Employment Credit Reports

What Should Employers Take Into Account Before Using a Credit Report?

Employers should approach the use of credit reports with caution; having policies and procedures in place to ensure the use of credit information is both relevant and fair.  An employer should first determine if there is a sound business reason to obtain a credit report.  Many employers limit credit reports to management and executive positions, or to a positions that have access to cash, assets, company credit cards, or confidential information.  Employers are well advised to run credit reports on bookkeepers or others who handle significant amounts of cash.

Unless the information in a credit report is directly job related, its use can be considered discriminatory.  In addition, employers should avoid making negative hiring decisions on credit report information that is old, relatively minor, or has no relevance to job performance.

The Items an Employer Can Look for in a Credit Report

  1. What are the person’s total monthly payments?  How does it compare to the projected salary and benefits?
  2. How many negative items are listed, such as late payments, collection actions, defaults, or accounts closed?
  3. Are there negative public records and are they related to employment?  For example a tax lien may indicate someone has not paid attention to their affairs or is under financial stress.  If there is a bankruptcy in the credit report, the employer should NOT utilize the bankruptcy without talking to an attorney.  It can be a form of discrimination to deny employment based upon an applicant taking advantage of their legal right to start over and get a fresh start from a bankruptcy proceeding.  Federal law expressly prohibits a private employer from discrimination solely on the basis of a person exercising their rights under the bankruptcy laws. (See 11 U.S.C. Section 525.)
  4. Are there any alerts from the credit agencies? Some bureaus issue fraud alerts based upon a variety of criteria if there is suspicion of fraud or abuse.

What are the Legal Limits in Obtaining a Credit Report?

First and foremost, the job applicant must provide written authorization before an employer can request a credit report.  Under the federal Fair Credit Reporting Act, an applicant has a series of additional rights.  If an employer intends not to hire someone based upon information in the credit report, then the applicant must first receive a copy of the report and a statement of rights.  The applicant has a right to review the credit report and to dispute any information believed to be inaccurate or incomplete.  This right applies even if the employer had additional reasons not to hire the person or if an applicant has excellent credit and even if there are other concerns such as a reported high debt level.

before utilizing negative information found in a credit report, the employer should consider:

  1. Is the negative information a valid predictor of job performance?
  2. Is the information current and correct?
  3. Is there negative information reported outside the applicant’s control such a the result of a disputed bill, medical bills, dissolution of marriage, or some other problem?
  4. Is there any reason not to consider the negative information? (For example, an employer should not generally consider a bankruptcy.)
  5. Is the employer consistent in the use of negative information? i.e.: have other applicants been hired with the same type of negative information and, if so, is there a rational reason why it was overlooked for others?  Is there a company hiring policy or some documentation put in the file to demonstrate that the employer is consistent?
  6. Has any decision or conclusion been documented?
  7. Is the applicant being afforded all of his or her legal rights?

The EEOC, Employment Credit Checks & Discrimination

If the use of credit reports for employment decisions results in the unfair exclusion of applicants with poor credit, it may have Equal Employment Opportunity Commission (EEOC) implications.  Even though  a credit report may appear neutral on its face, if its use results in a “disparate impact” upon members of protected groups, a claim can be made that the use of credit reports is in fact discrimination.

State Limitations on Credit Report Use by Employers

Currently twelve states – California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maryland, Nevada, New York, Oregon, Vermont, and Washington – have passed laws regulation the use of employment credit reports of job applicants and current employees that have impacted the way employers conduct background checks and many other states have bills waiting to be enacted.  For more information, see:

  • California Assembly Bill 22 (AB 22)
  • Colorado “Employment Opportunity Act” (SB13-018)
  • Connecticut Senate Bill No. 361 (S.B. 361)
  • Delaware House Bill No. 167 (H.B. 167)
  • Hawaii House Bill 31 SD1 CD1
  • The “Employee Credit Privacy Act” (Illinois House Bill 4658)
  • The “Job Applicant Fairness Act” (Maryland House Bill 87)
  • Nevada Senate Bill 127 (SB 127)
  • New York Assembly Bill 2034
  • Oregon Senate Bill (SB) 1045
  • Vermont Act No. 154 (S. 95)
  • 2007 Revised Code of Washington (RCW)

Conclusion – Employers Need Clear “Business Justification” for Credit Report Checks

While credit report checks are one tool available as part of a background check, employers are not encouraged to perform routine credit checks on all candidates since credit checks may contain errors, may not be job related, can feel like an invasion of privacy, or may violate federal and state laws. Employment Credit Reports should not be used unless they can articulate a clear “business justification,” which normally means that the job applicants or current employees have or will hold “sensitive” positions in which they may handle money or have access to personal data.  In fact, with many states recently passing laws limiting the use of credit checks for employment purposes, employers need to be careful when, to whom, and how they perform credit checks on prospective applicants.