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Using Credit Checks in the Hiring Process

legal and ethical use of credit reports for hiring employeesBackground Checks and Job Offer Withdrawal

You may think you’ve found the perfect person for the job, but you don’t know their whole story. It is possible that, upon performing an employee background or credit check for the hiring process, you may find information that would make you unwilling to hire them. At that point, what do you do?

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The following is a question about the use of background and credit reports for hiring employees that was asked by an employer in the hiring process and answered by Robin Thomas, J.D. of HR education materials publisher Personnel Policy Service, Inc.

Q: We use an outside company to run background checks on job applicants to whom we make job offers. The offer is conditioned on everything “checking out.” What steps should we take if a background investigation turns up information that makes us want to rescind the offer?

A: If you are using an outside organization to perform employee background checks, you must follow the requirements of the Fair Credit Reporting Act (FCRA), found in 15 U.S.C. §1681. The FCRA does not prohibit you from taking adverse action based on information from the employee background check. It does, however, require you to comply with comprehensive notice, consent, and disclosure obligations, both prior to performing an employee background check and after the results are reported.

(Download free Hiring model policy, including HR best practices and legal background.)


The FCRA applies to any “consumer report” or “investigative consumer report” provided by a third party “consumer reporting agency.” A “consumer reporting agency” is defined as any person who, for monetary fees, dues, or on a cooperative nonprofit basis, regularly engages in whole or in part in the practice of assembling or evaluating consumer credit information or other information on consumers for the purpose of furnishing consumer reports to third parties.

The FCRA defines a “consumer report” to include any written, oral, or other communication of any information by a consumer reporting agency regarding a consumer’s creditworthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used as a factor to establish the consumer’s eligibility for employment. An “investigative consumer report” is defined as a consumer report or portion of a consumer report which relies on interviews with neighbors, friends, and associates to compile information about the applicant’s character, general reputation, mode of living, and other personal characteristics. Accordingly, checks of a person’s credit, references, and motor vehicle records all are covered.

Legal and Ethical Use of Credit Reports for Hiring Employees

Before requesting a consumer report to use as a credit check for the hiring process, you must provide the applicant with a clear and conspicuous written disclosure that a consumer report may be obtained for employment purposes. In addition, the applicant must give you written authorization to obtain the report.

Then, once you receive the report, the FCRA indicates that * before * taking adverse action (such as not hiring an applicant) that is based in whole or in part on the information, you must provide a copy of the report to the applicant and describe in writing the person’s rights under the FCRA. As a practical matter, the consumer reporting agency is required to provide this summary to you with the report (but you are not required to provide the applicant a copy of the report unless you plan to take adverse action based on it).

A second, separate notice also must be provided after you take adverse action. This notice can be given orally, in writing, or electronically and must include:

(1) the name, address, and telephone number of the consumer reporting agency issuing the report

(2) a statement that the agency did not make the decision and is not able to explain why the decision was made

(3) a statement regarding the consumer’s right to obtain a free disclosure of the consumer’s file from the agency if the consumer requests the report within 60 days of notice of the adverse action

(4) a statement regarding the consumer’s right to dispute directly with the consumer reporting agency the accuracy or completeness of any information provided by the agency.

The Federal Trade Commission (the federal agency that enforces the FCRA) also has issued nonbinding, informal opinion letters providing limited guidance about how long an employer must wait between the time it notifies the applicant that it plans to take adverse action and provides a copy of the credit report, and the time that it actually may take the action. The FTC noted that the statute does not define the time period and recommends an “appropriate” time period, the duration of which must be assessed according to the circumstances. See Haynes-Hawkey Opinion Ltr. 12/18/97. In one letter ruling, the FTC approved of a five business-day period between furnishing the report and taking action. See Brinckerhoff-Weisberg Opinion Ltr. 6/29/97.

Further, to help prevent potential discrimination claims, you should make sure you have documented your job-related, business-related reasons for not hiring an applicant based on a background check. In addition, your documentation is stronger if it shows how the adverse report relates to the applicant’s ability to perform the job. So, for example, if a driving record report shows a DUI and the job requires the applicant to drive, this fact would clearly support your decision.

Regards,

Robin Thomas, J.D.
Personal Policy Service, Inc.

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