Employer Credit Checks May Soon Be Illegal

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Here’s the bad news: A majority of employers pull credit reports of prospective employees during the interview process. According to a survey conducted by the Society of Human Resource Management , 60% of employers admitted to screening an applicant’s credit before filling some of their openings.

The good news is that the cycle may not continue for much longer. Many states and even the federal government are taking steps to ensure that a candidate’s bad credit report isn’t issued to evaluate a prospective employee, especially since the report was never intended for that particular use.

“The [report] is designed to determine the likelihood of someone defaulting on a loan, not whether someone would make a good employee,” Brad Clarkson of the National Association of Professional Background Screeners points out.  

Additionally, Larry Lambert, President of Employment Screening Services, Inc., explains that a credit report pulled for employment purposes doesn’t contain an actual credit score. Under the Fair Credit Reporting Act, that is illegal. Once obtained, the report will disclose mortgage and consumer debt payment records, delinquencies, charge-offs, levels of debt and personal bankruptcies. As such, many employers use it as a defacto character reference, essential to determining whether or not an employee can do the job in question. Employers can’t pull your credit report without your permission, but most jobseekers will sign off on the request forms for fear of losing out on the position.

From the employer’s prospective, the rationale for checking credit reports is often based on some degree of extrapolation.

“Sometimes it's because the position actually handles cash, and they want to see whether the job-seeker has a dire financial status that, the employer believes, might create a greater-than-usual incentive for employee theft,” workplace expert and former Fortune 500 HR executive Liz Ryan explains, “Sometimes it's because the employer believes in a made-up correlation between credit problems and general irresponsibility on the part of the job applicant.”

Either way, she adds, employers researching an applicant’s credit history operate on a slippery slope.

“What's next?” Ryan asks. “Asking a job-seeker whether he or she is married, or has ever been depressed, or has ever had negative thoughts about a boss or employer?”

These sentiments are why three states – Washington, Oregon and Hawaii – have banned employers from arbitrarily pulling credit histories. Sixteen other states are currently trying to implement similar legislation. Additionally, according to The New York Times, Rep. Steve Cohen (D-Tenn.), is pursuing his own legislation that would prohibit employers nationwide from using credit checks to discriminate in hiring.

All versions of these laws, in essence, prohibit employers from pulling an applicant’s report unless there is a clear, legitimate business reason for it. For example, Lambert explains a maintenance company wouldn’t be able to request a credit history when they are hiring a janitor. They would, however, be able to if they were hiring a company accountant.

“There can be legitimate reasons to pull a credit report,” Lambert says. “You wouldn’t want to hire someone on the edge of bankruptcy to take care of your assets.”

The drawback is, however, that bad credit can be caused by any number of things, including not being able to pay bills due to long periods of unemployment. Luckily for jobseekers, some companies are cognizant of this cyclical effect.

“My business does extensive background checks for new employees, but we purposefully do not do credit checks,” Healy Jones, head of marketing for document-scanning service Office Drop, tells MainStreet. “Even hardworking people have been losing jobs since the economic downturn. It doesn’t make sense to discriminate against someone who worked hard their whole life and then lost a job and had problems meeting obligations.”

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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