Background Checking: The Implications of Credit Background Checks on the Decision to Hire or Not to Hire August 24, 2010

Key Findings Most organizations do not conduct credit background checks on all job candidates. Four out of 10 organizations do not conduct background checks at all, while 47% conduct background checks on select job candidates. Only 13% of organizations conduct credit background checks on all job candidates. Which factors have the most impact on hiring decisions? The three most influential factors for recruiters in the decision to hire a job candidate or not are: 1) a “good fit” with the organizational culture (85%); 2) previous work experience directly applicable to the job (82%); and 3) specific skills expertise needed for the job (80%). Only 9% of recruiters reported that favorable credit background check results were most influential in their hiring decisions. For which candidates do organizations conduct credit checks? Primarily for those candidates applying for positions with financial responsibility (91%); for senior executive positions (46%); and for those positions with access to highly confidential employee information (34%). These trends span across all industries, they are not unique to financial institutions. In other words, HR professionals report using credit checks for positions where this information is most job relevant – regardless of industry. Do employers use credit checks to screen out mass numbers of candidates in the early phases of the application process? No; at least 87% of organizations initiate credit checks only after a contingent offer (57%) or after the job interview (30%). This finding also substantiates the finding that organizations place relatively more importance on other job relevant factors in making hiring decisions. Are credit check results used as a definitive hiring criterion? No; 87% of organizations report that they allow job candidates, in certain circumstances, the opportunity to explain results.

Key Findings Not all debt revealed from a credit background check results in the decision not to hire. The top two situations that would impact an organization’s decision to NOT extend a job offer are: 1) current outstanding judgments and 2) accounts in debt collection. For most organizations, foreclosures, tax liens, education-related debt and medical debt do not play a major role in the decision to not hire a job candidate. How far back is credit checked? When examining credit background checks, organizations focus on long-term credit history, not short-term single events. Most organizations focus on credit history between 4 to 7 years overall; 33% of organizations reported that up to 6 to 7 years of credit history was most influential in their organization’s assessment of the job candidate’s credit standing, and 27% reported that up to 4 to 5 years was most influential. 17% of organization indicated all years of the credit history are equally important. Why do organizations conduct credit background checks? The primary reasons that organizations conduct credit background checks are: 1) to reduce/prevent theft and embezzlement and 2) to reduce liability for negligent hiring.

In general, when making a hiring decision about a job candidate, which are the most important factors influencing the final decision to hire a particular candidate over another? The three most influential factors in hiring decisions were: 1) a “good fit” with the organizational culture (85%); 2) previous work experience directly applicable to the job (82%); and 3) specific skills expertise needed for the job (80%). Only 9% of organizations reported that favorable credit background check results were most influential in their hiring decisions. Note: n = 518. Percentages do not total 100% due to multiple response options.

In general, when making a hiring decision about a job candidate, which are the most important factors influencing the final decision to hire a particular candidate over another? Comparison by Organization’s Region and Industry Favorable credit background check results (by region): Organizations in the Northeast (17%) were more likely than organizations in the Midwest (6%) to report that favorable credit background check results are a most important factor influencing the final decision to hire a particular candidate over another. Favorable credit background check results (by industry): Financial services organizations (48%) were more likely than health care and social services organizations (4%), non-auto manufacturers (8%) or professional services organizations (9%) to report that favorable credit background check results are a most important factor influencing the final decision to hire a particular candidate over another.

Does your organization, or an agency hired by your organization, conduct credit background checks for any job candidates by reviewing the candidates’ consumer reports? Four out of 10 organizations do not conduct background checks, while 47% conduct background checks on select job candidates – those with financial responsibility, those applying for senior executive positions, those with access to highly confidential employee information (see slide 6). Only 13% of organizations conduct credit background checks on all job candidates. Note: n = 343

On which categories of job candidates does your organization conduct credit background checks? (Select Job Candidates) Primarily for those candidates applying for positions with financial responsibility (91%); for senior executive positions (46%); and for those positions with access to highly confidential employee information (34%) are among the job candidates that organizations select for credit background checks. These trends span across all industries, they are not unique to financial institutions. Note: n = 158. The data in this figure represent organizations that conduct credit background checks on select job candidates. Percentages do not total to 100% as respondents were allowed multiple choices.

What is the primary reason that your organization conducts credit background checks on job candidates? The primary reasons that organizations conduct credit background checks is: 1) to reduce/prevent theft and embezzlement and 2) to reduce liability for negligent hiring. Note: n = 195

In general, if a credit background check revealed information that presented the job candidate’s financial situation negatively, what types of information are MOST likely to affect your decision to NOT extend a job offer? When examining credit background checks, organizations focus on long-term credit history, not short-term single events. Among organizations that conduct credit background checks for job candidates, 33% reported that up to 6 to 7 years of credit history was most influential and 27% reported that up to 4 to 5 years was most influential (see slide 12). Note: n = 201. Percentages do not total to 100% as respondents were allowed multiple choices. Respondents were asked to select their top two options.

