A Little Credit Check Goes a Long Way

Washington, and now Oregon, limits employers' use of credit checks of job applicants

How can you tell if a job candidate will be reliable and honest? Human resource staff members have several tools at their disposal to help answer this question, including criminal background checks, reference checks and employment verification.

But there's one tool they must use with caution: credit history checks.

In 2007, Washington state was one of the first in the U.S. to pass a law banning the use of credit history checks for the purpose of screening job applicants (as well as for determining employee termination, promotion or compensation), except in cases where credit history is "substantially job related" or such a check is required by law (such as by the Federal Deposit Insurance Corp.).

In July, Oregon firms will have to abide by a similar law that has been passed or proposed in 15 other states, with Congress contemplating passing its own law at the national level.

"State legislatures recognize that allowing firms to use credit checks is unfair and inaccurate, penalizing employees for the wrong reasons," said Brian Keeley, an associate with the Seattle office of law firm Bullivant Houser Bailey PC. "In the current economic situation, people have problems with credit through no fault of their own."

Most of the 31,000-plus people out of work in Clark County would probably agree with Keeley. According to U.S. Bureau of Labor Statistics, Clark County's unemployment rate in 2010 is at the highest level in decades – 14.8 percent in Jan., down slightly to 14.6 percent in March. And today's jobseekers are even more likely to have a blemished credit history than in recessions past, with RealtyTrak reporting one in every 185 Clark County households in some stage of foreclosure – the second-highest in the state.

Nationwide, the foreclosure rate rose 7 percent over last quarter – up 16 percent compared to 1st quarter 2009.

To Check or Not to Check

While advocates of credit check limitations say there is no research that shows statistical correlation between credit history and job performance, local HR professionals claim that credit history checks are valid in certain circumstances.

"If an employee will have direct access to financials, it makes perfect sense to do a credit check," said Tracy Peterkin, operations and HR manager with TJ & Associates, a Vancouver-based business consulting firm. "However, each position is different so it is wise to review the job description and consider checking with legal counsel first."

Wendy Henderson, president of the Southwest Washington Human Resource Management Association and senior manager of the benefits team at Portland Banfield Pet Hospital, said positions that would qualify for credit checks include managerial positions that involve direction and control of the business, positions that have access to personal and financial information and those with fiduciary responsibilities.

Henderson said it was important to understand that a credit check is far more than just a person's credit score. For example, the credit check also contains ID theft, fraud and bankruptcy history, which can provide insight into personal character and behavior patterns, she said.

Business as Usual?     

While recent national news articles about credit check bans can give the impression that these laws will significantly affect hiring practices, opinion among local employers is that not much is going to change.

"There is a misconception that all employers are doing these types of credit checks," said Chrys A. Martin, shareholder at the Portland office of law firm Bullivant Houser Bailey. "But that's not true."

A 2010 survey performed by the Society for Human Resource Management revealed that only 13 percent of employers said they used credit checks on all job applications.

"The Washington law hasn't affected the companies I've been with," said Jennifer Buriss, director of HR at The Holland Inc./Burgerville. "It's normally been the practice anyway."

David Konz, HR associate at Tidewater Barge Lines, said when the Washington state law passed in 2007, it changed some paperwork and documentation, but other than that, it had no major effect on his day-to-day recruitment practices.

Although Martin said she thought the Oregon law was too open-ended and could lead to litigation over what "directly related to job qualifications" means, Keeley said he wasn't aware of any published appellate decisions or lawsuits relating to Washington state's law.

"The law was deliberately vague," Keeley said. "Employers have really refrained from obtaining credit checks on employees or job candidates."

Henderson believes that with the passage of Oregon's law, companies such as Banfield, with offices in both states, will find it easier to have a cohesive recruitment policy.

Plus, said Henderson, when laws like this are passed, "it gives you a chance to take a fresh look at a policy that maybe you haven't looked at in a long time."

Steps to Compliance

According to Chrys A. Martin, shareholder at the Portland office of law firm Bullivant Houser Bailey, employers should follow these steps to ensure they are compliant with Washington's and Oregon's employment laws:

  • Evaluate all positions for which credit checks are being performed.
  • Check with your legal employment counsel to determine which positions qualify for credit checks and continue credit checks only for those positions.
  • Rewrite job descriptions to include why a credit check is required for that position.
  • Ensure your hiring practices also comply with the federal Fair Credit Reporting Act (FCRA).

David Konz, HR associate at Tidewater Barge Lines and Workforce Readiness chairman with Southwest Washington Human Resources Management Association, added another bit of advice: network with your HR colleagues.

"Research, prepare and reach out to others," Konz said.

For more information

Washington law: www.leg.wa.gov/pub/billinfo/2007-08/Pdf/Bills/Senate%20Passed%20Legislature/5827-S.P.L.pdf

Oregon law:  www.oregon.gov/BOLI  (Oregon Bureau of Labor and Industry)