Does Your Employees’ Credit History Affect Their Job Performance?

Would you hire an applicant with a poor credit history?  And what if you hired a candidate who became an all-star employee who, you later learn, has a credit score of 550?  Would that make you think less of her as an employee?  Would you question her judgment or consider her high-risk?  Good Morning America asked all of these questions earlier this week.  And, according to the responses they received, credit history and credit ratings may have a greater impact on a person’s ability to find work than you’d think. 

Are Credit Checks Really Being Used to Weed Out Potential Employees?

You bet.  Credit history is a standard part of many background checks, along with motor vehicle data, and drug testing.  Why?  Well, for some, there is no reason why.

Often, I’ll review an employee handbook and come across boilerplate language providing for far-reaching background checks.  When I ask the employer what they’re seeking to gain with this knowledge, it’s very common for them not to have an answer.  They may have wanted to institute a pre-employment drug-testing policy and, when they located a vendor to handle the testing, for an additional small fee, the same vendor would also do background checks.

So, what the heck; a bargain is a hard thing to pass up.  And that’s how their background-check policy came to be.


Why Employers Should Ditch the Credit Check

Putting aside the relatively low costs that could be saved, there are a number of reasons why credit checks aren’t necessarily the best idea for your organization.  But here are two that come to mind immediately:  The FACT Act and the EEOC.

The Fair and Accurate Credit Transactions Act (also known as “FACTA”), was an amendment to the Fair Credit Reporting Act (FCRA), passed in 2003, primarily to help consumers fight the growing crime of identity theft.  Accuracy, privacy, limits on information sharing, and consumer rights to disclosure are all key elements of FACTA.

And, with FACTA, what you don’t know can hurt you.  Employers are bound by a very detailed list of requirements when using credit checks as part of the hiring process.  For example, there are specific disclosures that must be made before and after the credit check is performed.  There are even rules on how an employer must go about destroying related documents.  And, no, these rules are not satisfied by tossing the records in the trash can.

The EEOC has long-maintained that criminal histories can be reviewed as part of the hiring process but cannot be a per se bar to employment.  Instead, if a background check reveals a criminal record, employers must engage in a “meaningful discussion” with the candidate and provide him or her with an opportunity to explain the circumstances of the instances involved and how he or she has changed, etc.

The same is true for credit checks. To avoid a claim of disparate impact, employers who do perform credit checks should remember that a negative credit history should not be an automatic bar to employment. Instead, they should give the potential hire a meaningful opportunity to explain the circumstances of the debt and how he or she has gone about making changes towards a more fiscally responsible future.

Then consider this explanation, coupled with how important or relevant credit might be to the specific job for which he or she has applied.  Weigh all of this before concluding that the credit history has a negative impact on the candidate’s ability to perform the duties of the position.

Why Employers Should Keep Doing Credit Checks

Legal liability is real.  Negligent hiring lawsuits are very real.  An employer can be held liable for negligently hiring an employee the employer should have known was likely to violate the rights of another.  For example, if your organization employs technicians who drive from job site to job site, you really must do a motor vehicle’s check.  If a technician gets into an accident because of reckless driving and seriously wounds or kills another driver, you may be held liable for his conduct if he’d been involved in numerous instances of reckless driving, which you did not know because you didn’t do a background check.

The same idea applies in the context of credit checks. If you hire an employee who, it turns out, was embezzling company funds to finance a gambling habit, you may be on the hook if her actions caused harm to customers who, for example, bounced checks because of the embezzlement.  Had you done a credit check, it would have shown that, right before being hired, she had an erratic payment history, tending to show fiscal instability.  If an employee’s actions hurt someone, the employer may be liable. The threat of liability gives employers reason to be cautious in checking an applicant’s past. A bad decision can wreck havoc on a company’s budget and reputation as well as ruin the career of the hiring official. Employers no longer feel secure in relying on their instinct as a basis to hire.

Start with honesty.  Studies estimate that anywhere from 30% to as much as 60% of employees lie on their job applications.  (This gives me an excellent opportunity to advocate, again, for the importance of having every employee fill out a job application).  Think of credit and background checks as a little test to see whether your candidates fit within that group. 

The law might require it.  For certain positions, federal and state laws require employers to complete certain background checks on employees after extending a contingent job offer.  FDIC-regulated banks, for example, have to comply with an extensive set of regulations during their hiring process.


My final piece of advice is this: 

Try to remember that the cobbler’s children have no shoes. The reality is that, just because an employee can’t manage her own credit does not mean that she can’t manage yours.  Often, people who are very devoted to their work let their personal lives go untended.  So do not assume that a bad credit score equals a poor performance rating.


Related Resources

See GMA’s original story, How Bad Credit Can Affect Job Prospects, by Tory Johnson.

And HR Hero has helpful resources on FACTA, as well.

John Phillips will be co-presenting a webinar on this very issue on July 17, Background Checks: Follow the Rules, Know the Risks, Reap the Rewards.

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