I Hope the EEOC Listened: Employment Credit Reports Have Value

This week, the EEOC held hearings to “explore” whether employers should be allowed to review a job applicant’s credit report before making a hiring decision. I say “explore” because they clearly are against this legal employment screening business practice and assert that it can be discriminatory.

“An ever increasing number of job applicants and workers are being exposed to employment screening tools, such as credit checks, that could unfairly exclude them from job opportunities,” said Jacqueline Berrien, chairwoman of the Equal Employment Opportunity Commission.

I’ll start by saying that I am by no means the great defender of credit reports. I believe that a company should not indiscriminately run credit reports on all candidates unless required to do so by regulation or necessitated by job responsibility. And when you analyze the statistics from SHRM’s Background Checking Survey (on Credit Reports), businesses in general seem to support that statement.

They found that only 13 percent of all organizations were running credit reports on all candidates, 47 percent were checking credit on select candidates, and the remainder of respondents were not using them at all. Of those that review credit reports on select workers, 91 percent do so because the candidate would have fiduciary and financial responsibilities. And, 46 percent do so because the person was an executive level candidate.

EmployeeScreenIQ’s Screening Trends survey found that only one third of respondents thought credit checks were a high priority in the hiring process. Some 15 percent said they evaluated credit on all candidates, 45 percent said they did so on select candidates, and 39 percent said they never reviewed credit when making a hiring decision.

I understand that this is becoming a hot button issue, but I think our state and federal governments and agencies need to take a step back and analyze this information before abolishing the practice.

The states of Hawaii, Oregon, Washington, and Illinois have already passed legislation aimed at curbing the use of employment credit reports, with around 19 other states considering proposed legislation. There is a federal effort to do the same, and of course, the EEOC would be only so happy to see this measure pass. It’s important to note that there are a number existing laws that provide protection for job candidates against those that would misuse employment credit reports.

Seyfarth Shaw attorney Pam Devata provided testimony to the EEOC concerning these laws.

While some have argued that additional restrictions are needed with respect to the use of credit in employment, I believe that adequate protections are already in place with respect to an employer’s use of credit reports for employment purposes. The Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq., the Bankruptcy Code, 11 U.S.C. § 101 et seq., Title VII, 42 U.S.C. § 2000e et seq., and state laws all protect consumers’ rights.”

As to Pam’s point, California Gov. Arnold Schwarzenegger has twice vetoed a state bill aimed to ban employment credit reports. His rationale the second time around was as follows:

I am returning Assembly Bill 943 without my signature. This bill would prohibit the use of consumer credit reports for employment purposes unless the information is either substantially job related, as defined, or required by law to be disclosed to or obtained by the user of the report.

This bill is similar to legislation I vetoed last year on the basis that California’s employers and businesses have inherent needs to obtain information about applicants for employment and existing law already provides protections for employees from improper use of credit reports.

As with last year’s bill, this measure would also significantly increase the exposure for potential litigation over the use of credit checks. For these reasons, I am unable to sign this bill.”

Devata, in her EEOC testimony, goes on to say:

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. . . the FCRA has very stringent and detailed procedures that employers must follow before they use credit reports in whole or in part in making hiring or other employment decisions. The FCRA requires the following as it relates to an employer’s use of credit reports:

  • Before requesting a credit report, an employer must tell a consumer that a credit check will be requested, and must obtain the employee’s consent to obtain the credit information.
  • Before obtaining a credit report, an employer must certify to a third party consumer reporting agency the following: (1) that it has a permissible purpose to obtain the information, (2) that the employer will comply with the disclosure and authorization and adverse action provisions in the FCRA, and (3) that the employer will not use “information from the consumer report … in violation of any applicable Federal or State equal employment opportunity law or regulation”
  • Before taking any adverse action, in whole or in part based on information in the credit report, an employer must follow a two-step adverse action process which requires that the consumer: (1) be given a copy of his or her report and a copy of the Federal Trade Commission’s “Summary of Your Rights Under the Fair Credit Reporting Act,” and (2) be told of his or her right to dispute the accuracy or completeness of information in the report prior to adverse action being taken.

While those opposed to employers’ use of credit checks have sometimes opined that employers may not tell applicants that the reason they are being denied employment is based on a credit report, to not do so would both be contrary to federal and many state laws as well as my experience in working with employers large and small.

No employer could do so without leaving an informational trail of the credit search. Unlike a criminal record that has no research trail, every time a credit check is requested, it shows up as a “soft-hit” on a person’s credit history with the name of the entity requesting the report as well as the purpose for which it was requested. In my experience, employers are aware of this fact. They are also aware that if an applicant makes it to the final stages of the hiring process (for example, following completion of an application, an interview or conditional offer), and then is not hired, the applicant often assumes that the decision may have something to do with the final information received by an employer—oftentimes a background check.

Perhaps this is another reason why 87 percent of employers go above merely allowing an applicant to dispute information in his or her report, but also speak directly to applicants allowing them to explain the circumstances surrounding information in their credit report before making an employment decision. Finally, employers are knowledgeable of their responsibilities under the FCRA to provide a copy of the report to the applicant and allow an applicant to dispute information in the report. Employers who fail to follow the FCRA risk private actions from consumers for negligent non-compliance and/or willful non-compliance as well as possible investigation from the Federal Trade Commission.”

(You can check out Pam’s full testimony to the EEOC here.)

In my opinion, much of the backlash against credit reports is a populist response to our current economic climate. After all, people are struggling.

However, another important finding from the SHRM study is that employers aren’t just reviewing the last couple of years worth of credit history, but rather, looking at the entire report as a “body of work.” Most employers understand that finding someone with perfect credit is near impossible, even in good times. Today, if companies waited around for candidates with perfect credit, they wouldn’t be able to hire anyone. They also know that unless regulated, that bad credit alone will not disqualify someone from employment. Further, when derogatory information is found, a great majority are asking for an explanation before taking action.

