Employment Background Check Guidelines #8
Prevent new type of lawsuit: Credit-check discrimination
If your organization uses credit background checks in the hiring process, you’d better have a sound business reason for doing so or you could face a new type of litigation: Minorities who’ve been turned down for jobs because of their credit history are arguing that employers are using credit checks as a way of illegally discriminating against minority applicants.
The numbers back up their claims. Several studies by state insurance bureaus have found that African-Americans and Latinos are overrepresented among consumers with low credit scores and under-represented among those with high credit scores.
In 2011 a new amendment to the Fair Credit Reporting Act took effect. You must not only get an applicant’s consent to order a credit report but, if “adverse action” is taken against an applicant (or an employee) because of information in the reports, you must provide the person with a notice of the adverse action and the contact info for the agency that furnished the report.
Sign of the times: In 2015, the New York City Council passed an amendment to the New York City Human Rights Law that would bar most city employers from using credit checks as part of their hiring process. New York City aimed to join 10 states and Chicago in barring employer credit checks in hiring.
Understanding ‘disparate impact’
Title VII of the Civil Rights Act of 1964 prohibits employers from discriminating against employees or applicants based on their race, color, religion, sex or national origin. Illegal discrimination can occur in two different ways: disparate treatment or disparate impact.
Disparate treatment discrimination occurs when a worker is intentionally treated differently because of his or her race, sex, national origin, etc. This form of bias is spotted rather easily.
Disparate impact discrimination occurs when an apparently neutral company policy negatively affects one group more than the majority.
Advocates say business’s growing reliance on credit ratings disparately impacts African-Americans, Hispanics and possibly women.
Show business necessity for test
The good news: Title VII gives employers an affirmative defense against disparate impact charges. If you can demonstrate that it’s necessary for the person in that position to have good credit, then it’s irrelevant how the requirement affects minorities.
But how easy is it to make that argument?
Conventional wisdom has held that people with bad credit are more likely to steal because they need the money to pay their bills. However, employee-theft studies have, so far, failed to show this to be the case.
Two studies found that employee theft typically occurs in a Robin Hood model: Employees who feel wronged by the organization because of low pay or lack of advancement take out their frustrations by stealing from the company. These workers tend to be young, unmarried and more likely to work part time.
However, a credit background check usually would not catch these workers beforehand. Being young, they have little established credit and therefore are less likely to have bad credit.
A Canadian study suggests that the larger thefts are carried out by well-educated, white-collar workers in their 30s. Typical “white-collar crime” is rooted in financial distress, but often it is simply greed. There are no clear data as to whether these white-collar criminals engaged in theft in previous jobs.
The bottom line: Credit background checks fill the employer’s psychological need to “do something” when hiring a person who will be responsible for handling money. But credit checks offer no guarantee of sorting out the “bad eggs” in hiring.
If you use credit background checks in your hiring process, make sure you can point to a clear business necessity.
Also, focus on other nondiscriminatory approaches that can vet candidates and prevent theft more effectively than credit checks.
FAQs: Employment background checks
Here’s a sampling of questions on reference/background checks submitted by readers of
Business Management Daily, answered by employment law attorneys.
Background checks: Weigh convictions, not arrests?
Q. We’re going back and forth on this question: On an employment application, can we legally ask about an applicant’s prior conviction record or arrest record? —T.F., Nevada
A. This is a common employer mistake. As a general rule, when making hiring decisions, you can consider a prospective employee’s criminal history record only if it includes convictions. You should not take into account criminal charges and arrests that didn’t result in convictions. So on applications and in interviews, you should ask only about convictions, not arrests. Also, the EEOC suggests that employers look at the nature and gravity of the conviction, how long ago it happened and whether the offense relates to the job being applied for.
Consent required to run background checks on internal applicants?
Q. We are considering applicants for a management position, including several internal applicants. Our policy is to obtain background checks on all candidates from a consumer reporting agency. If the internal applicants signed consent forms when we originally hired them, do we need to get new consent forms from them? — J.P.
A. It depends. If the original consent forms the internal applicants signed when they initially applied for employment specifically state that you may obtain consumer reports on them for employment purposes other than the original hiring decision, then they are likely sufficient to permit you to obtain new reports without the need to get new consent forms.
If you have any concerns about the sufficiency of the original consents, however, you should go ahead and obtain new ones. The employees are motivated to cooperate, since the reports are necessary for you to consider their applications for the promotion. You can stipulate that internal candidates who decline consent will be disqualified from further consideration for the position.
Obtain OK to share background-check info with clients?
Q. Our company routinely runs background checks on all people to whom we offer positions. Can we legally disclose an employee’s background information to a customer who requests it? (The employee is working on the customer’s job site.) — L.B., North Carolina
A. Generally, you can’t share information obtained during a background check with a third party (including clients) unless the employee gives his or her OK in writing. Giving away that info without written approval could violate the employee’s rights under the Fair Credit Reporting Act and possibly state laws.
However, you can require employees to authorize disclosure of background check information to third parties as a condition of continued employment. For example, you could properly tell the employee, “If you want to continue working here, you must authorize me to share your background check information with Customer A.” Likewise, you can require that an employee authorize a customer to conduct its own background check.
Online resource: Download the EEOC’s booklet, Background Checks: What Employers Need to Know.