Editorial Policy

States Weighing Limits on Employer Credit Checks

Marcia Frellick

September 15, 2011

Earlier this month, California became the seventh state whose legislature passed a bill that would limit employers’ ability to check the credit reports of people interviewing for jobs unless the information was vital to the job’s duties.

The bill, headed for Gov. Jerry Brown’s desk, follows similar legislation signed into law in Connecticut (in July) and Maryland (in April) and similar laws passed in previous years in Hawaii, Illinois, Oregon and Washington. At least 18 other states have introduced similar legislation, according to the National Conference of State Legislators.

The recent escalation in legislative activity on the issue comes as nationwide unemployment continues to hover above 9 percent and the U.S. poverty rate has climbed to an 18-year high.

Those fighting the bills say this is no time to be handcuffing businesses who could be damaged by poor hires, and they say businesses will suffer from additional regulations. Consumer activists say there is no better time for these laws. Both sides agree there is little empirical evidence that hiring people with bad credit affects job performance.

The growing number of states recently considering or passing these bills means job seekers are pressuring legislators for relief, says Nat Lippert, research analyst with Unite Here, a union that represents service workers in the U.S. and Canada.

“More legislators are realizing that this is a widespread practice that’s locking more and more people in a Catch-22 — they can’t pay their bills because they can’t get a job and they can’t get a job because they can’t pay their bills,” says Lippert. “Unfortunately, while we know it’s a widespread problem, most job seekers simply never find out why they didn’t get the job so it’s difficult to know exactly how many people this affects but we know from the industry statistics that it’s a large number of people.”

Employer credit checks increasingly common
More employers have started using this tool in the last decade. A 2010 survey by the Society for Human Resource Management (SHRM) showed that 60 percent of employers said they run credit checks on at least some job applicants, as compared to 35 percent of employers surveyed by SHRM in 2001.

The 2010 survey also asked employers, “In general, when making a hiring decision about a job candidate, which are the most important factors influencing the final decision to hire a particular candidate over another?”

Most employers answered: “a good fit with the organizational structure” (85 percent), previous work experience directly applicable to the job (82 percent) and performed well during the interview (80%). Nine percent said a favorable credit background check was the most important factor in their hiring decisions.

The vast majority of employers in the survey (91%) who conduct credit checks do so for jobs with fiduciary or financial responsibility, such as handling cash, banking, accounting, budgeting or those involving sensitive credit card information. Nearly half the respondents also consider the credit of candidates for senior executive positions, such as CEO and CFO.

Some of the states that have passed these laws have included exceptions that, for example, allow employers to pull reports on people working with a company’s finances. These exceptions are important, says Norm Magnuson, vice president of public affairs for the Consumer Data Industry Association, the trade association for the consumer reporting industry.

While the CDIA opposes bills that would broadly limit employers’ ability to make a hiring decision based on relevant data contained in a credit report, the organization would assess individual bills state by state, Magnuson says.

“People ask what difference does it make that they can’t pay their credit card bills and they’re going to be employed as a security guard. In probably most cases, there is none. It does make a difference if you’re going to work in a bank or a jewelry store, maybe — the rationale being how you handle your own finances may affect how you handle the finances of your employer,” Magnuson says.

Consumer advocates, pro-business groups clash on legislation
Jose Gonzalez, vice president of government affairs for Associated Industries of Florida, says even when exceptions are granted, restricting businesses in hiring practices is a slippery slope.

“You start with ‘you can’t do a credit check on a prospective employee’ and next it’s ‘you have to dismiss their criminal histories.’ That makes us very nervous.”

Consumer activists say the tool hits hardest the people who are struggling the most and has a discriminatory impact on African Americans and Hispanics, who statistically have lower incomes and lower credit scores.

Gonzalez says the current economic crisis has hit across all economic factions and that the bigger problem is that “the government is trying to regulate its way out of the economic crisis.”

A Florida state senator has introduced legislation limiting credit checks in the state this year and the business community is fighting it, Gonzalez says. He says the measure has little chance of passing with a legislature that is conservative and pro-business.

States that don’t have laws restricting employers on the issue follow the guidelines of the Fair Credit Reporting Act, which says employers may obtain credit reports on job seekers with the applicant’s written permission. They can check histories of overdue payments on mortgages, credit cards, rent and loans, whether the person has been sued or has filed for bankruptcy, among other factors.

Denying permission for such a check, employment experts agree, is not really an option because that sends a red flag that an applicant has something to hide and will likely hurt their chances of employment.

Consumer advocates also say that a credit report may distort or misrepresent a person’s value as an employee.

Sarah Crawford, senior counsel for the Lawyers Committee for Civil Rights Under Law testified before a House subcommittee in September of last year, saying, “While credit reports may show whether bills have been paid on time, they do not reflect the circumstances surrounding debts or reasons for any late payments. For example, a credit report would not explain that a factory worker lost his job when his employer went out of business. A credit report would not explain that a man’s credit was destroyed because he was the victim of identity theft or a predatory lending scam. A credit report would not explain that a woman’s credit was destroyed as a result of divorce. And a credit report would not explain that a woman lost her job and her health coverage before developing breast cancer and incurring astronomical medical bills.”

Gonzalez called restrictions on credit checks “a knee-jerk reaction to the current economic crisis.”

“Employers are fully aware that folks are having difficulty,” Gonzalez says. “You would expect to see defaults on their credit and financial obligations. The employer will always seek out that person that they need. If you let the market work—it will sort itself out. That’s why you’ll see the business community in Florida oppose this legislation.”