By now it’s common knowledge that some employers check applicant’s credit when making hiring decisions, but the debate about the ethics – and effectiveness – of that practice are under fire. The results of a study by the Society for Human Resource Management were just released with interesting conclusions that may have both thrown fuel and water on that fire.
In fact, nearly 50% of companies check credit reports of at least some potential employees during the hiring process. To do so companies need to get applicant’s written permission, but any applicant that says “no,” most likely just disqualified themselves from contention on suspicion that they’re hiding something, alone. If allowed, employers access an amended credit report but not a credit score – a common misnomer.
Employers see a bad credit history as an indication that employees are more likely to steal, cheat, commit fraud, embezzle, or engage in other “harmful acts” on the job. However, this new study dispels the myth that people with bad credit scores are more likely to make bad employees
Said Jeremy Bernerth, the lead researcher and professor at Louisiana State University “The idea is that if you have a bad credit score, you’ll engage in deviant acts. We found no relationship there.”
The Society’s study polled thousands of participants, who fill out a comprehensive survey designed to measure the personality traits of applicants. They also polled their immediate work supervisors and managers about those employee’s on-the-job performance and decorum with the company. Finally, they pulled the same employee’s credit scores and lined the three branches of data up to look for correlations, and found no direct evidence that lower credit scores meant bad employees.
But there were some interesting findings that keep the debate – and use of credit pulls by employers – a live issue. Two of the survey questions had to do with employee task performance and citizenship behavior. The study did find correlations that those with higher credit scores rated higher in these. Task performance is how well people do in their day-to-day job functions, while citizenship behavior is “discretionary actions that either benefit the company or the individual.” Of course positive measures in both of these factors equate to a positive impact on the company.
“It’s really about consistency,” a spokesperson says. “We’re all driven towards consistency. If we’re being reliable and dependable in terms of our financial behavior, there’s a consistency in us that drives us towards those sorts of behaviors on the job.”
But many advocates worry that employers will start looking at credit reports as a panacea for determining the psychological makeup and character of potential employees. While they may have some place as a supplemental hiring tool, they definitely shouldn’t be taken as gospel. Remember that online 35% of credit score is repayment on time, the other 65% a combination of length of credit history, type of debt, and other factors which aren’t even relevant to employee makeup. Likewise, there are many reasons why an applicant may have blemishes on a credit report that are anomalies, not indicators of long term character patterns. For instance, we’ve seen many people take a hit on their credit report because they were laid off from a job, downsized to part time, went through a divorce, medical crisis, or had a bad mortgage loan, all things that are either out of their control or excusable, especially considering the recession and real estate bust.
With that in mind, should employers even be allowed to check credit reports? Employers say, “Yes,” and with good reason – pointing to the data that every year, retailers lose $30 billion because of employee theft and $55 million from workplace violence. Up to 1/3 of applicants lie on their resumes. The same Society for Human Resource Management states that right now about 13% of employers pull credit reports for all candidates and 47% check those for selected positions. They’re deemed most useful for jobs that involve handling finances, fiduciary responsibility to clients, access to confidential information (like Human Resources) and executive level positions. Of companies polled, 54% say the primary reason they used credit checks was to prevent theft and embezzlement, while 91% use credit checks for applicants applying for positions with fiduciary or financial responsibility.
It seems that is the Mason-Dixon line of this debate, and civil rights and workplace rights advocates are mainly trying to regulate the widespread practice of discriminating hiring based solely on credit pulls. Lawmakers from a dozen states have proposed bills that will prohibit credit checks during the hiring process, with the exception of those sensitive financial positions mentioned above. Three states have passed these laws so far. Representative Steve Cohen, a Democrat from Tennessee, has introduced his own legislation on a Federal level.
Legislators in more than a dozen states have introduced bills to curb the use of credit checks during the hiring process, and three states have passed such laws.
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