SHRM: Credit Reports Remain Crucial to Hiring Process

By Steve Bates Dec 21, 2010

There are no simple or effective alternatives to credit checks for use by HR professionals as part of their evaluation of job candidates, the Society for Human Resource Management (SHRM) said in comments to the U.S. Equal Employment Opportunity Commission (EEOC).

SHRM’s latest comments on the practice of conducting credit investigations for some job applicants come in response to an idea that was floated at an Oct. 20, 2010, EEOC hearing. It was suggested that the answers to these three questions from a former employer would obviate the need for credit checks:

  1. Did the employee perform adequately?
  2. Did you have any concerns about the employee’s integrity or reliability?
  3. Would you re-hire this employee?

SHRM said that using just these three questions would raise “practical and legal issues.” In a Dec. 3, 2010, letter, SHRM Director of Government Affairs Michael P. Aitken commended the EEOC “for recognizing that employers could benefit from receiving additional reference information about prospective employees and for exploring ways to improve job-related information sharing in the employment process.”

However, the letter said that many employers are concerned about legal liability for answering these types of questions, that the answers to such questions would not provide adequate information for making hiring decisions, that the questions don’t address credit data for the retention or termination of a current employee, and that it might not be feasible for large organizations to process this type of reference request efficiently.

Some background investigation practices, including credit checks and criminal history investigations, have come under fire in recent months, prompting legislators and regulators at the federal and state levels to consider curbing such practices.

A representative of SHRM testified at the Oct. 20, 2010, EEOC hearing that “there is a compelling public interest in enabling our nation’s employers—whether that employer is in the government or private sector—to assess the skills, abilities and work habits of potential hires.” Christine V. Walters, J.D., SPHR, added that 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.”

In the new SHRM letter, Aitken said that the concern about legal liability is a significant factor limiting the information that previous employers will release about an employee being considered for a position at another organization.

“Based on law and legal decisions,” the letter stated, “employers may be subject to legal liability if they provide a negative reference for discriminatory reasons, in retaliation for the former employee complaining of an illegal activity, or if they give a defamatory reference or disclose confidential facts that constitute an invasion of privacy.”

A defamation lawsuit is one potential legal issue. A negligent referral lawsuit is another. The SHRM letter noted that many employers have adopted policies restricting the information they give out about former employees because of the fear of such litigation. One lawsuit alleging negligent referral resulted in a jury award exceeding $8 million.

In addition, some states, including California, have enacted laws addressing references. Some of the statutes offer a degree of immunity to employers that provide references. “Employer experience with these statutes, however, has been mixed,” the SHRM letter said.

Even if employers are willing to answer the three questions suggested at the October 2010 EEOC hearing, SHRM said in its new comments, “the questions themselves are not particularly illuminating. The fact that an employee has performed ‘adequately’ in one position will not necessarily result in adequate performance in a new or different position. Further, questions focusing on adequacy, integrity and reliability do not address the information potential employers hope to obtain from previous supervisors—information about the individual’s knowledge, skills and abilities.”

The SHRM comments noted that the three questions don’t address the information needed by employers seeking to fill a position such as bank teller, where credit history is particularly relevant.

“In conclusion,” the SHRM letter said, “asking previous employers the three suggested questions is not a realistic substitute for employer use of other available information, including credit reports.”

Steve Bates is manager of online editorial content for SHRM.


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