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If your organization uses credit checks in the hiring process, you’d better have a sound business reason for doing so or you could face a new type of litigation: Minorities who’ve been turned down for jobs because of their credit history are arguing that employers are using credit checks as a way of illegally discriminating against minority applicants.

The numbers back up their claims. According to a Texas Department of Insurance study in 2004, credit scores of African-Americans generally run 10 to 35 percent lower than those of white Americans. Hispanics’ scores run 5 to 25 percent lower than whites.

Credit checks are becoming increasingly popular. While a 1996 Society for Human Resource Management survey found that only 19 percent of employers pull credit reports as part of the screening process, that number rose to 35 percent by 2003.

Understanding ‘disparate impact’

Title VII of the Civil Rights Act of 1964 prohibits employers from discriminating against employees or applicants based on their race, color, religion, sex or national origin. Illegal discrimination can occur in two different ways: disparate treatment or disparate impact.

Disparate treatment discrimination occurs when a worker is intentionally treated differently because of his or her race, sex, national origin, etc. This form of bias is spotted pretty easily.

Disparate impact discrimination occurs when an apparently neutral company policy negatively affects one group more than the majority.

Advocates say business’s growing reliance on credit ratings disparately impacts African-Americans, Hispanics and possibly women.

Show business necessity for test

The good news: Title VII gives employers an affirmative defense against disparate impact charges: If you can demonstrate that it’s necessary for the person in that position to have good credit, then it’s irrelevant how the requirement affects minorities.

But how easy is it to make that argument? Conventional wisdom has held that people with bad credit are more likely to steal because they need the money to pay their bills. However, employee-theft studies have, so far, failed to show this to be the case.

Two recent studies say employee theft typically occurs in a Robin Hood model: Employees who feel wronged by the organization because of low pay or lack of advancement take out their frustrations by stealing from the company. These workers tend to be young, unmarried and more likely to work part-time.

However, a credit check usually would not catch these workers beforehand. Being young, they have little established credit and therefore are less likely to have bad credit.

A Canadian study suggests that the larger thefts are carried out by well-educated, white-collar workers in their 30s. Typical “white-collar crime” is rooted in financial distress, but often it is simply greed. There is no clear data as to whether these white-collar criminals engaged in theft in previous jobs.

The bottom line: Credit checks fill the employer’s psychological need to “do something” when hiring a person who will be responsible for money. But credit checks offer no guarantee of sorting out the “bad eggs” in hiring.

If you use credit checks in your hiring process, make sure you can point to a clear business necessity. Also, focus on other nondiscriminatory approaches that can vet candidates and prevent theft more effectively than credit checks.  

Preventing employee theft: 5 strategies

1. Conduct thorough background checks. Verify all assertions made on the résumé. If they aren’t true, don’t hire the person. No court will fault you for that. Order a thorough background search in which investigators talk to previous employers and even neighbors. This type of investigation costs more, but it is cheaper than replacing a thief who stole from you. Employers still can conduct credit checks for financially sensitive jobs, but would be hard-pressed to justify checks for other positions.

2. Tight financial controls. Don’t let one employee be the master of the books. Use at least two different people, and rotate them to lessen the likelihood of collaboration between conspirators.

3. Regular outside audits. Auditors from outside the company should randomly examine the books to check for irregularities.

4. Monitor employee activity. Workplace cameras, e-mail monitoring and other surveillance can alert employers to suspicious activities.

5. Recheck employees. Conduct background checks on current employees on a regular basis.  

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