Running a Credit Check on Potential Employees

Many employers use credit checks as a means of screening the background of potential hires. In states where there is specific legislation limiting the use of credit checks in hiring decisions, the employer must follow the law of their state, but in every state employers are at least subject to the requirements of the Fair Credit Reporting Act (FCRA). According to the FCRA, employers may run a credit check when they hire new employees and when they evaluate employees for promotion, reassignment, and retention — as long as they comply with certain defined procedures at every phase of the credit check process.’

Before Running a Credit Check

Before an employer runs a credit check, the employer must notify the individual in writing in a document separate from the job application form that a report may be used. The employer must also get the person’s written authorization before pulling a credit report. The authorization form for the credit check may be included in the same document as the notice informing the individual of the credit check. Special procedures apply to credit checks run on employees in the trucking industry.

Before Taking Adverse Action

Adverse action means denial of employment or any other decision for employment purposes that adversely affects any current or prospective employee.” The Act imposes obligations on employers both before and after they take an adverse action against an employee or job applicant.

Before taking an’adverse action, an employer must give the individual a pre-adverse action disclosure that includes a copy of the individual’s consumer report and a copy of “A Summary of Your Rights Under the Fair Credit Reporting Act” — a document prescribed by the Federal Trade Commission. The company that furnishes the individual’s report will give you the summary of consumer rights.

Employers are not required to give applicants an opportunity to explain items in the credit report or even identify which items cause the employer concern. On the other hand, the employee might have a good explanation for a particular item, or even be able to prove that the item is false. If time allows it might pay to discuss the items in question with the applicant or candidate and listen consider any explanations or evidence that is offered in response.

After an employer takes an adverse action, the employer must give the individual notice — orally, in writing, or electronically — that the action has been taken. The notice must include:

• The name, address, and phone number of the company that supplied the report;
• A statement that the company that supplied the report did not make the decision to take the adverse action 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, and his or her right to an additional free consumer report from the agency upon request within 60 days.

For more information on running a credit check on potential employees, visit the Federal Trade Commission – Using Consumer Reports: What Employers Need to Know.’

Case Studies: Running a Credit Check on Potential Employees

Case Study 1: Failure to Provide Notice and Authorization

Greenfield Corporation, a manufacturing company, conducted credit checks on job applicants without providing a separate written notice informing them of the credit check. They also neglected to obtain written authorization from the applicants beforehand. This failure to comply with the Fair Credit Reporting Act (FCRA) requirements resulted in legal consequences for Greenfield Corporation.

Case Study 2: Inadequate Pre-Adverse Action Disclosure

Silverstone Financial Services, a financial institution, decided not to hire a candidate based on negative information found in their credit report. However, the company failed to provide the candidate with a pre-adverse action disclosure, including a copy of the consumer report and a summary of their rights under the FCRA. This oversight exposed Silverstone Financial Services to potential legal liabilities.

Case Study 3: Lack of Adverse Action Notice

Sunrise Retail Store denied employment to an applicant due to adverse information revealed in their credit report. However, the company failed to provide proper notice to the applicant regarding the adverse action taken. By not informing the individual orally, in writing, or electronically, Sunrise Retail Store violated the FCRA’s requirements and faced potential legal repercussions.