Employers using credit reports in the hiring and firing of employees

By Mike Scott

Legal News

In this tight job market, personal credit scores are playing a significant role in the hiring of new employees.

And in some cases, credit scores may be factoring into dismissals.

That is according to Gary Nitzkin, a partner with Nitzkin and Associates in Southfield who also is a CPA.

When interviewing individuals for open positions, companies have the right to pull the employee's credit report under the Fair Credit Reporting Act, with the prospective employee's permission.

Nitzkin is unsure whether that has occurred more frequently since the national economy sunk into a recessionary state in early 2008, but he is aware that it is occurring in as many as one out of five open positions.

"It is done by an employer generally to see if a prospective employee is responsible and to check on whether they are having money issues or are in need of immediate cash," Nitzkin said.

In some instances, such a move could result in a self-fulfilling prophecy for the job candidate, particularly if he or she has been unemployed for a long period of time.

A high period of unemployment, something that is more typical in recent years than at any point over the last three decades, might be more common for individuals seeking work, especially in the wake of plummeting housing values and the rising number of foreclosures.

"For some employees, the process of having their credit report checked can be the first step in a downward spiral," Nitzkin said.

Under the Fair Credit Reporting Act, companies that choose not to hire a candidate because of his or her credit report must notify the job applicant, a requirement that not all hiring companies or organizations adhere to, Nitzkin said.

The employer also must provide the candidate with a free look at the credit report used.

"There are many employers that do not provide such a report or the reasoning for their decision and that could cause a significant financial penalty," Nitzkin said.

When the job market was strong, employers generally did not conduct credit report research on prospective employees, but as hiring standards have risen, so have the cases of using a credit report to measure a candidate's level of responsibility, job performance, and honesty, said Steven Fishman, a partner and chair of the Workplace Law Practice Group at Bodman LLP in Troy and Detroit.

"There is more desire for information about employees as part of discipline discharge (research) and pre-hire screening," Fishman said.

The investigation is subject to the fair credit laws, thus the use, retention and application of information as part of a personnel decision must be documented.

"In the eyes of an employer, it can measure credit worthiness, character, and responsibility," Fishman said.

Employers cannot use information in a credit report that is not "job related" when making a decision, Fishman said. Yet the law can be applied broadly in some circumstances.

The hiring or retention of an employee in a management position, for example, would likely be seen as a role where personal responsibility needs to be present outside of the workplace, at least in the collective minds of many employers.

Additional consideration could be given to existing employees who have demonstrated competence and performance in their daily roles, but a poor credit report could be a concern to employers even in those situations, Fishman said.

"Employers may measure the value of a long-time employee and may ask questions appropriate of that employee to ensure there is a (comfort level) with the employer," Fishman said.

The penalty could include negligent violations of the federal statute that include actual damages, suffering, and loss of income, he said.

Willful damages can include statutory damages or actual damages, whatever is higher, plus fees and other costs.

However, even employers that understand the laws about what they need to provide candidates when pulling a credit report could be in danger of lawsuits, Nitzkin added.

That's because a poor credit report traditionally impacts a higher percentage of minority populations, which can lead to the potential for discrimination lawsuits.

The Equal Employment Opportunity Commission (EEOC) has publicly stated its concern over this issue and will seek to uncover instances of discrimination related to personal credit reports, Nitzkin said.

While Nitzkin has not had personal experience with companies discharging a current employee because of his or her credit score, he believes it does occur.

"When you have a situation of at-will employment, that is an option that a company has," Nitzkin said.

"It can be a very expensive option because of all the training and investments made on behalf of that individual and unemployment benefits, but I believe it can happen."

Nitzkin warns employers that pull credit reports that the information contained within them can be misleading. He encourages companies who pull credit reports on prospective or current employees to use the information carefully.

"It can be difficult to garner the information about an individual's credit history just from looking at a report," Nitzkin said.

"You may have a situation where there has been an illness (within the immediate family) and there are medical bills that are outstanding.

"People who are normally responsible and trustworthy may just be having a difficult time financially in the short-term."

It is easier for employers to follow a set policy or guidelines when dealing with the issues of reviewing prospect or employee credit reports, Fishman said.

Firms like Bodman can provide the methodology needed to map out employer objectives in the hiring and firing process.

"You want to have a uniform and objective process in place and that's what (lawyers) can provide," Fishman said.

"The most important consideration though is fair treatment."

Published: Thu, Nov 25, 2010

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