By
updated 1/13/2011 12:20:22 PM ET 2011-01-13T17:20:22

Before hiring new employees, Jeff Huckaby, chief executive at IT management firm rackAID  LLC, runs various background checks on applicants. And for positions with responsibilities like handling clients' financial and other sensitive information, he runs a credit check. He can't risk hiring a liability.

"When you hire someone for sensitive positions, you need to learn as much about them as you can," Huckaby says.

In fact, 60 percent of employers now run credit checks on at least some applicants, an 18 percent increase from 2006, according to the Society for Human Resource Management, a trade group for human resources professionals. Some business owners who run credit checks say they provide foresight into a potential employee's traits and performance. Others say the practice is unfair. Some states, including Washington and Illinois, have recently made credit checks illegal during the hiring process, or at least limited their use.

There are many nuances surrounding the use of financial information to make hiring decisions. Here's what you need to know about pre-employment credit screenings.

The Pros and Cons 
Credit checks can be helpful in the hiring process because a person's financial wellness, particularly credit, can impact the company's bottom line, says Denise Winston, founder of financial education company Money Start Here. For instance, financial problems can affect an employee's immune system, requiring them to take more sick days than a financially healthy employee, according to research conducted at Ontario's Carleton University. Money issues also affect employees' personal relationships and that may lead to a lack of productivity at work, based on research published in the Journal of Family Issues. Financial problems also can be distracting and cause a worker to lose focus, according to the American Institute of Stress, a nonprofit organization.

Credit problems are not always a sign of irresponsible behavior or self-inflicted personal problems, however. A person with bad credit may have excellent job skills but end up in circumstances out of their control, says Oakland, Calif.-based attorney Elizabeth Cohee.

How to Use the Information
Because no credit report can tell the whole story, some experts recommend it only be used as part of a more detailed background check. For example, Brandon Scivolette, president of Elite Moving Labor LLC, says he often combines a credit report with references and information from social media activity for a rounded summary of an applicant.

If you do run a credit report, always consider the reason behind negative marks, says Larry Lambeth, president of Employment Screening Services, Inc. He recommends discussing questionable marks with applicants.

"If I see they've taken command of [a negative financial] situation, I may even favor them over someone who has not faced similar adversity," Huckaby says.

Keeping It Legal
Remember to also adhere to the legal restrictions on credit checks. First, you can't run a report without the applicant's written permission -- and they have the right to receive a copy. It's also against the law to base a hiring decision solely on a credit report, according to the federal Fair Credit Reporting Act.

"Not all positions should have credit checks pulled," adds Paul Dent, founder and chief executive of employment screening company Hirease Inc. "Evaluating an applicant's credit should only be done if it is pertinent to the job." For example, people responsible for advising clients on financial matters should have a background that shows evidence of handling finances effectively.

When a credit report is needed, remember to ask for an Employment Credit Report. It differs from a traditional credit report in that it masks social security numbers and doesn't include or affect credit scores.

Federal law also entitles employees to receive notice that a report has been requested and a written statement indicating that the information was not the basis for an employment decision. Business owners should consult an employment attorney on this, and consider drafting a waiver document for applicants that grants you the right to obtain their credit information, according to Steven Mitchell Sack, attorney and author of The Employee Rights Handbook: Effective Legal Strategies to Protect Your Job from Interview to Pink Slip (Legal Strategies Publications, 2010).

"Such a document helps overcome [legal] problems, and provide indemnification and hold harmless protection in the event the applicant is denied the position as a result of poor credit," Sack says.
 

Copyright © 2013 Entrepreneur.com, Inc.

Discuss:

Discussion comments

,

Most active discussions

  1. votes comments
  2. votes comments
  3. votes comments
  4. votes comments

Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 4.36%
$30K home equity loan FICO 5.08%
$75K home equity loan FICO 4.51%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 10.96%
10.86%
Cash Back Cards 16.44%
16.41%
Rewards Cards 15.97%
15.95%
Source: Bankrate.com