How do you know if a potential employee can handle money responsibly? What information can you use to get an indication that they will fulfill their work obligations? Is there any evidentiary way to measure whether a prospective hire is ethical?
One way leaders try to begin answering these questions is by running a pre-employment credit check. A survey by CareerBuilder estimated that about 30% of employers will perform a pre-employment credit check on applicants. It’s no surprise that modern American life has changed a lot since Benjamin Franklin wrote, “The second vice is lying; the first is running in debt.”
But let me be clear: Debt itself isn’t a problem; not repaying can be. Many of the Founding Fathers found themselves in debt for years. Thomas Jefferson sold off his library collection in 1815 and used the proceeds to help settle some of his debts. John Adams’ son, John Quincy Adams, helped pay off a lien on the family home, according to Paul Nagel in his book John Quincy Adams: A Public Life, A Private Life. Even Alexander Hamilton found himself overdrawn on his Bank of New York account — the very bank he founded — by more than $5,000 (which equates to tens of thousands of dollars today).
From my perspective, it’s best to only use a credit check for applicants considered for a position that involves handling money, such as chief financial officers or bank tellers. With white-collar crime estimated to cost the U.S. between $300 and $600 billion annually, according to CBS News, I’ve observed many leaders consider pre-employment credit checks as a security step for their business. They want to keep employees, investors, shareholders and customers safe from prospective thieves, embezzlers and fraudsters.
Credit checks can also indicate a candidate’s potential vulnerabilities, depending on the job. You could also uncover other information. For example, previous jobs that were not listed on an application could turn up, and I’ve even seen instances where the applicant is caught using someone else’s identifying information.
Know the law.
There are a few best practices to consider before diving into pre-employment credit checks, especially when it comes to the law. Some states set limits on pre-employment credit checks, and Congress recently introduced a bill that would only allow employers to use credit checks if it’s required by law or in relation to a national security investigation.
The federal Fair Credit Reporting Act requires employers to get an applicant’s consent before pulling a credit report. If you intend on using the information you find as the basis for a job decision, you must notify the applicant, and you must do so again once you make a final decision.
California takes it a step further: Employers are only allowed to obtain credit reports from specific kinds of applicants. These include people applying for managerial positions, law enforcement, anyone handling $10,000 or more during a workday and positions that require regular access to someone else’s confidential or proprietary information.
The applicant must receive written notice explaining why their credit is being checked and must choose if they would like to receive a copy of the report. They are due to another notice if the credit report is a reason they are not hired.
Treat contractors like employees.
While the rules are unclear about conducting background credit checks on contract employees — a definition that is itself changing — the safest route (should you choose to conduct a credit check) would be to behave the same as if the individual were one of your own employees. Follow federal laws and those of your state in giving notice that employment is conditional, provided a background credit check (and criminal check) are conducted. If there’s a problem, notify the prospective contractor and give them an opportunity to respond or correct an error.
Remember that credit checks don’t always show the whole picture.
It’s important to keep in mind that credit reports are a living thing: They grow stronger with time, and when hurt, they heal over time. Anyone can hit a rough patch. Today, the reality is that debt is common at any age. Recent college graduates, for example, might be low-wage earners. So, they might have to decide between paying rent and utilities or not missing a payment on their student loans. Additionally, a bankruptcy filed seven years ago, with no other negative marks, is a very different thing than a bankruptcy filed a few months ago, and therefore is unlikely to be relevant.
This is why it’s not only a good hiring practice but also the most reasonable course of action (and often the legally required one) to have a conversation about any information uncovered in the credit check that would affect your decision to hire that individual. For instance, what if their current employer is the one going bankrupt and is unable to pay wages, thus causing financial problems for their employees? It’s also possible there is incorrect information on the credit report or that a sudden job loss, illness, divorce, etc., led to a negative mark.
Remember, you’ve spent a lot of time building your business and its reputation. You have a duty to yourself to ensure you are hiring the best people. Should you choose to conduct pre-employment credit checks, remember to know the local and federal laws and always perform your due diligence before basing hiring decisions on what comes up. As a result, you can make informed decisions and trust your team with the company’s money and its future.