Should You Screen Hires For Credit Problems?
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As a subscriber you can listen to articles at work, in the car, or while you work out. Subscribe NowIf your company is using credit reports as part of the employment screening process, or if you’re thinking about adding those reports to your current process, you should think again. For one thing, it’s illegal in many states. And even if that wasn’t the case, it puts companies on shaky ground from an ethics standpoint.
Our clients often ask about adding credit reports to the screening we perform on their behalf, and we nearly always try to talk them out of it — even though that means less revenue. While some companies see credit reports as another way to examine the character of potential hires, the reasons to avoid this type of screening clearly outweigh the benefits.
For starters, you may be breaking the law. Nearly a dozen states have adopted outright bans on the use of employment credit reports unless the company can prove some kind of business necessity. Simply saying you’d like to know about your prospect’s financial health or personal financial problems isn’t considered a business necessity. Wanting to perform screening because the candidate will handle your company’s money doesn’t count, either. If you want to use a credit report in those states, you have to be able to prove that there’s some kind of industry-specific situation for which you need the information.
If that seems counterintuitive, especially when you’re hiring someone who will have some kind of fiduciary responsibility, you need to know that there’s a difference between the type of credit report a prospective lender receives and an employment credit report. The information included within an employment credit report cannot contain information employers aren’t supposed to consider. For example, it excludes any reference to factors such as age or marital status and doesn’t include data such as FICO scores.
The credit reports used by bankers and credit-card issuers are designed to provide insight into a prospective borrower’s credit risk, so the lenders can evaluate whether they should extend credit. In that situation, it’s acceptable to include data such as information about a spouse, because the borrower’s credit is held jointly.
Some employers want to use credit reports because they view past bankruptcies as an instant disqualifier. That’s a bad idea (and may even be illegal). Simply having a bankruptcy isn’t a foolproof sign of fiscal malfeasance. One of the biggest causes of bankruptcy today is medical costs. One serious accident or a long battle with a chronic illness can drain a family’s finances. Would you want to rule out a great candidate because her husband battled a rare cancer for four years?
When clients tell us they would like to use credit reports as part of the screening process, we ask three questions:
1. Is there a business necessity? If you’re hiring a CFO or credit manager, it’s possible. It’s less likely if you’re hiring an accounts receivable clerk or a custodian.
2. What specifically in a credit file would cause you to decline employment? If they answer “poor credit habits,” we remind them that many Americans (and our government) have huge debts and poor credit ratings. It’s not a reliable indicator that someone will be a bad hire.
3. Are you aware that many credit reports contain errors? I check my reports from all three major credit reporting agencies every year because my records have included errors in the past. Would you reject a great candidate because some creditor made a mistake?
If companies insist that they want to use credit reports, they have to go through a certification process (unless they’re publicly held). We have to arrange for a certified inspection company to conduct an onsite inspection to verify that the company adheres to certain practices, that information is secured (for example, in locked file cabinets), and that the company is not misrepresenting itself in any way. The process is quite a hassle, but the credit reporting agencies instituted it after some companies defrauded them and gained access to consumers’ private information.
In short, you should never use credit reports as a blanket screening tool for employment. It’s illegal in some places, and unfair and even unethical in others. Instead, talk with the company that handles your background screenings. Explain what you want to know about prospective hires and let them use their expertise to recommend a better way to screen. If you do have a need to use credit reports for some positions, be sure you develop a carefully articulated policy and set clear limits. That will offer you some protection if your practice is challenged.
Mike McCarty is CEO of Danville-based Safe Hiring Solutions.