• Todd Eiseman

Does the Employer Ban on Consumer Credit Checks Affect You?

Before we jump too far into 2016, we’d like to look back over the past year at some important background screening trends. In particular, we’re interesting in exploring the increasing number of laws that ban employers from running consumer credit checks in the hiring process. Does this growing trend affect you?

Historically, employers perform credit checks to ensure they’re hiring reliable, responsible professionals, particularly when that individual will be handling financial or other sensitive information. If the employee is later involved in internal fraud or theft, the credit check can protect the employer against negligent hiring lawsuits.

But a total of eleven states and many more cities – New York City making the most headlines – have restricted companies from running credit reports on their candidates and employees. So what does this mean for your company?


Why Ban Employee Credit Checks?

Supporters of the ban don’t believe credit checks paint a true picture of the financially responsible nature of a candidate. This lack of accuracy is particularly the case, they argue, with regard to minorities and low-income workers, whose debts may be entirely unrelated to their capacity to fulfill their job responsibilities.

Because credit reports rely on data that include medical bills, student loans or other information that indicates difficult economic circumstances, proponents argue that credit checks used in the hiring decision are de facto discriminatory.

Those who are qualified for a job deserve a fair chance in the hiring process regardless of their financial history, they say, particularly in the wake of the most recent US economic downturn.


How This Affects Employers

Many of these individual state or city laws allow job candidates to file a lawsuit if they find out a credit report was used to make the hiring decision. Moreover, running a credit check in states or jurisdictions in violation of this ban will generally result in costly penalties and lawsuits for employers.

If your company is in the financial industry or the position you’re hiring for is responsible for financial assets, sensitive information, or security, it’s particularly important to find out the details of the law that applies to you.

Opponents of these laws say that bad credit is generally the number one signal behind fraudulent behavior that may put your company at risk. Other experts in the credit industry, however, say there’s no proven correlation between negative credit history and fraud.

Either way, employers need to be cognizant of their hiring process, being careful to strike a balance between legal and ethical practices and protective measures.


Exemptions to the Credit Report Ban

Each state and city has slight variations on this law, so we recommending checking in with your legal counsel to determine exactly how it affects your company.

However, most of these laws do provide exemptions. Primarily, these apply to any individual who is or will be a higher level executive or in a position in which they handle large amounts of money or assets, as well as law enforcement positions, cybersecurity positions, positions with security clearances, and others.

Also, be aware that in some states, even in these exempted positions, an employer is generally restricted from using the credit report as the sole decision maker in hiring, promoting, or terminating.


The Future of the Credit Report Ban

A recent study found interesting data in response to the ban. They found that employers located in regions in which low credit score occur more frequently raise their education and experience requirements to compensate for the ban. The outcome results in even more discriminatory behavior, and higher unemployment among a whole class of workers who may have otherwise successfully filled these roles.

All that to say, the employee credit check topic is still in hot debate. Proponents make a valid and well‑intentioned point, and while we expect to see more states and cities adopt similar laws in 2016, it would be wise for employers to keep actively updated.

There are, of course, a number of other background screening tools that, in correlation with a well‑designed interview and hiring process, will help protect employers against many hiring risks. We know it can be challenging to find the best people for the job, so let us know how we can help you make that decision today.


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