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Credit Reports for Employment Background Checks

An Excellent Candidate Assessment Resource

October 15th, 2015

By Michael Mays, President, Employer’s InfoSource

In spite of misleading headlines and perhaps a bit of erroneous information surrounding the use of credit reports for employment purposes, credit reports are a legal, meaningful and information rich candidate assessment resource. Indeed, credit reports are authorized for employment evaluation use under the federal Fair Credit Reporting Act (FCRA) as well as state law in all 50 states – with some notable restrictions.

Contrary to attention-grabbing headlines, employment credit reports have not been “banned” or “prohibited” for use by employers anywhere in the USA. However, your state (or city) may have imposed certain job-specific restrictions / exemptions and additional disclosure requirements on employers who wish to use credit report information to evaluate job candidates. Some state level restrictions are more broad-reaching than other states.

Given the nature of the governmental exceptions to various state credit report restrictions, one might surmise that government is exempting itself from the very laws it imposes on everyone else. Be that as it may, employers can, and still do, use credit reports for employment background evaluation purposes.

So far, 10 states and 1 city (New York City) have enacted legislation setting limitations or requiring a specific basis under which employers may evaluate a job applicant’s credit report. These are local restrictions that reach beyond the terms set forth under section 604 of the federal Fair Credit Reporting Act [15 U.S.C. § 1681b].

Many of these 10 states have narrowed the permissible purpose of obtaining a job applicant’s credit report by prospective employers to financial/fiduciary, managerial / executive positions and positions of public trust such as police officers and certain high-level government employees. This can include cashiers and others who handle cash and credit card information. (Naturally, it is advisable to become familiar with the applicable corresponding laws in your state.)

The following 10 states and 1 city have enacted their own law pertaining to the use of credit reports for employment evaluation purposes:

  • Hawaii (Post Conditional Job Offer – must be related to “bona fide occupational qualifications”.)
  • Maryland (After offer of employment and substantially job related.)
  • Oregon (Substantially job related – must disclose to applicant.)
  • Washington (Substantially job related – disclosed to applicant.)

Advantages of Credit Report Information in the Employment Decision Process

The candidate’s credit report can provide a wealth of background information and can truly round-off a candidate’s background check. However, employers should balance the information contained in a credit report with its relevance to the position under consideration. Employers should not necessarily focus on just one or two negative items. View the information as a whole, as it might pertain to job related scenarios, and how it balances with the over-all background check (provided that you have conducted thorough background verifications). Credit reports can serve to confirm information provided by your applicant, and can also indicate inconsistencies with information previously provided – including previously undisclosed employment and other names or addresses used by the prospective employee.

For example, if there is collection activity indicated on a credit report, is it just one collection account from a dentist’s office for $285.50 example, or is there a string of collection accounts from numerous sources or local retailers? Maybe there are 25 collection accounts for small amounts of say $25.00 to $100.00 from area grocery stores? A pattern of collection accounts reflecting relatively small dollar (cash back) amounts and mostly within the same geographic region, typically indicates a pattern of writing bad checks to area merchants. And such a pattern can conceivably point to a person who could potentially be subject to criminal prosecution.

Is the applicant facing repossession or foreclosure combined with long-term bad check writing? This could indicate an individual who may be experiencing insurmountable financial issues that could transfer to workplace and performance issues. Especially if lawsuits or wage garnishment ensue.

[You might reasonably wonder why the police wouldn’t immediately arrest such a bad check offender. The problem is, in most jurisdictions, police are completely over-burdened with bad check reports and with all the other crimes they have to investigate, non-sufficient funds checks take a lower priority from an investigative manpower allocation standpoint. Consequently, stores have found that turning bad checks over to collection agencies which in-turn, report bad checks to the credit bureaus, has at least some redeeming results – sooner or later.]

