of the buying process.
But what about credit reports as part of your employment screening process. Yes, you can run credit reports on applicants, but there can be some restrictions. And in many instances, credit reports are not necessary for every position in your company (in some cases there must be a direct relation to the job in order to use a credit report for employment purposes). Are there laws that govern the use of credit reports in your hiring process? Yes!
As your company decides if you should run credit reports on applicants, here's some basic information you may find helpful.
Credit Reports used for employment screening purposes are almost identical to the reports used for securing a loan or buying a house. But here's what is different: The three major credit reporting bureaus provide a “modified” version of a credit report called an “employment credit report.” It does not include a credit score, date-of-birth, or put an “inquiry” on a credit report (the more inquiries one has can lower a credit score).
It's most likely not necessary to run credit histories on every applicant for each position you plan to fill. And in some states, you cannot run a credit report on every applicant for every job opening (read next bullet point). While credit reports can be valuable in determining the financial stability of an individual, you may only want to run histories on applicants who have direct contact with money or fiscal responsibility.
A few states thus far have passed laws which restrict the use of credit reports in hiring process. The major reason for this is the ongoing concern with the economic situation, and the fact that unemployment rates and other hardships have caused many to fall on hard economic times. Therefore, the premise being job seekers with a negative credit history could have a difficult time securing employment, even if they are qualified for the job. The states that have passed legislation are Hawaii, Oregon, Washington and Illinois. If you're in any of these states or hire employees to work in those states, here are links to each state's law on using Credit Reports in the hiring process (what you can and can't do). In many cases there are some exemptions (such as financial institutions).
Your company must be knowledgeable and follow all federal, state and employment laws regarding credit reports and how they can be conducted on employees and applicants. And don't forget the FCRA (I've covered the FCRA in previous blog posts). It says basically that certain items (like derogatory information) cannot be used if more than 7 years old. Regardless, if you don't' extend a job offer to an applicant, you must provide an adverse action decisions. Click here for more information on your responsibility under the FCRA.
With all of this being said, some businesses operate under the belief that applicants with bad credit are more prone to steal from their employer. Such is not always the case though. Just because a negative conclusion can be drawn from an applicant's credit history doesn't necessarily mean they are going to commit a theft of company property or assets. Further, just because someone doesn't pay their bills on time doesn't necessarily provide an accurate indicator of how an individual will perform as an employee.
On the other hand, credit reports are an invaluable tool for many businesses. They assist with risk mitigation and help protect company assets. But the process is becoming more complex as new legislation is introduced and enacted throughout the country. And keep in mind other states could enact legislation regarding the restriction of using credit reports as part of the employment screening process. It's really about making the process fair and protecting the consumer, thus for example, adopting laws to use credit reports only if there is a direct relation to the job (again, with some exceptions).
It's always important that you regularly evaluate your background check program and policies to ensure compliance with all federal and state laws. Of course, the overall goal is to make smart hiring decisions to keep your business safe and secure.
This post is not intended as legal advice, and is provided as information only. Please seek legal advice to ensure you're processes and methodologies adhere to all regulatory laws and guidelines.