It is important to consider that most companies are using this tool to gauge personal responsibility. If a person has a history of mishandling their own finances, are they fit to manage the finances of their employer? Can they be trusted with personal information on a company’s customers?

The government should rely on the real facts, not anecdotes or public misunderstandings and enforce the current laws. I have no problem with the EEOC (and the states) going after those that abuse or intentionally misuse employment credit reports. But, don’t let a small number of isolated incidents ruin everyone else’s ability to protect themselves, their employees, and their customers.

This was originally published on EmployeeScreenIQ’s IQ Blog.


12 Comments on “I Hope the EEOC Listened: Employment Credit Reports Have Value

  1. Nick,

    You’ve talked a lot about why it’s not a problem to run credit checks, but what VALUE do they add to the decision process (excepting roles with fiduciary responsibility)?

    I can think of many circumstances in which it hurts employees. I can think of few in which it helps employers.

    – Chris

    1. Chris the reason is simple….and mirrors the response by NFishman above….if a candidate can not manage their finances in a proper manner, then what evidence do I have that they will manage their responsibilities in a proper manner? Unlike most HR reps, when I find a questionable credit report on a potential employee, I always ask them to explain the questionable items. There are many factors that go into rejecting a candidate solely on credit. If everything else checks out, and I have been satisfied in their explanation(s) on the questions I have, I will go ahead and hire them.

      1. Except the correlation between workplace performance and credit scores is weak with a validity coefficient of .07 according to a study by Michael Aamodt done for none other than SHRM. In my mind, you might as well be asking them what sort of tree they would be if it is that non-correlated.

    2.  The studies that have been performed prove that NICK is WRONG.  There is no correlation.  There is a mild and unvalidated (due to the people doing the study not being psychologists etc) between personality and credit checks.  It reveals that those with great credit records tend to be DISAGREEABLE and not well liked.  But even that is a tenuous link.  THERE IS NO STATISTICAL EVIDENCE THAT CREDIT SCORES ARE LINKED TO FRAUD OR POOR JOB PERFORMANCE.

  2. Yeah Chris. There is no doubt that using credit reports without a true need by job responsibility, industry or regulation is a minefield for employers. I got a similar question this morning and responded as follows:

    Imagine that you’ve entrusted your life savings to a financial planner with a reputable firm who mismanages your money and leaves you with nothing. Now, let’s say that the employer didn’t run a credit report before hiring the individual and that credit report would have revealed a history of irresponsible management of their own personal finances. If they couldn’t manage their own money responsibly, you probably wouldn’t want them managing yours.

    Pam Devata also gave a few examples in her testimony. See below:

    Much has been debated about whether information in a credit report is an accurate predictor of a person’s judgment, propensity to engage in theft or fraud, or ability to perform specific jobs. We have set forth below specific anecdotes from employers with respect to the relevancy of having access to a credit report for employment purposes:

    In Example Number 1 a company became concerned when a sales employee whose salary was approximately $80,000 began displaying lavish spending habits, including purchases of a new Mercedes, expensive jewelry, and exotic and lavish vacations, which the employee discussed at work. As part of a promotion, the company ran a credit check on the employee and learned she was heavily in debt. After an investigation, the company then learned that the employee was involved in a fraudulent scheme against the company that also involved two other company employees. The employees were stealing and selling company product on the black market. One of the employees was in quality control, and the other employees were in sales.

    In Example Number 2 a financial services firm employed a security officer to monitor the activities of traders. A routine credit check that the company periodically ran on its security officers revealed that he had $800,000 in debt. The company then began monitoring his activities, and discovered that he was involved in a money laundering scheme with a rogue trader.

    In Example Number 3, an applicant applied for a job as a student loan officer in the Financial Aid Department at a college. The employer ran a credit check on the applicant and saw large amounts of unpaid debt, some of which was attributed to his own student loans that were outstanding as well as other accounts in collections. The employer hired the individual only to learn that six months into employment, the employee had attempted to process fraudulent loans by stealing the identity of a student.

    1. Aren’t these just isolated anecdotes, the very thing you ask us to ignore when an employer abuses credit reports? Attorney Sarah Crawford testified in front of the committee and said “TransUnion official recently admitted under oath, ‘At this point we don’t have any research to show any statistical correlation between what’s in somebody’s credit report and their job performance or their likelihood to commit fraud.'”

      Wouldn’t TransUnion have this information, especially when testifying before Oregon lawmakers debating whether to put restrictions on credit checks used in employment? Is there any information showing correlation that you’ve found? The best I’ve found is correlation that roughly parallels personality profiles (think Myers-Briggs) and the marketing and use of personality profiles have shifted from a decision making tool in hiring to an internal or career development tool because of its unreliability.

      1. It’s not necessarily a predictor that someone will rob you blind. However, it can be used to assess an individual’s personal responsibility. If they cannot manage their own financial obligations responsibly, how will they manage someone else’s? And again, the presence of poor credit should just be used to ask more probing questions about what’s going on.

          1. If you already have existing laws that protect consumers from those that misuse or abuse these reports, why not just enforce them? Again, if you go back to the SHRM study and our findings about how employers are using credit reports, the issue doesn’t require more legislation. Punish those that run afoul of the law, but don’t ruin it for the vast majority of employers that use them responsibly.

      2.  There was a thorough study by LSU that refutes this entire column.  Furthermore, there have been large awards against companies improperly using credit reports to deny jobs.  I will bet that the guy who defrauded Best Buy and Madoff BOTH had stellar credit scores as do many PSYCHOPATHS.

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