Here’s a question from a reader about credit checks – a subject most of us could probably stand to know a little more about.
A discussion in one of my LinkedIn groups veered to the use of credit checks in the workplace (for hiring, firing, promotion, etc). The topic is obviously an emotional one during a recession.
I know that privacy isn’t an issue because the employee must grant permission for a company to request the reports. And for certain professions, obtaining a credit report is required due diligence in the hiring process (example: National security positions).
I know that a handful of states have outlawed the practice.
Concerning the use of credit checks in the workplace: Is it true that we do not have proof of the relationship between credit checks and job performance? I always operated under the assumption that credit checks are a part of due diligence when vetting candidates. Yet, if the practice holds little validity; is it ethical?
Credit checks can be a complicated and sensitive issue. Let’s try to take the emotion out of the conversation and just talk about credit checks. I asked Heather Bussing, an employment attorney practicing labor and employment law prevention, policies and litigation, to answer a few questions for us about the topic.
First, can you give us the Readers Digest version of the Fair Credit Reporting Act (FCRA)? This is the law that most employers cite when asking for authorization to run a credit check on a candidate or employee.
Heather: The FCRA applies pretty much any time an employer obtains a background check or credit report from a third party. Here’s the official summary with links to the law and requirements.
Before a company can get or use a report, it has to get written permission from the person it’s about. The reporting agencies should have all the necessary forms and keep them up to date.
After the company gets the report, if they plan to reject someone for a job, raise, promotion or any other adverse action, then they have to do several things before they make the final decision:
- Send the candidate/employee a “Pre-adverse Action letter” that lets the person know what the planned action is, what information the planned action is based on, and give the person a chance to correct or dispute the information.
- Send them a copy of the report.
- Send them a Summary of Your Rights Under the Fair Credit Reporting Act.
Then, the company actually has to give the person time to respond and wait to make the decision –even if there may be other factors that would cause the employer to take the adverse action. How long? No one knows. But the FTC has said a minimum of 5 business days. I’d wait at least 10-15 business days, since the candidate has to get the letter, try to figure out what (if anything) is incorrect and why, gather the correct information, and then write the company back with the real story.
If the candidate sends new or corrected information, the employer has to at least consider it. If the employer then decides to finalize their adverse employment decision, it has to give notice of the final decision, along with how to contact the reporting agency to dispute or correct the information in the report.
Do you know if every state has some sort of credit check law in place? Can a state “outlaw” a federal law?
Heather: The federal law applies to everyone. About 20 states have their own versions as well. When state and federal laws overlap, the general rule is that states can provide more protections to employees/consumers, but can never provide less protection, or contradict the federal law. So states can’t ‘outlaw’ a federal law, but they can effectively prohibit using credit reports because it provides more protection to employees/consumers.
Here’s a list of some of state fair credit reporting laws-mostly dealing with retention and inclusion of criminal records. Some states also have more specific requirements. For example, Massachusetts law says the final adverse action notice must be in 10 pt. type and be issued within 10 days.
Other states have stricter rules about when an employer may obtain a background or credit report. These rules are usually based on state privacy laws. Some states, including California, Washington, Oregon, Hawaii, Illinois, Maryland, Vermont, and Connecticut, limit the use of credit reports to positions where the information is important to the job duties.
Almost every state allows employers to get deeper and more comprehensive information for higher management positions and jobs that involve money or sensitive information.
There is almost no limit on information that can be obtained in a misconduct investigation; and no notice is required either.
From my experience, not every candidate is submitted to a credit check. It has to be relevant to the work someone will perform. Could you share your thoughts on background checks being relevant?
In states where it’s unrestricted, an employer could do a background check on almost anyone who is applying for a job. But they don’t, because it can be expensive, time consuming, and a pain in the neck. Generally, it’s a good idea to wait until you narrow it down to the final, few candidates.
