Financial background checks on candidates

Q: I don’t understand the reason why some potential employers would check a candidate’s financial background. It doesn’t make sense to me. People need jobs to be responsible for their financial state of being.

A: Your question is valid, particularly in this challenging economic climate. There are legal issues and limitations associated with requesting a financial background check on a candidate. However, there are some legitimate reasons why some employers conduct financial background checks on final candidates. In several states, there is recent legislation that limits the use of such information.

Employers conduct financial background checks on candidates for a variety of positions but most often for roles in schools, hospitals, financial institutions, airports or the government. One of the reasons is simple. The employer wants to minimize any risk associated with hiring a new employee. The rationale is that a candidate’s financial background should be a factor in the hiring decision. The concern is that if you hire an employee with a precarious financial history or a large debt, this employee may be more likely than other employees to engage in fraud or embezzlement. Or this employee could be vulnerable to bribery or undue influence by others.

I contacted Jeffrey A. Dretler, a Partner in the Employment Law Group at Prince Lobel Tye LLP. Dretler explains, “Using financial background checks as part of the hiring process is governed by a federal law called the Fair Credit Reporting Act (FCRA) and various state laws with which employers must comply. Usually, an employer does not conduct the check itself, but engages a third party who specializes in gathering such information. The background check is often referred to as a ‘Consumer Report’ and the third party which conducts the check is referred to as a Consumer Reporting Agency. The FCRA requires an employer utilizing a Consumer Reporting Agency to conduct a financial background check to obtain a candidate’s authorization before doing so.” Under the FCRA, the employer must provide the candidate with a notice of the rights available to them. Lastly, the employer must provide the candidate with a copy of the final report, and must notify the candidate if it intends not to hire the candidate based on information contained in the report. The candidate should be given a chance to clarify or explain this information because, although rare, mistakes can occur.


Dretler offers, “Recently, in response to the economic crisis, a number of states (e.g., California, Connecticut, Hawaii, Illinois, Oregon and Washington) have enacted laws which prohibit an employer from making an adverse hiring decision based on a candidate’s financial situation, except in certain limited situations such as applications for positions with financial institutions, state-approved credit unions, investment advisors registered with the Securities and Exchange Commission, certain managerial roles, positions with access to highly confidential data, and positions where federal law requires a company to examine credit history data.”

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