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Oct 22, 2010

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:

. . . 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.