Employee Credit Reports: What’s on Them, and Why are They Used?

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Do employers actually check credit?

Recently, the PBSA teamed up with HR.com to conduct a nationwide survey of over 1,500 HR professionals to gauge their views on background screening. The results showed that 25% of HR professionals use credit or finance checks while hiring for some positions, and 6% check the credit of all applicants.

Credit checks are more likely for jobs that involve a security clearance or access to money, sensitive customer data, or confidential company information—such as banking positions, law enforcement, and managerial positions.

An applicant’s credit history can flag potential problems that an employer would want to avoid.

  • Continual late payments could indicate that an applicant isn’t very organized or responsible.
  • Using lots of available credit or having excessive debt are markers for financial distress, which may be viewed as increasing the likelihood of theft or fraud.
  • Evidence of mishandling finances could indicate a poor fit for a job that involves being responsible for money or consumer information.

What do employers see on an employee credit report?

When an employer runs an employee credit report on an employee or applicant, they receive a modified credit report that shows debt and payment history, but it doesn’t show the credit score. What employers see, and how far back they can look, is determined by state regulations and the FCRA, but is typically capped at 7 years.

Consumer Rights

Employers using employee credit reports to screen employees must follow specific procedures set by the Federal Trade Commission and Fair Credit Reporting Act in order to remain compliant.

  1. They must obtain the consumer’s written consent, as well as give them a copy of the Summary of Rights Under the FCRA.
  2. They must tell the consumer how they want to utilize the credit report.
  3. They cannot misuse the information they get from the CRA.
  4. They must tell the consumer if the information within their report is being used to deny employment. This is considered Pre-Adverse Action.
  5. They must give the consumer a copy of the information they were given, if they decide not to hire an applicant based on the findings of the report.
  6. The consumer is then given an opportunity to dispute the information contained within the report before the employer makes a final adverse decision.

If an employer isn’t compliant with the FCRA, they run the risk of hefty fines and lawsuits. Walmart and McDonalds are two major corporations that were slammed with class action lawsuits after they were found to be non-compliant with the FCRA during their background screening process.

Adverse Action and the Opportunity to Dispute

For an employer to reject an applicant based on the employee credit report, the last step they must take in order to be in compliance with the FCRA is to give the applicant an Adverse Action Notice.

After a reasonable amount of time, if the applicant hasn’t appealed the Pre-Adverse Action Letter or provided reasonable explanation of the information in the report, the employer must provide written notice containing the following information:

  • Statement that the adverse action is based either in whole or part on the information in the credit report provided by the Credit Reporting Agency (CRA)
  • Notice of the applicant’s right to dispute the accuracy or completeness of the report
  • Name, address, and phone number of the CRA they used
  • Notice of the applicant’s right to another free consumer report provided by the CRA within 60 days

If an employer is leaning towards rejecting an applicant based on the employee credit report, they must inform the applicant before the decision is made.

The employer is obligated to send a Pre-Adverse Action Letter, including a copy of the report used and a summary of the applicant’s rights.

If there are inaccuracies on the report, the applicant then has the opportunity to dispute the information.

At this point, the employer must wait a reasonable period (usually 3-5 business days) before they proceed with their rejection. The goal is to allow the applicant to explain the red flags on the report, or, if the negative information is incorrect, dispute and correct the report.

State Consumer Reporting Laws

California, Colorado, Connecticut, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont, and Washington have passed laws prohibiting employers from pulling credit reports at all, or restricting how and when employers may use them to make hiring decisions.

Over the past few years, restrictions regarding the use of credit checks by employers on applicants and employees have been passed at various state and municipal levels. The federal government has indicated its own concerns of potential discriminatory impact of the use of credit checks. The nuanced differences in obligations and requirements that may govern in any particular jurisdiction have created a legal minefield for employers who utilize credit checks.

More jurisdictions are joining this trend, with Representative Maxine Waters (D-CA) and Senator Elizabeth Warren (D-MA) proposing bills in the US House and Senate that would restrict the ways in which consumer credit information could be used for employment purposes.

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