Research and Statistics

States weigh limits on credit checks for employment


In July 2009, Hawaii became the second state to curb the practice of allowing all employers to make hiring decisions based on a job applicant’s credit score.

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Do a few bad marks on your credit file make you a poor job candidate?

A handful of state and national law makers are saying “no.” And they want to make sure that employers can’t use credit as a litmus test for hiring. Two states have already banned the practice, several more are considering it, and one Congressional committee is weighing a bill that would address the issue on a national basis.

“This is the tip of a very large iceberg,” says Jay Stanley, privacy expert with the ACLU.

Absent a state law or change in national law, employers can (with an applicant’s permission), pull a credit history and decline to hire a candidate based on what they find — even if the information has no relation to the job. And with many Americans struggling financially simply because they are out of work, legislators are seeking to prevent something they see as needlessly punitive.

“It’s a type of modern-day debtor’s prison where there’s no way out,” says Marcus Oshiro, the state representative who introduced Hawaii’s bill.

In July 2009, Hawaii became the second state, behind Washington, to limit the use of credit histories in pre-employment screening.

“One issue I’m banging my head against is folks who say, ‘If you’re in debt, you’re untrustworthy,'” says Matthew Lesser, a Connecticut state representative who introduced a bill banning pre-employment credit checks in his state. “We only have to wonder what Bernie Madoff’s credit score was.”

Who gets screened?

How many job applicants have to pass pre-employment credit checks? More than you might think.

No longer are credit checks limited to workers who are responsible for money, financial information or the personal property of others. These days, 43 percent of companies conducting any type of pre-employment screening use credit checks for some or all employees, according to a 2006 study by the Society of Human Resource Management. That number is up from previous studies.

“The use of credit checks for employment decisions has skyrocketed in the past few years,” says Lesser.

The problem, he says, is that many people don’t know about it until they can’t get a job. “A lot of this has just fallen under the radar,” Lesser says.

With a national unemployment rate hovering near 10 percent and many Americans suffering damaged credit in the wake of the Wall Street meltdown, the mortgage crisis and the credit crunch, politicians and consumer advocates worry that the screenings unfairly penalize people who are trying to — literally — work their way out of financial trouble.

“What we found when we were researching the bill was that companies are credit checking even low-level workers,” says Sally Lieber, a former California speaker pro tempore who introduced a similar bill in that state last year. “It’s really a privacy concern when there’s a lot of fishing around for data and no real reason behind it.”

Another fact that worries lawmakers, consumer advocates and consumers alike: A good number of personal bankruptcies, which ruin credit, result from medical crises.

“So you start off with cancer, have to declare bankruptcy and now you can’t get a job?” says Stanley. “Good social policy aims at preventing negative spirals in people’s lives.”

Washington state passed a law two years ago prohibiting employers from viewing credit histories unless creditworthiness was necessary for the job. Hawaii’s law went into effect in July. Connecticut, New York, Missouri and Texas all have weighed proposals to reduce or eliminate an employer’s use of credit histories in hiring, and lawmakers in other states are considering similar measures. Typically, state bills contain exceptions for positions such as public safety officers, executives with financial responsibilities to their employer or employer’s clients, and certain occupations, such as airline security workers, where credit checks are required by law. And the proposed credit-check measures do not prohibit employers from conducting criminal background checks.

Recently, U.S. Rep. Steve Cohen of Tennessee sponsored the “Equal Employment for All Act,” a national bill that would bar employers from using credit reports in hiring or promotions.

In researching the bill, Cohen and his staffers discovered that many of the credit-challenged were “young people, seniors, minorities and divorced women,” says Steven Broderick, the congressman’s communications director. The bill (HR 3149), would ensure that “employers could not use a person’s credit history against them,” Broderick says. The bill has been sent to the House Financial Services Committee for consideration.

Where are the laws now?
While the credit-check reform measures often garner kudos from constituents, they are no slam-dunk for lawmakers. Three recent examples:

  • Washington state’s law took several years and several attempts, says state Sen. Steve Hobbs, who proposed the legislation.
  • In Hawaii, Oshiro first submitted his bill in 2003. It passed this year, but later the legislature had to overturn a gubernatorial veto.
  • In 2008, a California measure cleared both bodies of the legislature, only to be vetoed by Gov. Arnold Schwarzenegger. State Assemblyman Tony Mendoza reintroduced the legislation again in 2009.

In other states, measures limiting employers’ use of credit checks have gained support and votes, only to disappear into committees.

“We just couldn’t get any traction,” says Charlie Leal, legislative director for state Rep. Eddie Lucio III, of a Texas measure that applied only to state employees. But, he adds, “Often, in a state legislature it takes two to three times to get a bill moving through the process.”

The main opposition to the credit-check measures? In many cases, the organizations lining up against the bills are banking and financial associations, as well as some retail groups and, occasionally, the companies that provide credit histories and background checks. The opposition’s main contention is that credit checks are necessary to properly screen employees.

In many cases, state or local business groups oppose the measures. In Hawaii, the state Society of Human Resource Management opposed the measure initially, then dropped its objections after the exemptions were added, says Shawn Carbrey, state director of legislative and governmental affairs for SHRM Hawaii.

Oshiro tags Hawaii’s law, which excludes situations in which good credit is a bona fide job tool, as well as positions where the checks are specifically required by law, a “compromise.” “It offers employers and potential employees some protection,” he says.

But the state’s chamber of commerce continued to oppose the bill and urged the governor to veto it, says Jim Tollefson, president of the Hawaii Chamber of Commerce. “We think it takes away an employer’s right to properly and adequately screen employees,” he says.

Not every employer seems to agree that measures limiting credit checks will hinder businesses.

“A number of members do use credit reports in their hiring,” says Bob Carragher, manager of government relations for SHRM’s national office. But in terms of various state laws limiting the practice, he says, “I’ve not heard anything from members that this is a major threat to the profession’s ability to screen applicants.”

See related: Credit checks for job applicants become more common, Interactive guide: How to read, understand your credit report, How to dispute credit report errors

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