Ban on Credit Reports Shouldn’t Impact Employee Screening

As New York City joins the long list of jurisdictions restricting the use of credit reports for employment, the debate over this trend continues between employers, advocates, and politicians. Among the more vocal concerns are those of employers, a large number of whom utilize credit reports to assess fiscal responsibility in job applicants and, in some cases, as a fraud prevention tool. With studies from the Federal Trade Commission indicating that 26% of consumers have material errors in their credit reports and from research center Demos citing that unemployment and medical bills are primary links to poor credit, the push to ban credit background checks is sure to continue.

According to a 2012 survey conducted by the Society for Human Resource Management, nearly half of employers perform credit background checks on all or select applicants and/or employees. The top reasons cited for performing these checks are: (1) to prevent/reduce theft or embezzlement; and (2) to reduce the legal liability from negligent hiring or retention. In certain instances a credit background check may be a reasonable tool to accomplish these goals, but the information contained within credit reports can also prove to be misleading.

Why? Because a credit report doesn’t show the full context of an individual’s personal history. Sometimes, a poor credit report can be explained fairly simply, as it may coincide with a messy divorce or an unexpected loss of income. Other examples that may negatively impact a person’s credit report, but not accurately reflect their suitability for employment, include identity theft, lack of insurance, outright reporting mistakes, and, as previously referenced, excessive medical bills and unemployment.

While companies who rely on credit reports to assess a candidate’s qualification for employment are likely troubled by the trend to ban such a practice, there are more accurate ways to properly screen prospective and current employees while protecting your company from unnecessary risk and liability. In most cases, going beyond a credit report and accessing public record information can provide  better indicators of an applicant’s financial history and pattern of responsibility.

In fact, with the exception of details related to credit score, accounts, balances, and payment activities, a good portion of the information contained in credit reports can be obtained from public records. Some examples of the records employers can use in lieu of credit reports to help evaluate an applicant’s history of financial responsibility and overall personal background include:

Civil Lawsuits and Judgments

A search of civil lawsuits involving your applicant will help you determine whether they have been sued by creditors for breach of contract. Since lawsuits that are pending or have not resulted in a judgment against a consumer are not recorded on a credit report, this information can provide you with relevant information that you will not obtain with a credit background check alone. Additionally, not all civil monetary judgments are reported as adverse actions on a consumer’s credit report, so you run the risk of missing pertinent information without performing supplemental civil and judgment record checks.

State and Federal Tax Liens

As with civil judgments, credit reports may not list all state and/or federal tax liens for a consumer and an independent search for these filings can provide details on any unpaid taxes. Depending on the jurisdiction, this information can be researched at either the county level or with the Office of the Secretary of State.

Outstanding Child Support

Information regarding overdue child support payments can be reported to credit bureaus as an adverse action and debt obligation. In some jurisdictions, this same information can be obtained from state child enforcement agencies and/or the county court clerks’ office. For example, employers in New York can perform a search with the Department of State, which maintains a list of outstanding child support warrants issued by the New York Department of Taxation and Finance.

UCC Financing Statements

A search of UCC (Uniform Commercial Code) financing statements will provide you with information regarding certain debt obligations for an applicant. Creditors will often file UCC statements to demonstrate a security interest in certain personal property owned by a creditor. This information can typically be obtained from the Office of the Secretary of State or the county recorder’s office.

Real Property Information

Conducting a search of real property records will provide you with information regarding any real estate owned by an applicant. Such a review can be performed with the county recorder’s office and can uncover additional financial information, including mortgages, home equity loans and lines of credit, property liens, and mechanic’s liens.

Personal Bankruptcies 

While there are certain legal restrictions to the use of personal bankruptcies in employment decisions, these filings can provide you with information regarding a person’s financial background similar to a credit report. A review of the schedule of assets and liabilities filed with a bankruptcy petition will contain details regarding credit obligations, real and personal property holdings, outstanding judgments and liens, and pending lawsuits. 

Criminal Records

One of the most important public record searches employers should be performing, and the one that will go a long way in protecting you from liability, is a criminal background search. As always, I am not referring to a free, instant, or “google” criminal record search. Employers should be performing thorough criminal checks that, at the very least, include a statewide inquiry (where available) and local county searches. For a more thorough inquiry, consider including a search of federal criminal indictments with the United States District Courts and a sex offender/predator review on a national and state level. While so-called “nationwide” criminal searches do have some value in potentially alerting you to a criminal record filed outside an individuals linked jurisdictions, such inquiries should only be used to supplement state and county level searches as they are limited in scope.

A Word of Caution

Your company’s access to the above records will depend on factors such as jurisdictional limitations, the requirement of a signed release form, and the nature of the position you are hiring for. Additionally, although these information sources are considered a matter of public record in most states, there may be legal restrictions on the use of some of the filings for employment purposes, particularly criminal and bankruptcy matters. If using a third-party background screening company to perform these searches on behalf of your company, you must also abide by the requirements set forth in the Fair Credit Reporting Act. The FTC provides a comprehensive guide on how this federal law applies to employers here. To ensure your company’s FCRA compliance, you should also consult legal counsel before implementing any new screening procedures.

Conclusion

While there are valid points on both sides of the heated debate on the use of credit reports for employment, such restrictions will not prevent employers from accessing relevant information to aid in making important hiring decisions. Since credit reports themselves are not reliable enough to use as the deciding factor in a hiring decision, such checks should be supplemented with public record research. If you are in a state or city that still allows the performance of credit background checks, the information obtained should be taken in context along with the applicant’s entire background. This is where a comprehensive professional employment background investigation becomes an employer’s best tool, allowing for a better assessment of a candidate’s circumstances to help make a more informed hiring decision.

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Thomas Whelan

Thomas F. Whelan has been a professional investigator for over twenty years. He is a small business owner and the President of Whelan & Whelan, LLC, a private investigation firm specializing in background checks, due diligence, social media investigations, and business intelligence services. Tom can be reached via email at tom@whelanandwhelan.com.