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SHRM: Credit Checks Are Legitimate Screening Tool
 

By Kathy Gurchiek  11/2/2010

The federal government should not eliminate an employer’s use of credit histories to help make decisions about job candidates, a representative for the Society for Human Resource Management (SHRM) told the U.S. Equal Employment Opportunity Commission (EEOC) during a public hearing Oct. 20, 2010.

The EEOC heard public comment from SHRM and other stakeholders to determine the extent of the practice, the effectiveness of its intended purpose, and its potential impact on different populations.

Hawaii, Illinois, Oregon and Washington have enacted laws restricting the use of credit reports for employment-related decisions. Some see the use of such reports as a way to assess a job candidate’s judgment; others argue that it could be discriminatory and that it represents a kind of economic segregation.

“The use of credit checks has grown, and at the same time questions have emerged about the fairness of the practice, whether the results of the credit check correlate to job performance and whether there are any adverse impacts,” said EEOC Chair Jacqueline A. Berrien at the start of the hearing.

Among those offering comment were the U.S. Chamber of Commerce, the National Council of Negro Women, the National Consumer Law Center, Lawyers Committee for Civil Rights Under Law and the Federal Trade Commission.

“SHRM believes there is a compelling public interest in enabling our nation’s employers—whether that employer is in the government or the private sector—to assess the skills, abilities and work habits of potential hires,” said Christine V. Walters, JD, SPHR, in prepared comments.

Walters is sole proprietor of FiveL, where she serves as an HR and employment law consultant. She is secretary of SHRM’s Maryland State Council and a former member of SHRM’s Employee Relations Special Expertise Panel.

Credit history is one of many factors—including education, experience and certifications—that employers use “to narrow that applicant pool to those who are most qualified,” Walters said.

HR typically conducts a background check on the job finalist or group of finalists before making a job offer, she pointed out. That background check might include checking personal references, criminal history and credit history, and the emphasis on those factors might differ depending on the employer and the position to be filled.

“We believe employees already have significant federal protection for the misuse of background checks,” she said, citing the Fair Credit Reporting Act (FCRA) of 1970 and the Civil Rights Act of 1964.

SHRM Research Data Cited

Walters referenced recent SHRM Research Department data on the use of employer background screening practices.

Among the findings, she said:

  • Only 13 percent of organizations surveyed conduct credit checks on all job candidates. Another 47 percent consider credit history for candidates of select jobs.
  • Employers generally conduct credit checks only for certain positions—jobs of financial or fiduciary responsibilities (91 percent), senior executive positions (46 percent) and those who would have access to highly confidential employee information (34 percent).
  • Four out of 10 organizations do not conduct credit checks.
  • Credit history ranked the lowest on a list of criteria employers typically use in making hiring decisions.
  • Medical debt is not considered during the hiring process. Only 11 percent of SHRM survey respondents consider home foreclosures when making a hiring decision.
  • Among employers who look at credit history, 87 percent allow candidates, in certain circumstances, the opportunity to explain the results of their report.

She and other panelists noted that FCRA restricts employer use of credit reports to employment purposes. Under law, the employer must give the job candidate an opportunity to refute, explain or correct information in the credit history that might weigh against the candidate.

EEOC Commissioner Stuart J. Ishimaru observed to Walters that it sounded as if most employers use a credit history report at the end of the interview process.

Walters concurred.

“It’s a fiscal issue,” she added. “The employer has to pay for every report they get” and can’t afford to pay for a credit report for every job applicant. SHRM research shows that among employers that use credit checks, 57 percent initiate them only after making a contingent offer and 30 percent initiate them after the job interview, Walters told commissioners.

Credit Report vs. Credit Score

It was emphasized throughout the hearing that there is a difference between credit histories or reports and credit scores.

A credit score is a number that gives a snapshot of a period of time; employers do not see this information. A credit report covers a longer period and provides information regarding a person’s different types of debt, explained Pamela Quigley Devata, a partner in the Labor & Employment Department of Seyfarth Shaw LLP.

“We’re not talking about a litmus test that a person is automatically disqualified here” because of his or her credit report, she said.

Devata specializes in the FCRA and state laws affecting background screening and is a past member of the Board of Directors of the National Association of Professional Background Screeners.

But Sarah Crawford of the Lawyers Committee for Civil Rights Under Law said the use of credit histories by employers can have a disparate impact on a range of protected groups. She noted that many reports are riddled with errors or incomplete information, and she cited studies showing that credit history is a poor predictor of job performance.

“Credit reports fail to provide context,” she said, noting that they do not reflect the circumstances surrounding debts or late payments.

“One issue that we have raised is whether HR professionals are being trained in how to interpret the complex information that is provided,” Crawford said. “I would suggest it would almost be better if employers had a credit score because that is aimed at synthesizing the information in an academic way.”

She urged the EEOC to issue comprehensive guidance and to increase public education and enforcement efforts regarding improper use of credit checks.

Chi Chi Wu, staff attorney with the National Consumer Law Center in Boston, said it was “absurd” to use credit history as a screening tool given the state of the economy.

“It’s a practice that we believe is harmful and unfair to American workers,” she said. “The use of credit history for job applicants is especially absurd when you are looking at an unemployment rate of 10 percent and have many workers looking for a job.”

She said she doubted whether all employers follow the law by notifying job candidates of information in their credit report that could have an adverse impact on the hiring decision. Credit reports are not a valid predictor of job performance, she maintained, noting that they were designed to predict the likelihood that a consumer will make payments on a loan, not an indicator that the person would be a poor employee or might steal.

“I don’t hear employers saying because you have bad credit you cannot work for my company,” SHRM’s Walters said. However, HR practitioners tell her they want the opportunity to use a credit history as one of many indicators of who might be the most qualified candidate.

“A good decision of which candidate to hire is comprised of many factors,” she said, “and credit may be one” of those.

“The one thing that seems particularly clear to me,” Commissioner Victoria A. Lipnic said, “is that there is much we do not know about how both credit reports are used, the reason for them, … and what employers get out of them.”

It was unclear whether the EEOC will issue any guidance on the use of credit histories by employers. The hearing was one of several the EEOC planned to examine barriers to employment and their potential adverse impact on protected groups.

On Sept. 23, 2010, SHRM testified before the U.S. House Financial Services Subcommittee on Financial Institutions and Consumer Credit about the Equal Employment for All Act. That law would prohibit the use of credit checks for most employment purposes.

Kathy Gurchiek is associate editor for HR News. She can be reached at kathy.gurchiek@shrm.org.

Related articles:

Proposed Bills in N.J. Would Limit Employers’ Use of Credit Checks, SHRM Legal Issues, April 12, 2010

Maryland, Other States Weigh Limits on Credit Checks for Employment, SHRM Legal Issues, March 3, 2010

Caution Urged on Legislation to Limit Credit Checks on Job Prospects, News About SHRM, Dec. 17, 2009

Bills Would Bar Bias Based on Credit History, Require Reporting of Child Pornography, SHRM Legal Issues, April 7, 2009

Other resources:

Background Checking: Has the Use of Credit Background Checks Increased? A Comparative Look - 2010 and 2004 SHRM Poll, Sept. 22, 2010

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