The Legality of Using Credit Reports in Hiring Decisions

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By Angela Loëb

A couple of months ago someone in my professional network posed this question:  “How legal is it to use credit reports to disqualify otherwise good quality applicants?”

Interestingly, when this question was posed to me, I had just been networking with a small group over coffee the week before when this very topic came up.  One of the people there, a recruiter who is with a financial services company, brought up the challenge that they have with hiring people with good credit scores.  Obviously, this is a criteria for their company.  This recruiter’s comments led to an informal discussion about the desire in their HR department for lightening up those kinds of hiring restrictions, especially in light of the economic situation.  This financial services company, by the way, does something with credit cards for consumers.

The thinking in hiring circles is that those in the financial industry and those in accounting/finance positions who are entrusted with money might be tempted to embezzle when they are in debt, so, hence the credit checking.  The prevalent thought is that those who control company budget should, perhaps, be held to a higher standard.

Whether you agree with that thinking or not, there is one instance when I believe you’d agree that credit checking is important.  I also once provided candidates to an firm that worked with clients in bankruptcy.  Because of the access to certain databases and ability to modify fields of information in those databases, the firm insisted that they could only hire those not in danger of bankruptcy so as to avoid possible temptation.  It really makes sense in this case.

Personally, I don’t think that all positions should require credit checks.  It’s perfectly acceptable to write a hiring policy that details which positions require credit checking and which don’t… as long as the organization does not deviate from their written policy, they’ll be fine with the EEOC.

What does the HR profession think about all this?  As a member of an international HR professionals association, Society for Human Resource Management (SHRM), I frequently see articles published by the association on this subject.  In a February 2011 article from HR Magazine (a SHRM publication) called Close-Up On Screening, it was reported:

With a law that took effect Jan. 1, Illinois became the fourth state to restrict the use of credit histories in hiring decisions. Similar measures have been narrowly defeated in other jurisdictions, and the previous U.S. Congress introduced a bill on the subject but did not vote on it.

In November 2010, Massachusetts became the second state, after Hawaii, to prohibit private employers from asking job applicants about their criminal records on initial written applications. Massachusetts already prohibited the question on public-sector job applications, as do several other states and more than two dozen cities and counties. The laws and policies require employers to wait until later in the hiring process to ask applicants about their criminal records.

And in the April 2011 issue of HR Magazine the topic is broached again in States Seek to Limit Credit Checks for Hiring.  Apparently, there are “14 states pursuing laws that would prohibit employers from using a person’s credit history as a screening tool for hiring and retention decisions.”  So far, 4 states have passed laws that limit the use of credit report data for employment purposes.

Obviously, there is a raging debate about this topic, with both sides making their cases.  In the April HR Magazine article, one law maker is cited as saying that there is no proven link between bad credit and employee theft.  An opponent from an industry association takes the positions that if a person can’t manage his or her own finances, it could be a sign that he or she will struggle to manage the business finances.

All this is brought into check by an interesting comment made by Lester S. Rosen in the March 2011 HR Magazine article.  Rosen is chief executive officer of ESR Inc., a background-screening company in Novato, Calif., and author of The Safe Hiring Manual.  He says, “The perception that employers are ordering massive amounts of credit reports is nothing like the truth.”

In that same article, it’s pointed out that “In the past decade, employers have increased their use of all types of background checking, but a recent Society for Human Resource Management (SHRM) poll shows that the use of credit reports has not increased in the past five years.”

Well, whether it’s prevalent or not seems irrelevant in the end because legislatures in 14 states, including my home state of Texas, are considering the legislation restricting the use of credit reports in hiring decisions.  And my networking acquaintance’s question “How legal is it to use credit reports to disqualify otherwise good quality applicants?” will soon be answered… at least in our neck of the woods anyway.

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Angela Loëb is an author, speaker and co-owner of Great Occupations and owner of InSync Resources. She and her partner, Jay Markunas, help people make successful career transitions through workshops, “pajama learning” webclasses, personalized consulting sessions, as well as through The Job Search Boot Camp Show. Find out more at www.greatoccupations.com.

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