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Employment Credit Check
They say (and by they, we really mean Uncle Ben from Spiderman), “with great power comes great responsibility.” This power and responsibility come in when conducting Employment Credit Checks. As an employer or HR practitioner, are you aware that along with the benefits of providing background information about a potential employee, there are risks involved? Find out what these are and how you can navigate the hiring process with them.
According to a National Association of Background Screeners (NAPBS) survey, around 47% of candidates have their credit screened as part of the hiring process. The same study found that employers are most likely to use credit checks for positions with financial responsibility, such as accounting, finance, and banking jobs.These checks are done by 51% of employers in the US. Are you part of this 51% already? Decide if you should add to this statistic as we dive into the controversial topic and explore the potential implications for job seekers and employers alike. Let's dive in.

What Is an Employment Credit Check?

Most companies conduct background checks as part of their employment screening process. An employment credit check is a background check that an employer may conduct on a job applicant or current employee to gain insight into their financial history. An employment credit check assesses an individual's financial responsibility, trustworthiness, and ability to manage money.During an employment credit check, an employer will typically obtain a copy of the applicant's credit report from one of the three major credit reporting agencies: Equifax, Experian, or TransUnion. This report will provide information about the individual's credit history, including their credit score, payment history, outstanding debts, and bankruptcies or foreclosures.
As part of a rigorous hiring process, employers may use this information to decide an applicant's suitability for a job, particularly those involving handling money or sensitive financial information. For example, an employer may hesitate to hire someone for a financial analyst position if their credit report shows a history of missed payments or large amounts of debt. On the other hand, an individual with a strong credit report may be viewed as responsible and trustworthy and, therefore, more likely to be hired for a job that involves financial responsibility.It's worth noting that not all employers conduct employment credit checks, and in some cases, it may only be done for specific positions or industries. Some states and countries restrict when and how employers can use credit history in hiring.Remember, an employment credit check is just one part of the hiring process and should not be viewed as the sole determinant of an applicant's suitability for a job. Employers should consider various factors, including an individual's skills, experience, and references.

Pros and Cons of Conducting an Employment Credit Check

Employment credit checks have become increasingly common in hiring as employers seek to evaluate job candidates beyond their resume and interview performance. Some argue that credit checks provide valuable insights into a candidate's financial responsibility and trustworthiness, while opponents say they are unfair, invasive, and potentially discriminatory.Let’s explore the pros and cons of conducting an employment credit check.

Pros of Employment Credit Checks

Let's first explore the pros of employment credit checks in more detail, examining how they can help employers make more informed decisions and protect their organizations from liability.
  • Assess financial responsibility. An employment credit check can provide insight into an individual's financial responsibility and ability to manage money, which can be particularly important for jobs involving financial obligations. Some factors to look out for include how they manage debt, find loan options, track their expenses, and use their credit card.
  • Reduce the risk of theft or fraud. By screening candidates for financial troubles, employers may reduce the risk of theft or fraud in the workplace.
  • Hire trustworthy candidates. Candidates with solid credit reports may be viewed as more reliable and responsible, which can be valuable in roles that involve financial responsibilities.
  • Protect sensitive information. Employees with access to sensitive financial or personal information may be subject to employment credit checks to ensure that they can be trusted with this information.
  • Meet legal or regulatory requirements. Some industries or positions may require employment credit checks as part of legal or regulatory requirements.
  • Avoid liability. Employers may be liable if they hire an employee with a history of financial fraud or other financial issues that could have been uncovered with an employment credit check.

Cons of Employment Credit Checks

Amy Traub states, "As worker advocate Nat Lippert puts it, the use of credit reports in employment puts job seekers in a catch-22. They can't pay their bills because they can't get a job and now they can't get a job because they can't pay their bills." This quote exemplifies some of the controversies that arise with credit checks. While employment credit checks can provide some benefits, there are also potential downsides, including the risk of discrimination and the fact that credit history may not accurately reflect an individual's character or ability to do their job. Here are some potential drawbacks or cons of conducting an employment credit check as an HR professional or business owner:
  • Discriminatory risk. There is a risk of discrimination in employment credit checks, mainly if they are not conducted fairly or if the credit history is used to make discriminatory hiring decisions.
  • Inaccuracy of credit reports. Credit reports can contain errors or inaccuracies. For example, personal loans that report incorrectly may unfairly impact an applicant's chances of getting hired.
  • Unrelated to job performance. Credit history may not be related to job performance or an individual's ability to do their job well, particularly for positions that don't involve financial responsibilities.
  • Privacy concerns. Conducting employment credit checks involves accessing an individual's financial information, raising privacy concerns.
  • Cost. Employment credit checks can be expensive, particularly for small businesses or organizations with limited resources.
  • Legal restrictions. In some states or countries, there are restrictions on when and how employers can use credit history in the hiring process.
Employers must weigh the potential benefits and drawbacks of employment credit checks and make informed decisions about their use in hiring (you’ve got power AND responsibility)!

Federal and State Laws on Employment Credit Checks

It's crucial for employers to be familiar with both federal and state laws regarding employment credit checks and to ensure that their practices comply with all applicable laws and regulations. Employers should be aware that laws and regulations regarding employment credit checks can change over time and should stay current with any changes in the law.Here's an overview of the federal and state laws that apply to employment credit checks.

