The Controversy Over Credit Checks in Employment

According to a survey from the National Association of Professional Background Screeners (NAPBS), 95 percent of employers conduct background checks on prospective employees before hiring. However, roughly one out of every three of those employers also use credit checks as part of the hiring process for some positions, and nearly one out of every six of them use credit checks to fill all potential vacancies.

To clarify the distinction here, an ordinary background check usually involves checking a candidate’s public records, including criminal history. However, a credit check involves pulling “soft” credit reports from the three major credit bureaus. In doing this, an employer would be given information on lines of credit, amounts owed, payments made or missed, and any bankruptcies filed.

Why would an employer want this information? There are several arguments for this practice.

One is that if an employee is having trouble managing their personal finances, they might not be competent to manage finances for an employer. This argument obviously applies more to leadership positions where an employee would
be required to make financial decisions on behalf of their company. Any employee that has to manage a budget could arguably be a risk in this sense.

Another argument is that, if an employee is in a situation of financial hardship or desperation, he or she might be more susceptible to bribery, or more likely to commit theft or fraud. This stance is a controversial one, as it isn’t entirely clear that there is a solid nexus between financial struggle and propensity to behave unethically. Surely financial troubles might compel some people to lie or steal in order to fix their financial problems. But that doesn’t mean that every person experiencing financial hardship would compromise their principles in this way.

A third and final argument is actually unrelated to the financial information that a credit report would provide. Some employees may wish to lie about their past employment, either to claim employment that never actually occurred or to hide employment that they’d rather not disclose. A soft credit report will generally include employment history, so in this sense credit checks can be used as a way to verify a candidate’s employment claims.

It could of course be argued that an employer could verify past employment by simply calling the past employers. But there are caveats here. First, past employers are not required to confirm or deny employment for future employers. Second, if a past employer has gone out of business or been bought out by another entity, there may not be anyone left to contact. And third, if an applicant is trying to hide past employment rather than claim employment that never existed, an employer would have no way of auditing for this kind of dishonesty. So credit checks will usually provide a more reliable accounting of a candidate’s employment history.

But there are also risks in using credit checks for employment screening. In the second part of this article, we’ll look at how employers might expose themselves to potential legal liability if credit checks are not properly implemented.

How employers can expose themselves to legal liability if credit checks are not implemented carefully

A major concern in using credit checks for employment screening is discrimination. The law obviously does not prohibit employers from making employment decisions based on credit history. In fact, the Fair Credit Reporting Act (FCRA) impliedly permits denial of employment based on credit information, provided that the employer a) first obtain applicant consent to acquire the report, and b) provide the candidate with a copy of the credit reports it used in making its decision. And while some state laws have restricted the use of credit checks, all states allow for their use in at least some circumstances.

However, if a nexus can be identified between credit record trends and a protected class, then a legal case of discrimination might emerge. Such discrimination need not be intentional either. For example, suppose there is evidence that racial minorities are more likely to have poor credit history than white persons. If an attorney can show that an employer had a policy of systematically dismissing applicants with poor credit history, and precluding any further analysis, then that attorney might be able to make a case for disparate impact discrimination. In other words, it wouldn’t matter if the employer did not intend for their policy to discrimination against racial minorities; if it had the effect, that would be sufficient to establish liability, absent other reasons or circumstances.

So what can employers do to avoid liability with the use of credit checks in the employment screening process?

First, an employer should know the laws of the states in which it operates, and make sure that the use of credit checks is permitted.

Second, if an employer is going to use credit checks, it should do so only where credit history would be objectively relevant to the responsibilities of the position in question. So running a credit check on an applicant for a Chief Financial Officer (CFO) position would probably be appropriate, due to the authority and influence the employee will have on the financial affairs of the business. Any other leadership positions that would involve financial decision making would also be fair game.

Likewise, credit checks for positions that routinely process financial transactions and handle cash would probably be fine as well, since the employer is arguably exposed to risk with such activities. So bank tellers, bartenders, restaurant servers, and retail check-out clerks would all fit the bill. But for other jobs -- bus drivers, cooks, carpenters, custodians, etc. -- there would be no justifiable need to subject such applicants to credit checks.

And third, it goes without saying that, if an employer decides to implement credit checks for a given position, all potential hires should be subjected to the same checks. Any inconsistent treatment from applicant to applicant can open the door to the inference of discrimination. In large companies, this requires careful and competent communication of policies so as to ensure consistency. For example, a hotel chain with properties all over the United States needs to ensure that hiring practices are consistent (to the extent allowed by state laws).

In litigation, attorneys can benefit from the help of expert witnesses who can testify as to the propriety of credit checks in different industries and for different job positions. Establishing industry standards in making a case for or against the use of such screening methods can make all the difference in a potential lawsuit. So it is strongly recommended that attorneys avail themselves of this kind of help when they can.

By Dr. Gary Deel, PhD, JD For

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Disclaimer: Every effort has been made to ensure the accuracy of this publication at the time it was written. It is not intended to provide legal advice or suggest a guaranteed outcome as individual situations will differ and the law may have changed since publication. Readers considering legal action should consult with an experienced lawyer to understand current laws they may affect a case.

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