Tech & Work

The legal tightrope: Using credit checks to screen potential employees

When filling staff positions, many companies use credit checks to make sure the person they want to hire hasn't misrepresented his or her background. Here are some things you need to know if you use consumer credit reports to screen potential employees.


By A.X. Jones

Companies have long used credit checks as part of their hiring and retention efforts. Consumer-reporting agencies, such as Equifax and Trans Union, process billions of documents from credit transactions, public records, and other sources that are used in compiling a credit check.

But just as Internet privacy is an issue, concerns over how credit checks are conducted have mandated specific rules for their use. If you are not current on those rules, it could cost you.

Fully understanding the legalities of credit checks is especially pertinent as more businesses work to fill their IT rosters. Credit checks are one more way that a company can ensure that, for example, potential employees have the experience they claim on their resumes.

In this article, we’ll explain what kind of leeway the federal Fair Credit Reporting Act gives employers in checking on current and potential employees and some steps businesses need to take so that they comply with the law.

Fair Credit Reporting Act
The federal Fair Credit Reporting Act controls activities of the big consumer-reporting companies and the people, like you, who use their services. It considers a consumer report (credit check) to be:
"any written, oral, or other communication of any information by a consumer-reporting agency bearing on a consumer's credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing a consumer's eligibility for ... employment..."

When employers can use credit reports
All reporting agencies are only allowed to release a report for a few specifically approved uses, including employment.

Employers can use these consumer reports for a broad range of purposes, including decisions to hire, promote, retain, or otherwise affect someone’s employment in some way. Employers must be aware, however, that any report by consumer-reporting agencies may be subject to federal regulation.

If you misrepresent the reason you have requested a report or if your company uses it for a questionable purpose, it could mean trouble. In fact, you might be held personally liable even if you were acting on behalf of the company. Checking up on former employees, for example, for purposes unrelated to hiring them back, is an inappropriate use of the services.

And if you knowingly and willfully obtain information on a person from a consumer-reporting agency under false pretenses, you might be criminally prosecuted. The sentence could be a fine of up to $250,000 and imprisonment for up to two years.

Or you could be held liable for a failure to comply with the mandates of the Fair Credit Reporting Act, whether knowingly or negligently. Additional grounds may include invasion of privacy, slander, libel, and negligence. The damages may include the actual damages suffered, pre-set statutory damages, and attorney fees.

Federal law applies to credit checks and outranks any state laws that are inconsistent. This ensures some consistency across the United States. However, some states have enacted supplemental laws on credit checks, so it is imperative that you understand your state’s law as it pertains to credit checks for employment reasons.

The nuts and bolts of using a credit report
To use such services for legitimate "employment purposes," you must first:
  • Make a clear and conspicuous disclosure in writing to the person, in a separate document that consists only of that disclosure, that a consumer report may be obtained for employment purposes. You must make the disclosure before you ask for the report.
  • Secure a written authorization from the person for the procurement of the report.

If you take adverse action based on a credit report, you must give the person a copy of the report and a description in writing of their rights as prescribed by the Federal Trade Commission under 15 USC 1681g(c)(3). (See the FTC Web discussion and forms below.)

You must also tell the person affected:
  • About the adverse action, giving them the name, address, and telephone number (including the toll-free number for nationwide agencies) of the consumer-reporting agency making the report.
  • That the consumer-reporting agency did not make the decision to take adverse action and will not provide specific reasons why the adverse action was taken.
  • About his or her right to obtain, under 18 U.S.C.1681j, a free copy of the consumer report from the consumer-reporting agency, with an indication of the 60-day period under that statute for obtaining such a copy.
  • About his or her right to dispute, under 18 U.S.C. 1681i, the consumer-reporting agency’s accuracy or the completeness of any information in a consumer report furnished by the agency.

Other requirements may apply, depending on the particular facts involved.

Keep your lawyer’s number on speed-dial
If the laws surrounding credit checks sound complicated, it’s because they are. And recent congressional amendments specifically aimed at employers haven’t made things any easier.

If you plan to use credit checks, both in hiring and in ongoing monitoring of your employees, check with your lawyer first. He or she should be able to set you up with a procedure that protects you on both federal and state levels and that is fair to your employees. One issue with credit reports is their accuracy; if you have problems with employees' credit reports, it may be only fair to ask them about what’s being said so that they might clarify or correct what the report says about them. Your lawyer also can keep you posted on changes to the law.

If you want more guidance, the Federal Trade Commission provides a useful Web site giving guidance on federal law in this area, including a summary of consumer rights . The documents on this Web site will give you a more complete sense of what you must do when you use a consumer report.
Do you use credit checks as a way of screening applicants and monitoring employees, or do you feel it’s heavy-handed? Post a comment below or send us an e-mail and let us know.
This article is for informational purposes only; it discusses legal principles in general terms only and not as they would apply to any particular person's factual situation. It is not legal advice nor does it create any kind of an attorney-client relationship. No warranty as to the accuracy or correctness or sanity of this information is made, expressly or implicitly. Each person's legal situation depends on the particular laws that may apply and his or her own unique, factual circumstances. If you need legal guidance on credit reports, see your lawyer.

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