Employers Beware: Use Credit Checks At Own Risk

Law360 Scott Flaherty
June 17, 2014

Because credit reports may include inaccurate information or unfairly screen out low-income or minority job applicants, using them in hiring is a tricky prospect that most employers would do well to use on a limited basis, attorneys say.

Though not as common as criminal background checks, employers sometimes use credit checks as part of their hiring processes, the idea being that credit reports may help an employer assess a job applicant’s level of responsibility when it comes to handling finances. But the use of credit checks is often limited to applicants for positions with certain duties because of downsides that come along with using the checks as an employment screen, as well as restrictions put in place through state and local laws, attorneys say.

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… employment attorneys explained that relying on blanket credit screening that is, running credit checks on everyone who applies for a job presents several potential issues. As an initial matter, it might be illegal under state or local law.

So far, 10 U.S. states have passed laws that place at least some restrictions on how employers can use credit information in making hiring decisions, while bills to impose similar limits have been introduced in many other states in recent years, according to the National Conference of State Legislatures, which tracks state legislative proposals across a range of policy topics.

But even in places where there aren’t explicit legal restrictions on the use of credit checks in hiring, attorneys say there are still a number of possible consequences that come along with a heavy reliance on them as a employment screen. For one, the reports themselves are often inaccurate.

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Attorneys explained that many factors, ranging from identity theft to medical expenses to the recent economic recession, might have negative effects on a person’s credit history of which he or she is unaware.

There are all kinds of reasons why somebody would fall behind and not know how to deal with … having that not affect their credit, ” said Ossai Miazad, co-chairman of Outten & Golden LLP’s discrimination and retaliation practice group.

And, in any event, blemishes on a job applicant’s credit report may not have much bearing on his or her ability to do a certain job or the likelihood that the person would do something illicit as an employee.

I think that they’re incredibly arbitrary; there’s actually no evidence that someone with credit problems is, for instance, more likely to steal, ” Miazad said.

Beyond accuracy issues, attorneys said that credit checks, like other employment policies intended to be facially neutral, may wind up having a disproportionate negative impact on job applicants who happen to be poor or minorities.
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But despite the downsides, some employers still feel that credit reports can help when they’re making hiring decisions. Management-side attorneys said that in those instances, they typically advise employers to tailor their use of credit checks to make sure the screening meets some legitimate business need because that could serve as a defense if the credit screening was challenged in a discrimination lawsuit.

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Management-side attorneys also stressed the requirement under the Fair Credit Reporting Act to notify a job applicant prior to an adverse hiring decision based on the credit report. But even beyond the legal requirements under the FCRA, employers may stand to gain in other ways by opening up a dialogue with a job applicant to discuss some issue that has cropped up on a credit check and to allow the person to explain what might have caused the blemish on their record.

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