SHRM Almost Gets It Right On Credit Checks

SHRM's position on background checks differs little from the Chamber of Commerce. (Photo illustration by Dreamstime).

What’s the saying? Close only counts in horseshoes or hand grenades?

If that’s the case, then a valiant effort by the Society for Human Resource Management to demonstrate they had an understanding on key issues regarding credit checks being used in employment decisions went to waste yesterday in testimony before the EEOC.

It started off surprisingly well with Christine Walters, SPHR (the person chosen by SHRM to speak on their behalf) opened with this statement:

To be clear, we believe that employment decisions should be made on the basis of an individual’s qualifications – such as education, training, professional experience, demonstrated competence – and not on factors that have no bearing on one’s ability to perform job-related duties. Furthermore, SHRM and its members fully appreciate that the high unemployment rate and overall health of the economy in the U.S. have had a severe impact on countless individuals’ credit history.

It went downhill from there, though.

Making the case for unfettered access to credit checks

Throughout the written statement provided by SHRM (available here as well), Walters repeatedly made the case for keeping the status quo of unrestricted access to credit checks (assuming Fair Credit Reporting Act authorization is met) while subsequently diminishing the importance of credit checks to the overall employee selection process. She also chose to highlight the so-called protections of the FCRA by pointing out that an employer couldn’t run a check without authorization, and that they had to inform the person if they made a decision based on the information, and allow them to challenge the accuracy of that information.

In addition to FCRA, she states that many regulating bodies include credit checking as part of their recommendations or guidelines. Other bodies have found that living beyond a person’s means and experiencing financial difficulty were more likely to commit theft or fraud in the workplace and thus recommended credit checks (and I’m assuming denials based on that information) as a way of proactively fixing the issue.

Lastly, Walters focuses on the fact that very few employers do across the board credit checks and that credit checks typically factor in the least out of all the factors in an employment decision. While I can’t think of a single private company that needs to do credit checks on all of their employees, what Walters seems to be implying is that only 13 percent of employers using credit checks inappropriately is enough of a case to show that the business world is handling credit checks responsibly.

A matter of protection

With respect to Ms. Walters, her written statement could have been replaced by the one from the U.S. Chamber of Commerce and hardly anyone would have noticed. They play the role of the unapologetic business side of the argument just fine.

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Arguing that FCRA is a protection from unfair hiring practices is like saying reading someone their Miranda rights before being arrested helps prevent illegal arrests. Notification and authorization (especially when you have an incentive like a job in front of a candidate) gives the employer the upper hand in all cases.

It also helps to mention that none of these bodies recommend credit checks for every single employee. Right now, other than a few states that have banned the practice, you can credit check anyone in your employment process. The only federal guidance has been vague instructions about limiting disparate impact, and until a case goes through that sets a precedent (or Congress acts to define these limits), you’re going to have well-meaning companies getting caught up with companies that indiscriminately use credit checks.

Most of the states that have acted so far have put reasonable limits on credit checks in regards to employment. If you have significant fiduciary responsibility, a credit check (along with all of the other information) may be applicable. Otherwise, the impact on predicting performance and the reliability to predict fraud or theft doesn’t exist and may cause disparate impact.

The bottom line: little difference between pro-business and pro-HR?

What I continue to be disappointed with is the lack of nuance in SHRM’s positions in front of Congressional committees over the years with regards to employee/employer issues.

Aren’t we beyond parroting what pro-business types have to say? Is the desire to be respected as a business organization hindering SHRM’s ability to offer a unique voice that’s careful to consider HR’s unique position in the business world?

If they truly believe that “employment decisions should be made on the basis of an individual’s qualifications – such as education, training, professional experience, demonstrated competence – and not on factors that have no bearing on one’s ability to perform job-related duties,” shouldn’t they choose to stand up for thoughtful (and inevitable) legislation that keeps both the employer and employee’s interests at heart?

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11 Comments on “SHRM Almost Gets It Right On Credit Checks

  1. Lance, I disagree with you. I have run into several situations where having an awareness of a candidates credit history would have saved the company from embezzlement. One situation for example was an accounting manager who was $120,000 in debt. If the company had checked her credit they might have declined to hire her and save themselves the $62,000 she embezzled from them. Or they might not have declined, hired her anyway, but by being informed of a potential exposure might have paid more attention to her work.

    There is value in using credit check as a tool in the appropriate situation. Employees who handle money, whether the company’s or a customers, should be checked. I don’t believe they should be used across the board or as the sole determining factor in hiring. But when my company reputation is on the line and that employee is a possible liability for me then I want to be able to make an informed decision. To me this is the same as doing a motor vehicle report. If they are going to drive for me I want to know. If they don’t drive for me I won’t check.