Does the position under consideration involve access to high-value proprietary information such as trade secrets, formulas, methods, designs, plans, cash or access to company funds, checking accounts, access to high-value inventory or will have fiduciary decision making authority? If so, then credit report information may take-on a notably sharper focus.   Would an applicant who is bordering on or actually experiencing financial difficulty, represent an unreasonable security risk?

Potential red flag indicators might involve a candidate who has a monthly indebtedness liability of far more than what the prospective salary would cover. If given the job, would the employee stay, or leave just as soon as a better paying position could be secured? In other words, would the candidate be parked in your organization awaiting a better situation? Meanwhile, you stand to lose your investment in recruiting/onboarding, time, training and salary. Is this to imply that a bad credit report automatically translates into a dishonest individual? No. But it does indicate potential risk factors that employers should consider when considering candidates for certain, risk sensitive, high access positions. Especially when combined with other adverse information such as criminal convictions for drug offenses or theft. (Habitual use of controlled substances and financial distress often go part and parcel.)

Perhaps the candidate has a perfectly acceptable credit report. Great! Just one less thing to be concerned with, right? Well yes, unless you notice that the credit report reflects a $2 million dollar combined mortgages on two expensive properties and a total monthly payment liability including credit cards of over $14,000, and the position under consideration pays $48,000 annually*. Then you might want to start asking questions. Is there another significant source of income? Perhaps an identification theft scenario or some other concerning issue is afoot? Sometimes the dots don’t seem to connect as clearly as they might. Further inquiry with the candidate may be in order. [* An actual scenario that we uncovered during a background check – which uncovered an ongoing fraudulent worker compensation/contrived lawsuit scam]

Balancing Credit Report Information with Job Relevance and Today’s Financial Climate

Does a bad credit report mean that the candidate represents a poor risk from a candidate quality / loss prevention standpoint? Perhaps and perhaps not. It’s often the nature and scope of adverse credit report information, possibly combined with additional question marks such as unverifiable employment or a significant unexplained gap in employment history that requires the most attention from hiring decision makers. A few isolated late payments on a credit card or mortgage is not the same as an on-going pattern of 60-90 day late accounts, collection accounts, bad checks, accounts closed by credit grantor, tax liens and account write offs . That’s why recruiters and hiring managers are well advised to balance the credit report information with the candidate’s verified background.

Take into account the verified “big picture” e.g. education, employment history, criminal history, driving report and personal / professional reference interviews.   In addition, there’s nothing wrong with asking the candidate about something of concern appearing on their credit report. There may likely be a perfectly acceptable explanation.

Why Reviewing a Candidate’s Credit Report Can be Significantly Important

Let’s say you’re a recruiter and you place a candidate in a fiduciary position with the employer/client, and you decided not to obtain review the candidate’s credit report. Then at some future point, there’s a serious problem with this employee with regards to, theft/embezzlement, forgery, fraud or some other type of shady dealings. What will your rationale be for not having reviewed the candidate’s pre-existing financial situation? How will you defend your decision for not evaluating the candidate’s financial persona and checking for potential red flags? As a result of not checking a credit report, you could miss the additional piece of information that could have raised legitimate questions pertaining to the applicant’s qualifications. [Embezzlements in amounts of well over $100,000 are more common that most people realize.]

On the other hand, having reviewed the applicant’s credit report, perhaps you gain the peace of mind in knowing that everything seems satisfactory and the one or two areas of possible concerned were explained to your satisfaction.

So which one of the two scenarios above are you most comfortable with? In the end, the $8.00 – $15.00 charged for a pre-employment credit report can provide you with a plethora of relevant information regarding your applicant’s background that can be weighed and balanced with job relevance and additional background information.

That’s the power of information. One additional piece of background information can go a long way to helping you make the best, most informed hiring decisions. Balance, proper perspective and job relatedness is the key.

[The content of this article reflects the opinion of the author. The author is not an attorney and nothing in this article is offered or intended as legal advice. Employers are strongly encouraged to consult with qualified legal counsel on matters pertaining to employment screening, legal compliance and labor law. We thank for allowing the use of links to their informative legal articles.]

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