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Checking the Credit Information of Job Applicants

Hiring new employees is a significant employment decision for which you need ample information. Pre-employment background checks are routine. Prospective employers have many options, including a criminal history check and a credit check.

Prospective employers should take care when ordering a job candidate's credit history. Doing so could raise legal issues. Federal and state laws dictate how and when an employer can ask about a job applicant's credit information.

More information on the job applicant can help you make the right hiring decision. Pre-employment background checks are increasingly popular, made easier by the internet. But, checking a prospective employee's credit information could bring legal problems if done improperly or in a state that bars the practice.

Pre-Employment Background Checks

Employment checks often come towards the end of the hiring process. One reason for this is the expense potential employers face when conducting a background screening.

Potential employers must pay for employee background checks, so only screen people to whom you offer a job. Employers often order the following types of screening checks through their human resources department:

  • Criminal background check (includes a report on any criminal records for the job applicant)
  • Employment screening (covers the job applicant's employment history)
  • Credit history

Many employers run credit checks to determine how the potential employee has used their credit, particularly those who have access to company money. This is imperative for big and small businesses because the poor financial conduct of their employees can harm them. Their employment credit report should include the following:

  • Available credit (credit cards)
  • Late payments
  • Foreclosures, if applicable
  • Payment history

An employment credit report should not contain the job applicant's credit score.

Ordering the Pre-Employment Credit Report

In most states, employers must get the person's permission before ordering a report. They will need the job applicant's Social Security number and date of birth. The employment credit report is a soft inquiry into the job applicant's credit file, so it should not negatively affect their credit score.

Federal Law on Pre-Employment Credit Checks

The Fair Credit Reporting Act (FCRA) establishes federal standards for employers. The FCRA only applies to information inquiries conducted by third-party consumer reporting agencies.

FCRA exempts employers that perform credit checks in-house. But, that credit information is challenging to get without the help of consumer credit reporting agencies. These agencies include Experian, TransUnion, and Equifax.

Federal requirements under the FCRA provide the following protections to prospective employees:

  1. Employers must certify their compliance with FCRA requirements, including ensuring that the report will not violate state or federal laws.
  2. Employers must get a "clear and conspicuous" disclosure from the applicant or employee before they can order a credit history.
  3. Applicants or employees must give prior written authorization to an employer before ordering a credit history report.
  4. Employers must give applicants or employees a written description of their rights under the FCRA and a copy of their credit report before taking any adverse action.

Also, consumer reporting agencies may not include the following in a credit report:

  • Bankruptcies after 10 years
  • Civil lawsuits, judgments, and arrest records after seven years (from date of entry)
  • Tax liens (if paid) after seven years
  • Accounts targeted for collection after seven years
  • Any more negative information after seven years (except criminal convictions)

Pre-Employment Credit Checks and the EEOC

The Equal Employment Opportunity Commission (EEOC) has filed lawsuits against pre-employment credit checks. It says they allegedly have a disparate impact on protected classes.

For example, the EEOC sued Kaplan Higher Education for using credit checks that excluded a large number of African Americans. On April 9, 2014, the Sixth Circuit Court of Appeals affirmed summary judgment in the case of Equal Employment Opportunity Commission (EEOC) v. Kaplan Higher Education Corporation, et al. The Sixth Circuit found the EEOC used flawed methods to prove that credit checks unfairly affected Black applicants.

One way to avoid this kind of suit is to use credit checks where there is a "business necessity." This would likely include credit checks for positions that involve financial management.

Pre-Employment Credit Checks: State Laws

Several states restrict the use of pre-employment credit checks when making a hiring decision. These states include the following:

Get Legal Help

Job applicant credit checks constitute a rapidly developing area of the law. Before you check a job applicant's credit, consult a qualified employment attorney. Speak to a local employment attorney today.

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