When New York City passed the nation’s most severe restrictions on employment credit reports in 2015, it joined 11 states and several other cities that limit the practice. Similar legislation is pending in 17 other states and at the federal level.

Even in places that have passed bans, though, exemptions exist. That’s because, despite the controversy, employment credit checks play an important – and in some cases required – role in due diligence around hiring.

The Controversy
A 2012 survey from the Society of Human Resource Management found that 45% of employers run employment credit reports to reduce or prevent theft, while 22% run them to reduce legal liability for negligent hiring.

Those who object to the practice cite the widespread damage to people’s credit caused by the recent recession and the fact that many bankruptcies and credit problems result from medical bills, temporary unemployment, and other factors that don’t necessarily indicate financial wrongdoing. That sets up a situation in which people whose credit suffered due to unemployment can’t get hired.

On the other hand, employers want to (and in some cases are required to) check for indications that a candidate might be a risk at a financial level by looking for fraud convictions, property liens, or bankruptcy.

That’s understandable when you consider that global occupational fraud accounts for nearly $3.7 trillion annually, according to a 2014 study by the Association of Certified Fraud Examiners. The same study found that evidence of living beyond one’s means is the top red-flag warning behavior exhibited by those who committed fraud. Credit checks are also required by state or federal law for certain kinds of positions (particularly in the financial services industry).

When credit checks aren’t specifically required by law, you may still want to run an employment credit check. Just make sure to consider these questions as you decide which of your open positions lend themselves to credit reports.

1. Which laws apply to employment credit reports?

Under the federal Fair Credit Reporting Act (FCRA), employment credit reports are legal, although you must also follow the specific state laws that apply, which might be more restrictive.

Under the FCRA, an employment credit report counts as a consumer report, just like a background check does. That means employers must get written consent and follow an FCRA-compliant adverse action process if they decide not to hire based on information uncovered in a credit report.

2. When do employment credit reports make sense?

Looking to the exceptions in states that prohibit most employment credit reports can give you a sense of when it truly makes sense to consider running one.

Typically, even states that otherwise ban employment credit checks allow exceptions in the following situations:

• The employee would have regular access to at least $10,000.
• The position is managerial or supervisory.
• The employee would have regular contact with personally identifiable information, such as Social Security numbers and birth dates.
• The employee would have access to trade secrets or to state or national security information.
• The position is in law enforcement.

All the state and local laws are nuanced, though, so get legal advice for your specific circumstances to make sure you’re in compliance.

3. Are there concerns about the discriminatory effects of credit reports?

With the EEOC pursuing cases against companies whose use of consumer reports has a  “disparate impact” on minorities, it makes sense to follow the agency’s guidance. Essentially, the EEOC discourages employment credit checks unless the employer can show that the information is essential to the job in question. If you’re already limiting credit checks to the kinds of positions I’ve already described, you should be on sound footing (though check with your own legal counsel to make sure).

Why Consider Employment Credit Reports?

Many companies continue to use employment credit checks on applications for specific kinds of positions because they offer many important benefits, including:

• Reducing the risk of negligent hiring lawsuits, theft, or embezzlement in roles that have access to company or client funds or sensitive information such as trade secrets or personal information like birth dates and Social Security numbers.
• Assessing the overall trustworthiness of candidates that will have large financial responsibility or hold senior executive positions.
• Confirming details of employment history the candidate provided.

When you decide you need employment credit reports, GoodHire and TAM have partnered to make the process easy. Just use TAM’s seamless integration with GoodHire to access their FCRA-compliant background check and employment credit report services. If you’re interested in joining our upcoming webinar on June 22, 2016, sign up here:

GoodHire is an FCRA-compliant employment screening service that automates and simplifies the background check process. Available through both an easy-to-use web interface and full-featured, RESTful API, GoodHire’s affordable, comprehensive services empower companies of all sizes to make the best hiring decisions. Our experienced and knowledgeable US-based support team is dedicated to providing every employer a 5-star experience.