Federal Law

Fair Credit Reporting Act (FCRA): This federal law sets standards for credit reporting agencies and regulates the use of consumer reports, including credit reports, in employment decisions. Under the FCRA, employers must obtain written permission from the individual before conducting an employment credit check. They must provide the individual with a copy of the report and a summary of their rights under the law if they take any adverse action based on the report. The FCRA also allows individuals to dispute inaccurate information in their credit reports.

State Laws

  • California. California law restricts the use of credit reports in employment decisions, with some exceptions. Employers in California may only use credit reports for specific positions, including managerial roles, law enforcement jobs, and jobs involving access to confidential information. Additionally, California law requires employers to provide notice to the individual before conducting a credit check and to provide a copy of the report if requested. Read more about this in the Civil Code 1785.1 (Consumer Credit Reporting Agencies Act).
  • Colorado. According to Colorado’s Employment Opportunity Act 8-2-126, employers may not use credit reports for employment purposes unless the job falls under certain exemptions, such as positions that involve financial transactions or access to confidential information. Employers in Colorado must also provide written notice before conducting a credit check and obtain written authorization from the individual.
  • Connecticut. Connecticut’s Public Act No. 11-223 prohibits employers from using credit reports in employment decisions, with certain exceptions, such as positions involving a fiduciary responsibility or access to sensitive information.
  • Hawaii. Hawaii state law allows employers to conduct credit checks, but only for positions that involve financial management or fiduciary responsibility. Employers must provide written notice before running a credit check and obtain written authorization from the individual. Hawaii prohibits discrimination based on credit history or credit report.
  • Illinois. In Illinois, employers may not use credit reports for employment purposes unless the job falls under certain exemptions, such as positions involving financial responsibility or access to confidential information. Additionally, Illinois law requires employers to provide notice before conducting a credit check and to provide a copy of the report if requested. Get more information through the Employee Credit Privacy Act 2011.
  • Maryland. Maryland’s Job Applicant Fairness Act 2011 prohibits employers from using credit reports in employment decisions, with certain exceptions, such as positions involving access to confidential information or financial responsibility.
  • New York City. New York City has enacted its law regarding credit checks in employment, which prohibits employers from requesting or using an applicant's credit history in most cases.
  • Washington. Washington state law prohibits employers from using credit reports for employment unless the job falls under certain exemptions, such as positions involving financial responsibility or access to confidential information. Employers must provide written notice before conducting a credit check and obtain written authorization from the individual.

Best Practices for Conducting Employment Credit Checks

Follow these best practices to conduct employment credit checks fairly and responsibly, protect the privacy and rights of individuals, and ultimately make informed hiring decisions.

Obtain Written Consent

Before conducting an employment credit check, obtain written permission from the individual. This consent should be separate from other application materials and clearly state that a credit check will be conducted.

Use a Reputable Credit Reporting Agency

Use a reputable credit reporting agency to conduct the credit check. Look for agencies that comply with the Fair Credit Reporting Act (FCRA) and have a track record of accuracy and reliability.

Limit the Use of Credit Checks

Only conduct employment credit checks for positions where it is relevant and necessary. For example, credit checks may be appropriate for jobs involving financial responsibility or access to sensitive information.

Provide Notice and Disclosure

Inform the individual that a credit check will be conducted, and provide a copy of the report if requested. Additionally, give disclosure to the individual if adverse action is taken based on the report, as required by the FCRA.

Ensure Compliance With Applicable Laws

Be aware of federal and state laws regarding employment credit checks, and ensure that your practices comply with all applicable laws and regulations. Some states have restrictions on when and how credit checks can be used, so staying current on any law changes is essential.

Alternatives to Employment Credit Checks

If you don’t like the risks and downsides that you may face when conducting credit checks, here are some good alternatives to save you some trouble and still get you the hiring information you need.

Personal References

Personal references can provide insight into the applicant's character, work ethic, and ability to handle financial responsibilities. Employers can better understand their potential employees by speaking with individuals who know the applicant well.

Skills and Aptitude Tests

Skills and aptitude tests can assess an applicant's abilities in areas relevant to the job, such as financial management, problem-solving, or critical thinking. These tests can be a valuable tool for evaluating applicants' skills and potential and help employers make informed hiring decisions without relying on credit checks.

Interview and Job History Analysis

Employers can also conduct in-depth interviews with applicants to assess their skills, experience, and qualifications. Employers can better understand their potential employees by analyzing the applicant's job history and asking targeted questions about their experience and work style. Each alternative can provide employers with valuable information without relying on credit checks. By combining these methods, employers can better understand applicants' qualifications, skills, and character and make informed hiring decisions based on this information.

Conclusion

Employment credit checks are a complex and often controversial practice in the hiring process. While they can provide valuable information to employers, they also raise concerns about fairness, privacy, and discrimination. Ensure understanding of the legal requirements and best practices for conducting employment credit checks and the potential alternatives to credit checks. By staying informed and up-to-date on these issues, employers and job seekers can navigate the complexities of employment credit checks and make informed hiring and employment decisions.
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