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Special Report Background Checking Caution Amid the Credit Crunch

February 27, 2009
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Related Topics: Miscellaneous Legal Issues, Tools, Recruitment, Staffing Management
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With the economic crisis bearing down, the sheer magnitude of consumer credit defaults and the already evident rise in crime in some U.S. cities may give pause to many employers that commonly reject job candidates with negative credit and criminal records.

    If employers had screened out applicants based on credit history hits in 2007, they would have eliminated more than 40 percent of all applicants; if they had rejected those with criminal hits, they would have eliminated nearly 10 percent, according to the latest background screening hit report by Kroll. The current economic crisis is highly likely to drive up hit rates for years to come.

    Although credit and criminal checks will remain relevant for some positions, widespread screening for broad job categories may not produce valid predictors of employee behavior or protection from negligent-hiring lawsuits. In addition, screening carries its own risks. Higher numbers of rejected candidates and soaring unemployment rates quickly translate into a rise in discrimination lawsuits.

    "There is a renewed risk of discrimination lawsuits, especially for large employers," says Rod Fliegel, shareholder at Littler Mendelson in San Francisco. "Name-brand companies should be particularly concerned," because "name brand" is typically a synonym for "deep pockets."

    "The risk will rise as more people are out of work," Fliegel says. "It is prudent for employers to take a close look at how they are using credit and criminal-conviction information, especially multistate employers. There should be refinement."

    Fliegel notes that the risk of discrimination lawsuits is also higher in light of recent actions by the Equal Employment Opportunity Commission and advocacy groups. "The most important point about criminal checks is that there is a lot of pressure from various groups, including the EEOC, to give ex-offenders a fair chance. Credit checks are under even greater scru­tiny than criminal checks."

Hiring debtors
    EEOC advisory guidance has always warned that employers should be cautious in using credit checks. "The EEOC wants the use of credit information to be job-related—in other words, consistent with business necessity," Fliegel notes. "Job relatedness requires a nexus between the vetting requirements and the actual job duties."

    Credit information, properly assessed, can provide valid information about a job candidate. "However, employers must have some standard for how to evaluate it," Fliegel warns. "Employers are looking for an indication of financial irresponsibility, but ominous information may have an innocent explanation, and there are many factors to consider."

    "With credit checks, employers are worried about theft of cash and access to accounts," says Andria Ryan, partner at Fisher & Phillips in Atlanta. "Companies run credit checks to look for very high levels of debt or financial irresponsibility, which they see as a reflection on character. Prudent employers will track applicant flow and look at the numbers to ensure that there is no disparate impact."

    Ryan warns that all employers should maintain strict compliance with the Fair Credit Reporting Act. "I’m shocked by how many employers are not getting applicant authorizations or using the proper notification when an applicant is rejected because of a credit check," she says. "There are a lot of screening companies that are not providing the appropriate forms, and this is not acceptable."

    To set the parameters for the type of negative credit information that will be used to disqualify candidates, employers should begin by noting the parameters set by their bonding agencies, according to Andrew Boling, partner at Baker & McKenzie in Chicago.

    "For example, insurance policies may specify how employees must be screened," Boling says. "If the insurer requires specific screening, it is usually allowable unless it violates state or federal law. But the employer must apply it across the board as a condition of insurance." He also warns employers that federal law and some state laws prohibit employers from rejecting a candidate because the candidate has filed for bankruptcy.

Hiring criminals
    Research on crime and conviction rates indicates that criminality increases during economic downturns, generally with a one-year lag from the onset of a downturn to the rise in crime. Early reports show an uptick in criminal offenses during 2008 in some cities.

    Criminal-conviction rates in the U.S. are among the highest in the world. The latest data from the Department of Justice indicate that 6.6 percent of the population will serve time in prison during their lifetime. The incarceration rate rises to 32 percent for black males and 17 percent for Hispanic males. These high rates for minorities signal the potential for disparate impact claims if employers mismanage the screening process.