Another option is to work with a third party vendor who obtains and reviews the report for you. These companies only send the report to you if there’s something in there you’ve said you want to know about. The advantage is that in most cases, you won’t have to go through the notice of adverse action process since you didn’t rely on the report for the decision.
Ironically, you also don’t have to get permission or give notices if you do your own background investigation in-house by reviewing public records or searching the Internet. The FCRA only gets triggered when you order a report from a third party.
The states that restrict use of background checks only allow the reports to be obtained for positions where the employees would have significant responsibility, cash or accounting duties, or positions that require a high level of trust.
The EEOC has also issued guidelines that caution employers before considering criminal convictions in employment decisions because it can have a disparate impact on minorities. Minorities are arrested and convicted more than Whites. But the EEOC also recognizes the business necessity of considering criminal records for some positions. Employers should look at the (1) nature and gravity of the offense or offenses, (2) length of time since the conviction or completion of sentence, and (3) nature of the job held or sought. Essentially the EEOC is saying it’s not enough to reject a candidate because they have a criminal conviction—the employer also has to consider how the conviction relates to the job, the circumstances of the offense, and how many and how recent is are the offenses. (EEOC Guidance 915.002, April 25, 2012 )
I know that credit checks are often done in cases where an employee’s job responsibilities include handling expensive inventory or large sums of cash. And the company needs to bond the employee. It’s protection for everyone involved. Are you aware of any other circumstances where a credit check is usually performed?
Any position that requires a state license or a security clearance will involve background checks as part of those processes. After that, it’s optional for individual employer to run background checks.
Background checks are very common in positions that involve handling money or valuable property. It’s probably also a good idea to be able to trust the people who run your computer systems and have unlimited access to all the company files and data.
If I’m a recruiter, what happens if I discover a candidate has a less than spotless credit history?
After the rotten economy the past few years, finding employees who have perfect credit is like finding presidential candidates who have never smoked dope. Minor blemishes should be ignored.
Depending on the position and circumstances, even bankruptcies may not matter. I have a friend who opened a small gift boutique; her spouse was a realtor. Both businesses tanked with the economy. But they struggled and worked really hard trying to wait it out. When they finally declared bankruptcy, everyone wondered what took them so long. Their problem was trying harder for too long to do the right thing. It wasn’t irresponsibility.
Bigger issues that indicate dishonesty, recklessness, or especially recent criminal records, should raise red flags.
And if I’m a candidate with a blemish on my credit report, is there anything I should do when interviewing?
First get your credit report and fix any inaccurate information before you go job hunting. You are entitled to one free copy per year from any of the major credit reporting agencies.
If you moved and that Macy’s bill didn’t catch up with you for a year, or you went through a divorce and are still paying the attorneys fees on your credit card, then you may need to explain it when asked. The key is to get over the anger, shame, or blaming others, and accept responsibility for your part in the situation. You also want to be in the process of correcting it. If you are asked, give a straight forward, honest answer that emphasizes how you are working to fix it.
If it is a criminal issue, know what your state laws are on whether and how much an employer can ask. For example, California has a law that prohibits employers from asking about certain marijuana charges (of course, it does!). There are also laws on how long reporting agencies can disclose criminal records and information—usually 7 years.
But many states don’t allow disclosure of charges that were dropped, expungements, or pardons. Often minor infractions can be expunged, i.e. wiped off your record after a certain amount of time after meeting certain requirements. So first, clean up anything you can. Then again, give a straightforward answer that admits the mistake and explains why it won’t happen again-without revealing the finer details of your divorce, therapy, 12-step program, ADD or antidepressant prescriptions.
Many thanks to Heather for sharing her expertise on this complex subject. I love the way Heather is able to break down a tedious subject into manageable parts. If you enjoy her style, be sure to check out her blog and follow her on Twitter.
As you can see, the law surrounding credit checks is very detailed. Since we can’t cover it all in a blog post, if you have any concerns or questions – please seek additional guidance. Have I told you lately how much I love answering reader questions? I do. So keep those questions coming…