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Property managers: Use caution when using credit checks to screen employees

Growing Your Business Legal Concerns

Criminal background checks and credit reports have become routine for rental applicants: About 43 percent of all landlords check rental applicants’ credit, and 48 percent of landlords consider credit information to be one of the top three factors they consider for potential renters.

At the same time, background checks are becoming increasingly common among employers. Nearly half of all employers routinely run employee credit checks for job applicants, and many of them also pull criminal background reports.

But property managers should beware: While the law is still wide open when it comes to running background checks on rental applicants, some jurisdictions are restricting employers from running employee credit checks.

Which States Restrict Employee Credit Checks?

At least 11 states so far, plus the District of Columbia and New York City, have enacted laws restricting employee credit checks on job applicants. These states are:

  • California
  • Colorado
  • Connecticut
  • Delaware (for public employers)
  • Hawaii
  • Illinois
  • Maryland
  • Nevada
  • Oregon
  • Vermont
  • Washington

Furthermore, at least 19 states have legislation pending in their state legislatures. So the list of states that are hitting the brakes on employers’ ability to run credit checks as a condition of employment is likely to get longer over time.

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It’s vital to understand your own state’s laws–and any laws that local councils may approve–before running an credit check on anyone; but especially job applicants, due to the increased protections that they’re provided in comparison with renters. The danger for property managers is in conflating the two processes, and treating employee credit checks the same as you treat rental applicant credit checks.

Employee Credit Checks: Pros & Cons

Why is opposition stiffening to employee credit checks? Critics have noted that credit checks have a disproportionate effect on minorities. Research from the Urban Institute, for example, found that while 64 percent of white survey respondents had a credit score of 720 or higher in 2013, the percentage of black Americans with the same score was just 33 percent.

Furthermore, the Federal Trade Commission found that nearly 1 in 5 credit reports had material errors on it.

On the other hand, there are still compelling reasons for most property managers to run employee credit checks–for example, the possibility of preventing embezzlement.

Can Employee Credit Checks Prevent Embezzlement?

It’s difficult to predict which employees may go on to commit embezzlement or fraud. For one, background checks aren’t very helpful, as the majority of embezzlers don’t have a prior history of criminal convictions. However, many small business owners are highly motivated to detect and prevent embezzlement, as the median average loss from embezzlement in 2016 was $294,354.

While background checks may not be helpful, employee credit checks could flag an applicant who is under significant financial pressure. This alone may not be reason to turn down an applicant–because, of course, finding a good job is a natural solution to financial stress. However, according to the Association of Certified Fraud Examiners, personal financial stress is one of three primary risk factors for embezzlement–so it’s something to be aware of.

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How to Run Employee Credit Checks in a Smart, Legal Manner

If you do choose to run employee credit checks, keep these tips in mind:

  • Always get written authorization before running employee credit checks.
  • Pull employee credit checks for all applicants (within reason). If you pull employee credit checks for some applicants, but not others, you leave yourself open to accusations of illegal discrimination–and they might be right.
  • If you decide not to hire an applicant based on information revealed by their employee credit check, send a formal adverse action letter explaining the decision. The letter must also inform them of their rights under the Fair Credit Reporting Act.
  • Don’t mix up your employee credit checks with rental applicants’ credit reports. The credit checks that you order are generally different for each group of people. If you are using a landlord credit check service, the products that they use are optimized to capture relevant credit information on renters. These are different products than employers use. Furthermore, a tenant credit check usually counts as a “hard inquiry” against the applicant’s credit–so just running the check could adversely affect the applicant’s credit score. An employer credit check, on the other hand, is a soft inquiry that doesn’t affect the job applicant’s credit score. Don’t mix up the two processes.
  • Have a policy and procedure for disposing of all personally identifiable background reports.
On the #BuildiumBlog: How to run employee credit checks without legal troubles. Read the post now! Click To Tweet

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Jason Van Steenwyk

Jason is a freelance writer and editor, as well as an avid fiddler. His articles have been published in a number of real estate publications including Wealth and Retirement Planner and Bankrate.com. He lives in Fort Lauderdale, FL with his cat, Sasha, and an unknown number of musical instruments.

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