George Robertson, CFP, CRPS, AIF

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Checking the Credit Scores of Job Seekers

Bringing the right employees on board can make or break your business. While most of the people you are likely to hire are honest and motivated to do a good job, some employees lack the proper work ethic and may even steal from the company or disclose sensitive information to competitors.

Because of the legal, financial, and security risks you run as a business owner when you hire employees, it is essential to screen job candidates to ensure that their reported professional experience and personal details are accurate. In addition to checking the references the candidate provides, you may want to conduct searches that tell you more about the applicant's background, including investigations of the candidate's criminal and credit histories.

Why is it useful to look into a job candidate's personal finances? A history of bad credit may be a sign of irresponsibility and could be a negative indicator of the candidate's future job performance. In addition, the employer could be faced with a negligent hiring claim if it is subsequently shown that the company failed to conduct proper background checks on an employee who committed acts resulting in harm to others. Finally, depending on the position, an employee who is under financial pressure could also pose a security risk, becoming subject to bribery or vulnerable to offers from competitors attempting to buy confidential information.

Many employers use outside consumer reporting agencies to conduct background checks on job candidates or existing employees being considered for reassignment or termination. Before ordering the credit report of a job applicant or current employee from a consumer reporting agency, you should take steps to comply with federal laws. Under the Fair Credit Reporting Act (FCRA), the employer must obtain written authorization from the job seeker or employee before requesting information on the individual's credit history from a consumer reporting agency.

While the FCRA does not require employers to obtain written authorization from job candidates to conduct background investigations in-house, it is seldom practical to gather financial information on a candidate without ordering reports from one of the three nationwide consumer credit reporting companies: Equifax, Experian, and TransUnion. These reports may be obtained by contacting these credit bureaus directly or by using a consumer reporting agency that performs background investigations that include credit checks.

If information contained in a third-party agency's report results in a decision not to hire or reassign the applicant, employers are required under the FCRA to alert the individual in the form of an adverse action notice. The notice must include the name, address, and phone number of the consumer reporting agency that supplied the report, a statement that the agency is not responsible for the decision and cannot give specific reasons for it, and a notice of the individual's right to dispute the accuracy or completeness of any information the agency furnished.

While a credit report can be a useful tool in determining whether a job applicant is suitable for employment, it should seldom be used as the deciding factor when hiring. A 2003 study conducted by organizational psychologists Jerry Palmer and Laura Koppes of Eastern Kentucky University showed that credit checks are not a valid predictor of employee job performance or turnover. In fact, the study found that employees with a greater number of 30-day late payments on their credit records received, on average, higher performance ratings than workers who paid their bills on time.

In some cases, refusing to hire a job seeker because a background check revealed a history of credit problems could even result in legal action against the employer. A candidate who is turned down for a position because of bad credit may file a lawsuit against the prospective employer on the grounds that creditworthiness is irrelevant to the duties of the position. Given these potential pitfalls, you may want to use credit checks as a hiring criterion only when there is a clear and compelling reason for doing so.

If a credit report on a job seeker reveals problems, it makes sense to discuss the findings with the applicant before reaching an employment decision. You may find that the candidate has experienced personal setbacks, such as divorce or sickness, and is in the process of recovering financially. Keep in mind, too, that some people with low credit scores may be bad at managing money, but are nonetheless great at their jobs.

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