    1. I’m not opposed to all credit checks, just setting reasonable limits on their use. “Anyone who handles money” is not a reasonable limit though. In fact, I believe businesses would have better results from putting processes in place that limit theft and fraud than trying to use a foggy crystal ball with credit checks. For cashiers, that’s register management. For call center workers, that’s monitoring.

      If someone has sole check writing ability on a company bank account, that’s when it may be time to look at a credit check. I think that can be accommodated in law without too much trouble, another thing that SHRM could have worked towards instead of going all in on the status quo.

  2. Hey Lance. I couldn’t disagree with you more. The SHRM position is spot on based on their research and the current laws they sited designed to protect applicants. We too, have conducted studies to see how credit reports are being used in the marketplace and our findings mirror that of SHRM’s. If you don’t believe me (or SHRM), check out Seyfarth Shaw attorney Pam Devata’s testimony from yesterday’s hearings where she offers “the vast majority of employers in my experience use credit reports for a very limited number of positions such as jobs dealing with company finances, positions in accounting departments, high level executives or positions dealing with sensitive personal data of customers or employees. As such, it is my experience that employers more often than not do not request credit checks on applicants or employees unless they feel it is related to the position in question. Moreover, the vast majority of employers whom I counsel allow applicants to explain information contained in their credit report.”

    I am not the great defender of credit reports. I don’t think they should be used unless they are directly related to the job, industry or responsibilities. However, can you imagine the kind of liability a bank and their customers would be subjected to if you didn’t allow them to review this information? Or how about a stock broker? A CEO or a CFO at a public company? If an individual shows a pattern of managing their personal finances, wouldn’t that give an employer pause for entrusting them with theirs?

    Here’s another telling piece of Pam’s testimony yesterday when it comes to using adverse information found on a credit report:

    “There seems to be a common misperception that employment credit reports include a credit score. They do not. Thus, before an employer is able to make a decision based on a credit report, the employer must review the content of the full report to obtain credit information and assess whether it is positive, negative, or neutral. This requires more than a mere glance at a numeric score; rather, employers must conduct thoughtful analyses of the information contained in the report. In my experience, employers rarely, if ever, make hiring decisions based on information in a credit report without giving an applicant the opportunity to explain the information on the report. These may also be some of the reasons, as discussed below, that many employers use credit reports as a final step in the hiring decision inasmuch as evaluating credit reports and talking to applicants about their credit report takes additional time generally not conducive to early stages of the hiring process.”

    With all the information out there, it appears as if you either distrust all of SHRM’s research, the consumer protection laws and the experts that echo this information or you have chosen to ignore it.

    1. Nick, before you throw stones, you should look at some of the existing state laws out there. For example, Washington state’s law states credit reports can only be used for employment purposes when “[s]ubstantially job related and the employer’s reasons for the use of such information are disclosed to the consumer in writing; or required by law.” It doesn’t ban the use of credit reports.

      That’s what I’m advocating. If you read through the testimony, SHRM is clearly advocating the status quo which offers no guidance or legal protections against those companies who do choose to do blanket credit reports (13% according to SHRM information). The consumer protection laws as they stand only impact notification, not adverse impact of decisions that are made using credit checks.

      I know you’re a vendor in this space and it is going to be hard for you to come around to my position but one of the things I would say SHRM could have done differently is work towards a solution rather than stand stubbornly with the status quo. For instance, they could have worked with employers, attorneys and vendors to share best practices with this issue and give employers guidelines that protect both employers from fraud and theft and employees who are experiencing disparate impact.

      What they chose to do is simply echo the statements of the US Chamber of Commerce and Employer representing law firms. They would have been better to advocate a more permissible law than the one currently being considered.

    2. You are right on target. I could not disagree with Haberman and Haun. If I used credit score or bankruptcy as a litmus test for hiring, we would have lost several great employee’s. There across the board approach to running credit checks on every applicant is like throwing the baby out with the bath water. It should either be eliminated or certainly monitored based on the whole background of the applicant and not just credit. There are a lot of thieves out there with great credit.

      1. You are right on target. I could not disagree with Haberman and Haun more. If I used credit score or bankruptcy as a litmus test for hiring, we would have lost several great employee’s. There across the board approach to running credit checks on every applicant is like throwing the baby out with the bath water. It should either be eliminated or certainly monitored based on the whole background of the applicant and not just credit. There are a lot of thieves out there with great credit.

