Four Questions to Ask When Using Employment Credit Reports in Hiring

August 17, 2016 | Bryan Barajas

Most people who use employment credit reports consider the method of payment information, the amount of debt, and the presence of bankruptcies, liens and civil cases to be most enlightening, and use that information to deny employment. But are they correct in so doing? Is that approach defensible? Whether you are looking at a credit report, criminal history, or any other background information containing potentially adverse  information,  when  evaluating  the  past  behavior  of  a  prospective  or current employee to determine suitability for a specific job, you must answer these four questions:

  1. Is it job-related?
  2. Is it current enough to be relevant?
  3. Is it severe enough to be significant considering the time elapsed since it occurred?
  4. Is the report accurate – is it likely that the applicant did (or did not) do it?

The question of job relatedness is the most difficult question to address. For what job is it critical to know that an applicant’s national credit card and local Joe’s Tires accounts are paid promptly every month? Under what circumstances should we consider the judgment in favor of the roofing contractor or hospital in making an employment suitability decision? Some would argue that a poor credit report, or many high credit lines, is a clear indication of a serious risk to their company because that is the best evidence that the subject is at least irresponsible, and probably dishonest. Following this logic, we know that all financially stable folks are always honest and trustworthy, while all poor and financially struggling people are naturally dishonest and untrustworthy.  Right? Of course not.

Is there an answer to the question of job relatedness? Unfortunately, not a clear one although many of the laws referenced in the resources do carve out circumstances, or in some cases positions, for which a credit report may be requested. Note that merely having a law that may permit the use of credit reports does not relieve the employer of the ultimate responsibility to be able to demonstrate job relevance if challenged. Most of the guidance from litigation has come in the form of what is not job related. If you are filling a warehouse position, credit worthiness is not a bona fide occupational qualification. When hiring an individual with clear fiduciary responsibility, like a counter in a money room, it may be appropriate… unless you are hiring in New York City! (Review the New York City Stop Credit Discrimination in Employment Act to learn more).

Do not forget the credit report does not investigate how the information reported came to pass. The raw data provided only pulls the curtain back slightly. The employer has an obligation, in determining job relevance, currency, and accuracy, to complete the research only suggested by the data reported. For example, if the applicant has “bad credit” due to a catastrophic illness in the family, should that have the same weight as someone who has bad credit due to an addiction to television shopping channels and an aversion to paying bills? Many think not and in fact there is a growing legislative movement to specifically exempt medical bills from any credit worthiness evaluation.

Recommendations to Consider

In the absence of reliable direction that is legally defensible, the bare facts in a credit report should not be allowed to disqualify any applicant. An employer has two options when using the employment credit report:

  • When the credit report contains information which, on its face, appears adverse based on job- related standards, that report should be used as the basis for a more in depth review with the candidate to probe the circumstances to determine if there are mitigating factors to explain that derogatory information and to assess whether the adverse information is relevant to the job and should be considered as a factor in the hiring, retention or promotion decision; and/or
  • Establish an annual employment credit report review, (with the appropriate FCRA consents), and review those reports for significant changes in position from year to year.

The second approach is recommended for employees with access to significant amounts of cash and other negotiable instruments, and those who can sign contracts or commit your company to outlays of significant resources, such as buyers, purchasing agents, sometimes including department heads and company officers, when permitted by law. The annual credit audit should be automatic but, again, the presence of a significant change in credit standing should only start an inquiry. It is not to be misconstrued as conclusive proof of wrongdoing.

Generally speaking, if you are not currently using employment credit reports, do not feel that you need to start. Upon close inspection, very few positions actually merit credit inquiries. The questions of integrity that some employers expect to be answered by a single credit report are often better addressed with a combination of thorough background checks, comprehensive and well communicated corporate ethics polices, with established controls and management oversight.

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