When does your organization, or any agency hired by your organization, initiate credit background checks on job candidates? Note: n = 199

Does your organization allow job candidates, in certain circumstances, the opportunity to explain the results (e.g., high debt, bankruptcy, etc.) of their consumer report that might have an adverse effect on an employment decision? Before the decision to hire or not has been made, 65% of organizations allow job candidates to explain the results of their credit background check (obtained via their consumer report). Twenty-two percent allow job candidates to explain after the decision to hire or not hire has been made. Note: n = 197

In general, when conducting a credit background check on job candidates, how many years of credit history are most influential in your assessment of the job candidate’s credit standing? When examining credit background checks, organizations focus on trends of financial behavior. In fact, organizations indicated that current outstanding judgement(s) (64%) and accounts in debt collection (49%) has the greatest impact on final hiring decisions (see slide 9). Both of these situations are synonymous with financial issues that have remained unresolved for longer periods of time. Note: n = 230. Excludes respondents who indicated, “N/A, my organization does not conduct credit background checks for any of its job candidates." Percentages do not total 100% due to rounding.

When conducting credit background checks on job candidates, in general, how many years of credit history does your organization check by job level? 1 year 2–3 years 4–5 years 6–7 years 8–9 years 10 years or more Executive/upper management (e.g., CEO, CFO) 0% 16% 50% 11% 23% Other management (e.g., directors, managers) 18% 55% Nonmanagement, salaried employees 2% 56% 12% 14% Nonmanagement, hourly employees 17% Note: n = 45. The data in this table represent organizations that conduct credit background checks on all job candidates. Respondents were asked to round up to the highest year.

When conducting credit background checks on job candidates, in general, how many years of credit history does your organization check? 1 year 2–3 years 4–5 years 6–7 years 8–9 years 10 years or more Job candidates who will work with children, the elderly, the disabled and other vulnerable populations 0% 100% Job candidates who will have security responsibilities (e.g., security guards, etc.) 7% 79% Job candidates for positions involving national defense or homeland security 9% 64% 27% Job candidates who will have access to highly confidential employee information (e.g., salary, benefits, medical information or other personal information about employees, etc.) 2% 12% 61% Job candidates for positions with fiduciary and financial responsibility (e.g., handling cash, banking, accounting, compliance, technology, etc.) 1% 6% 16% Job candidates for senior executive positions (e.g., CEO, CFO, CHRO, etc.) 3% 26% Job candidates who will have access to company or other people's property or otherwise placed in a position of financial trust (e.g., information technology, administrative services, cleaning crews, etc.) 14% 59% Job candidates who will be employed in safety-sensitive positions (including operating heavy equipment, transportation, etc.) 13% 50% 38% Job candidates who will work in health care or with access to drugs (e.g., hospitals, nursing homes, clinics, pharmacies, rehabilitation centers, etc.) 25% Job candidates for positions for which applicable state law requires a background check (e.g., day care teachers, licensed medical practitioners, etc.) Note: n = 4-138. Percentages may not total 100% due to rounding. The data in this table represent organizations that conduct credit background checks on select job candidates. Data sorted by the 6–7 years column. Respondents were asked to round up to the highest year.

Background Information on Credit Background Checks Many employers conduct some kind of background check on job applicants and/or employees. Background checks may include verification of educational or professional history, contacting references, obtaining a report on an individual’s criminal history, and/or obtaining a report on an individual’s credit history. The Fair Credit Reporting Act (FCRA) authorizes employers to obtain a consumer report for “employment purposes” from a consumer reporting agency (CRA) so long as certain disclosure requirements are met. The term “employment purposes,” means a report that is used for the purpose of evaluating a consumer for employment, promotion, reassignment or retention as an employee. For some employers, credit payment records serve as a factor in evaluating an individual’s suitability for a job, while others seek information on driving records, criminal histories, or other background information. All of these types of reports are considered consumer reports if they are obtained from a CRA. Before procuring a consumer report, FCRA requires employers to clearly disclose, in writing, that a report may be obtained for employment purposes and get written authorization from the individual. FCRA also requires that the employer provide the individual with a copy of the report and a written description of the consumer’s rights before taking any adverse action based in whole or in part on the report. The Federal Trade Commission website has additional information on the rights and duties imposed by the Fair Credit Reporting Act at (www.ftc.gov/os/statutes/fcradoc.pdf)

Background Checking: The Implications of Credit Background Checks on the Decision to Hire or Not to Hire Methodology These results summarize two research studies on credit background checks – the Background Checking: Conducting Credit Background Checks data findings which were released January 2010 and a SHRM Poll that was conducted in June 2010 with HR professionals in the employment and recruitment functional area. For more poll findings, visit: www.shrm.org/surveys Follow us on Twitter: http://twitter.com/SHRM_Research