The use of credit reports in background checks have been around for decades starting with banks and financial service institutions as a means to vet candidates who would be handling cash and have access to sensitive information, such as social security numbers, account numbers and balances, as well as other bank assets. The rationale was simple: if a candidate was experiencing difficulty managing their personal finances, then how effective could they be on the job in making leading or other financial decisions that might affect the company’s bottom line. Further, if the candidate was experiencing severe personal financial stress such as payment delinquencies, liens and collection activities, would it be prudent for the financial institution to hire and place such candidates in positions with access to cash and assets that might prompt dishonest behavior like theft or embezzlement?
Today, nearly half of employers include credit reports as a component of their background screening process for certain positions, according to a 2010 SHRM survey. Employers insist that credit reports help them sort out bad hires by predicting job performance, assess trustworthiness, and limit theft or embezzlement, therefore saving their companies time, money, and possible negligent hiring lawsuits. However, in recent years following the recession in 2007-2009 and the housing crisis, a higher number of applicants have poor credit. As a result, many local and state law makers have implemented regulations restricting use of credit reports during the hiring process. Even the Equal Employment Opportunity Commission (EEOC) has weighed in on the use of credit reports. The core issue is that the use of credit reports in background screening has had an adverse impact on the hiring of both African American and female applicants. The EEOC’s position is clear that Title VII does not bar employers from using credit reports in hiring decisions. Nevertheless, reckless use of such information during the hiring process can expose an employer to significant liability. Employers can be exposed to disparate impact claims from applicants when the results of their hiring process has a statistically significant negative impact on members of a protected class, even if the process on the surface is non-discriminatory.
The EEOC and local/state regulators support the use of credit reports in the hiring process when the employer can demonstrate business necessity. The problem has been that some employers have run credits reports on all applicants regardless of the position being sought, and based on the credit history, denied employment opportunities.
Typical positions that many employers run credit reports based on having a reasonable business need, include:
- Finance, accounting and budgeting positions that involve access to company or client funds, handling large sums of cash or sensitive personal information (e.g., credit card numbers, social security numbers, banking information, account numbers,etc.).
- Managerial and professional positions with access to financially sensitive employee or customer information, such as attorneys, real estate professionals / property managers, IT professionals, pharmacists, Human Resources, finance employees, etc.
- Executive roles such as CEO, COO or heads of functions that are responsible for large budgets, entity profit and loss, sensitive data and company assets.
For these jobs and others like them, it is often a good and reassuring sign that the individuals whose responsibility it is to handle sensitive personal / financial information are as responsible in their private lives as they are expected to be in their professional career. For those companies that do wish to proceed with using credit reports as a part of the background screening and hiring process, it’s still legal – but be cautious.
Given the regulatory scrutiny over the proper use of credit reports, make sure there is a business necessity for including a credit report in the background check and that the report relates to the job in question.