    The EEOC stipulates that employers may reject job applicants with criminal convictions only when warranted by the type and severity of the offense, the amount of time that has passed since the conviction and the nature of the job. Legal experts agree, however, that employers generally are more concerned about the risk of a negligent-hiring claim than the potential for discrimination charges based on disparate impact.

    "Screening may create an adverse impact on a protected group, but I would rather defend that than defend a negligent-hiring lawsuit," Boling says. "Employers must be careful, however, that they do not segment the workforce and screen only the segments with higher numbers of minority-group employees."


"I'm shocked by how many employers are not getting applicant authorizations or using the proper notification when an applicant is rejected because of a credit check. There are a lot of screening companies that are not providing the appropriate forms, and this is not acceptable."
—Andia Ryan, partner,
Fisher & Phillips, Atlanta

    Employers must set parameters to determine which types of convictions will disqualify a candidate. "The easiest category to defend is fiduciary crimes such as embezzlement or theft," Boling says. "It is also worthwhile for employers to take the risk to check for violent crimes, but the parameters must be set state by state."

    Constructing a sound policy for criminal checks is most crucial in industries where employees have high levels of access to the public. "In the hospitality industry, for example, employers are worried about negligent-hiring claims," Ryan says. "These are uncapped claims," meaning there is no limit to the liability a company could experience. Ryan recommends that employers analyze the workforce to determine which job titles may not warrant a criminal check because some positions offer limited contact with the public. In hospitality, that could include back-office staff or restaurant cooks.

    Ryan warns, however, that if an employer has not been conducting criminal checks and then decides to add them to the screening process, the employer must then conduct criminal checks not only for new hires going forward, but also for existing employees. "And the employer must be prepared to terminate employees who have a criminal record and to defend the parameters it used to decide who would be terminated," she says.

Fear factor
    The effectiveness of credit and criminal checks in predicting employee behaviors is still a matter of debate. Research indicates that employee attitudes and turnover rates are better predictors for employee theft than negative credit reports.

    Employment and criminal checks also do little to screen out those who commit fraud—among the most costly workplace crimes. Only 7 percent of fraud perpetrators have prior convictions, and only 12 percent have been previously terminated by an employer for fraud-related conduct, according to a 2008 report by the Association of Certified Fraud Examiners based on 959 cases of workplace fraud.

    More than half of the organizations victimized by fraud ran an employment-history check on the perpetrator; 40 percent ran a criminal background check and 23 percent ran a credit check. In half of the cases in which the perpetrator had convictions for fraud or had been terminated by an employer for fraud-related conduct, the victim organization had screened the perpetrator’s employment history as part of the hiring process.

    Also, most fraud is not committed by new hires, but by employees who have worked for the employer for a number of years, according to the report. In financial-statement fraud cases, which tend to be the most costly, excessive organizational pressure to perform was a particularly strong warning sign.

    Screening for criminal convictions may also be ineffective in reducing workplace violence. Contrary to popular belief, the majority of workplace violence incidents are not committed by new hires with criminal convictions. Instead, they result from robberies committed by perpetrators from outside the firm, according to the Bureau of Labor Statistics.

    Despite the legal risk posed by credit and criminal checks and their sometimes limited utility in predicting employee performance and behaviors, checks are appropriate for some positions. Moreover, legal experts note that the risk of a discrimination claim remains relatively low, and the employer’s profile may play a greater role in determining that risk than the actual policies applied in the screening process.

    "We always talk prudently about disparate-impact claims, but credit and criminal checks are not high-risk screening tools," Ryan says. "Personality and skills tests are much more risky, and the hiring phase carries less risk for discrimination suits than the termination phase. It is a fair assessment that some brand-name companies are going to be sued regardless of how good their screening policies may be."

    Defensible policies and careful record keeping are particularly important for large employers that commonly face multiple employment-related lawsuits every year. "To determine who is at the highest risk for discrimination suits stemming from screening, employers have to ask who makes the best defendants from the plaintiffs’ viewpoint, and those are brand-name companies and employers with deep pockets," Fliegel says. "As a predictor, employers should ask themselves, ‘What have I already been sued for?’ "

Workforce Management, February 16, 2009, p. 35-39 -- Subscribe Now!

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