Rethinking the Fair Credit Reporting Act: When Requesting Credit Reports for "Employment Purposes" Goes Too Far

AuthorKelly Gallagher
PositionKelly Michelle Gallagher, J.D. Candidate, University of Iowa College of Law
Pages05

Kelly Michelle Gallagher: J.D. Candidate, University of Iowa College of Law, 2006.

Page 1595

I Introduction

In recent years, employer requests for credit reports on employees and potential employees have become increasingly frequent.1 Employers believe that employees with good credit scores are less likely to steal from them and are more likely to be productive workers.2 However, for most jobs, the correlation between a good credit score and job performance is dubious.3Moreover, several studies have called into question the accuracy of credit reports, making employers' use of them in hiring and retention decisions more troubling.4 The Fair Credit Reporting Act5 ("FCRA") requires that employers first obtain authorization from employees before procuring a report.6 However, this protection is virtually meaningless in light of an employer's right to terminate or refuse to hire individuals who will not authorize a credit check.7

This Note examines the harmful effects of requiring a good credit history as a precondition of employment, including the unnecessary invasion of employee privacy and the barriers to employment that good credit requirements impose on minorities and the poor.8 Part II of this Note Page 1596 examines the contents of credit reports, the agencies providing them, and their accuracy.9 Part II also explains the background and purpose of the FCRA and discusses why employers request credit reports on their employees.10 Part III explains that the use of credit reports in employment decisions is problematic because it unnecessarily invades employee privacy and creates additional barriers to employment for minorities and the poor.11Part IV explains the inadequacies of the current protections for employees under the FCRA, privacy torts, Title VII, and state statutes.12 Part V proposes amending the FCRA or enacting separate employment legislation to give employees meaningful protection from probing employers.13 The proposed legislation would restrict employer access to credit information and limit an employer's ability to use credit information as a basis for hiring decisions.14

II Background

Consumer reports, more commonly known as credit reports, contain information about individuals' creditworthiness.15 This information is provided by three main credit reporting agencies in the United States.16 To combat abusive practices by the credit reporting agencies and abusive usage of consumer reports, Congress enacted the FCRA.17 While the FCRA has successfully dealt with some problems related to consumer reports, several remain.18 Perhaps the biggest flaw of the FCRA is its inability to protect employees from employers who condition employment on these invasive credit checks.19 This lack of protection is especially egregious because credit reports frequently contain inaccuracies and have little demonstrated relevance to the job in question.20 The following sections outline the background of credit reports, credit reporting agencies, and the FCRA. Page 1597

A Credit Reports In The Employment Context
1. Consumer Credit Reports

When consumers open credit card accounts, retain new cellular phone carriers, apply for home mortgages, or enter into numerous other transactions, the businesses with which they interact often request consumer reports, more commonly known as "credit reports." The Fair Credit Reporting Act defines consumer reports as including:

[A]ny written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer's credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumer's eligibility for-(A) credit or insurance to be used primarily for personal, family, or household purposes; (B) employment purposes; or (C) any other purpose authorized under section 1681b of this title.21

While consumers may believe the information contained in their credit reports is limited to a credit score and basic biographical information, the following very private information is included in these reports: bankruptcy records and tax liens; information on credit card accounts including credit limits, balances, and monthly payments; the names of others who have obtained the consumer's credit report; the consumer's address, phone number, social security number, and present and previous employers; and statements of dispute.22 Increasingly, employers are requesting employee authorization to obtain credit reports for use in hiring and retention decisions.23

2. Credit Reporting Agencies

With authorization from an employee or potential employee, employers can obtain credit reports from one of three major credit reporting agencies: Experian, Equifax, and Trans Union.24 In addition to providing information about a consumer's credit history, biographical characteristics, and payment histories, these agencies rate consumers according to their creditworthiness.25 Page 1598

The reports generated by these agencies may contain numerous inaccuracies. In fact, studies of the pervasiveness of errors in credit reports have found wide-ranging levels of accuracy.26 In one study, the Consumer Federation of America collected credit scores from each of the three major credit reporting agencies and studied the variance between the three reports for a single consumer.27 The study found that when comparing the three reports generated on a single consumer, only 24% "could be considered extremely consistent."28 In fact, 29% of the reports ranged fifty-or-more points for a single consumer and 4% ranged 100-or-more points.29 The study also considered the percentage of files omitting positive information or inaccurately including negative information about a consumer.30 78.4% of the files omitted an account in good standing, which, if included, may have helped increase a consumer's credit score.31 In addition, "43.1% of the files . . . conflicted regarding how often the consumer had been late by [thirty] days" when paying a specified account.32

In another study performed in 1998, the Public Interest Research Group found that "29% of credit reports contained errors that could result in the denial of credit (defined as false delinquencies, or reports listing accounts or public records that did not belong to the consumer)."33Presumably, inaccuracies in credit reports resulting in the denial of credit by lending institutions might also cause employers to make adverse hiring decisions.

Notwithstanding the many errors found in credit reports, the FCRA permits credit reporting agencies to release credit reports for numerous purposes. The agencies may release reports for child-support-collection purposes, in response to court orders, to the consumer to whom the report relates, and to persons the agency reasonably believes intend to use the information in a credit transaction, for an employment purpose, for an insurance decision, or for other "legitimate business need[s]."34 Page 1599

3. Why Are Employers Interested in Credit Checks?

Employers are interested in obtaining their employees' credit reports for a number of reasons. Employers believe employees with good credit will: (1) make good employees; (2) be less likely to steal from the business; and (3) be less likely to commit other crimes.35 While these concerns are understandable, it is unlikely that credit reports are actually predictive of an employee's potential job performance.36

Employers increasingly believe that employees "who handle credit wisely often make the best employees [because] [t]he responsibility they exercise in running their personal financial affairs usually spills over to the workplace."37 In addition, some employers "investigate employees to deter theft and shirking,"38 believing that employees with poor credit histories are more likely to steal and commit other crimes affecting the company than employees with good credit ratings.39 Lawsuits finding employers liable for negligent hiring and retention of dangerous employees have also encouraged employers to perform comprehensive background checks on employees, which may include credit checks.40 These fears regarding negligent hiring or retention lawsuits, employee theft, and "scandals . . . in Corporate America" have caused employers to increase the number of credit checks they perform on current and potential employees.41 Recent surveys indicate that "[t]hirty-five percent of companies use credit checks in pre- employment screenings,"42 and that employers run credit checks...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT