Should You Check a New Hire’s Credit Report?

It takes trust to hire someone new for your small business. Will they live up to your expectations? Will they represent your company in a positive light? Will they handle money and sensitive data responsibly?

That’s why some employers conduct employment-related credit inquiries to see if prospective employees have any financial skeletons they might be hiding — skeletons which could be indicators of fraud or other past criminal activity. In fact, a 2009 survey conducted by the Society for Human Resource Management found that nearly half of companies surveyed check at least some candidates’ credit histories. But before you request this information, here are five things you need to know.

  1. You must get permission in writing.
    Under the Fair Credit Reporting Act, employers need written consent from a job applicant before they can access the applicant’s credit report. Should there be an issue later on, you’ll want to have this paperwork on file.
  2. You cannot see the candidate’s credit score.
    Candidates’ credit histories (often as part of a package with any criminal history) are sold by third-party screening companies, but these companies do not disclose the person’s actual credit score. Instead, you’ll be able to see if the candidate has had debt go into default or judgment, which could be a red flag.
  3. You should demonstrate a business need for this information.
    The Civil Rights Act of 1964 prohibits the use of discriminatory employment tests or procedures unless the procedure is a business necessity. In fact, the Equal Employment Opportunity Commission (EEOC) is suing Kaplan Higher Education Corporation for racial discrimination based on its use of credit histories in the hiring process. Hiring a new CFO? You could have a legitimate business reason for checking his credit, since the employee will be heavily involved in financial decisions. But a cake decorator or a sign painter? Maybe not.
  4. You must tell the candidate if adverse information impacts your decision.
    Say you decide not to hire a potential CFO after discovering that his or her mortgage has gone into default. You’re within your rights to do that, but the Fair Credit Reporting Act requires you to disclose the adverse information you used to make that decision to the job applicant. You should also be prepared to provide a copy of the credit report if the candidate requests it.
  5. Some states are getting even stricter about credit checks.
    Depending on where you do business, you might be subject to more specific regulations. For instance, Illinois’ law on pre-employment credit checks went into effect earlier this year and bans the practice except in a few specific circumstances. Employment-related credit checks are also limited in Hawaii, Oregon, and Washington. With growing concerns over the economy and unemployment rates, over a dozen other states have pending legislation, so check your local laws to make sure you don’t inadvertently break them.

About Susan Johnston

Susan Johnston is a freelance writer and blogger who specializes in writing about business and personal finance. Her articles have appeared in or on The Boston Globe, Dance Retailer News, GetCurrency.com, Mint.com, PARADE Magazine, WomenEntrepreneur.com, and other places.
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AlexStandt
AlexStandt

This article was awesome!! Thank you. Being fairly new to the credit arena I am constantly trying to gather as much information as possible to try and keep myself headed in the right general direction. Spending some time on this post has actually given me a lot of great points to think about. In my recent research I have also been able to find some pretty useful information related to this topic when I Googled the credit locker university.  This was helpful as well.  Thanks again!

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