  3. @Lance I have mixed feelings on the subject. But why should financial information be protected from hiring decisions. Why erode employment at will even further? Does credit history not go to judgment. I’m not saying someone should necessarily be flat out denied a job based on credit history, but does it not paint a picture helpful for the hiring process. If there is a big ding on someones credit, and they explain, if it makes sense and aren’t deemed a security risk, OK. But if they just can’t manage their finances, or run up bills they had no intent of paying, well that gives a recruiter/hiring manager some good information. I find it fascinating that you are for HR using tools like social media, something unregulated, to get information about candidates and employees, yet you are opposed to them using, a regulated data collection agency.

    1. Corey, thanks for the comment. Two things:

      1. I don’t advocate eliminating credit checks. I said, “Most of the states that have acted so far have put reasonable limits on credit checks in regards to employment. If you have significant fiduciary responsibility, a credit check (along with all of the other information) may be applicable. Otherwise, the impact on predicting performance and the reliability to predict fraud or theft doesn’t exist and may cause disparate impact.”

      Right now, if you want to credit check a janitor, you could. Research shows that 13% of companies do it across the board.

      2. User created social media and credit information compiled by reporting agencies are two very different things. Credit checks are checkered with disparate impact possibility. To my knowledge, social media impact doesn’t create the same issues. Both require nuance but credit checks bring up more issues (history of minority discrimination on the basis of credit) and deserve to be regulated, not eliminated. In both cases, using a credit check or a social media check in the right circumstances is not a bad thing.

      1. Without having access to hard data, it does seem logical that credit information (not necessarily score) can be predictive of judgment, and therefore potential success and fraud. Especially when appropriately followed up on by hiring manager. If you have valid studies that dismiss the connection between credit history, potential success, and fraud, I would be grateful for the links and opportunity to reexamine my thoughts process on this subject.

        That is my point with social media, it absolutely has the potential for disparate impact. I see far more potential for danger with an employer cyber-stalking that janitor and finding information about his political affiliations, sexual preference, family size and plans, medical history, genetic data (his mother died of cancer at an early age and his father has heart disease) then I do by them seeing a string of missed and 30+ late payments.

        1. Take a look at some of the testimony here to get why I think it has no impact on success or fraud:

          http://www.eeoc.gov/eeoc/meetings/10-20-10/crawford.cfm
          http://www.eeoc.gov/eeoc/meetings/10-20-10/aamodt.cfm

          Potential, sure but that has at least not been the result so far (with admittedly limited data). The credit check issue came up because of a real disparate impact case.

          I think it is worth reminding HR professionals that simply knowing potentially discriminatory information is not enough to eliminate its use. That’s why we can still have in-person interviews with people even though it reveals potential information that could lead to disparate impact.

          And obviously you consider the two separate issues but I see social media more user controlled with less impact in a legal context (especially historically) than credit checks. Employers deserve real guidelines rather than an open book to do essentially anything at this point.

          1. I will look at the mentioned studies direct, and I do find the EEOCs decisions fascinating and I can see the point.

            I am not sure I follow you second paragraph. Are you saying that simply knowing about protected information when necessarily cause disparate impact on employment? Well if that is the case you seem to be negating your rationale for disallow general credit credit checks.

            As for the user controlled, not necessarily, remember the picture Laurie R. Posted wither her eyes closed and drink in hand? Someone could easily an maliciously hurt someone’s online reputation if they wanted, by planting out of context or false information. I have no doubt you will see that more and more. And that is if you get the right person to begin with. With a credit check, yes admittedly not error proof, you know who you are getting. Not necessarily true with social media. And at least with credit, you can check it and report errors. I have done it myself and had my the record corrected. With social media, not so much, there is no real place to fix errors. Even if you get the service/site to correct/update you can’t control what Google and others have cached. And at least with a credit check, I know a potential employer is checking and theoretically have a chance to respond/explain. With Social Media I would likely never know if I didn’t get a job because some recruiter thought it was me who got arrested for Heroin in the 80s and not some other Corey Feldman. Or because I blogged about supporting gay rights. Or if someone snaps a picture of me at Stewart’s rally to restore sanity, and posts it on the tubes. As for the history of it, well you and I have been in HR Social media for awhile, but for most of the world, this is still new, even for old timers compared to credit, it is very new.

            I don’t necessarily disagree with you on your statement that “Employers deserve real guidelines rather than an open book to do essentially anything at this point.” I just don’t see how SM should be any different.

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