White Paper - Consideration of Credit History in the Employment Context

According to our experience, there are two principal reasons why employers consider an employee’s credit history. In the first situation, operating under the assumption that excessive debt can render an employee vulnerable to the temptation to commit fraud or embezzlement, employers seek to evaluate the individual’s debt burden in deciding whether to employ this person in a position that would give him access to the employer’s money.

There is some empirical authority for the proposition that living beyond one’s means and financial difficulties are associated with workplace fraud. The Association of Certified Fraud Examiners has identified these as the top two “behavioral red flags” displayed by perpetrators of occupational fraud. See, Report to the Nations on Occupational Fraud and Abuse, 2018 Global Fraud Study, Association of Certified Fraud Examiners. In this context, all debts of any nature would likely be relevant to the question of whether a person who is experiencing financial difficulties is susceptible to committing fraud.

The other principal reason for considering an employee’s credit history is to identify characteristics which the employer believes are relevant to the job at issue. For example, an individual who is habitually late on her credit account payments may be a person who will not take care to perform her job faithfully on behalf of the employer. Perhaps this is a person who cannot manage important deadlines. In this scenario, the amount of debt may not be as relevant; rather, a person’s payment history and avoidance of delinquency would be of greater interest.

Some employers will evaluate credit reports by assigning a numerical value to adverse items on the report. For example, unpaid tax liens may be assigned a score of 10 points. Habitually delinquent payments may be assigned 5 points. Debts in collection might be assigned 15 points. These points will be deducted from an original assigned total of 100 points. If the final score falls below a certain threshold, the employer will decline to proceed with the applicant. It could be said that this approach is somewhat artificial and arbitrary. Each employer desiring to use a points system would be well advised to evaluate whether such a system can be justified as both job-related and a business necessity. 

Another approach to evaluating credit reports is to establish an aggregate threshold of bad debt [F1] above which an applicant is disqualified. Federal government employees – for example – are expected to “satisfy in good faith their obligations as citizens, including all just financial obligations. . . .” 5 C.F.R. § 2635. In light of this, federal agencies will consider the “nexus between the debt, the agency’s mission, and the position duties.” In doing so, they are guided by the following considerations:

Life events such as a divorce or serious medical conditions that resulted in the accumulation of bad debt can be mitigated. Adjudicators are looking for a demonstrated intent by the [applicant] to rectify the debt. If the effort is not evident, an adjudicator can determine the [applicant] to be unsuitable strictly on the presence of bad debt.

The DHS Personnel Security Process at 21. This unsuitability based upon the presence of bad debt alone is premised on the assumption that an applicant for a position with the federal government might be subject to blackmail or tempted to engage in illegal acts to generate funds, thus risking national security. Id. at 21. A private employer could apply a similar logic.

If the position at issue is one that could provide the employee with the means to engage in fraud for financial gain, bad debt could be treated as a disqualifier. Bad debt thresholds range from an aggregate lifetime bad debt of $3,000 to $10,000 among the various federal agencies. Id. at 22. It is not clear whether there is an empirical basis for these thresholds, i.e., whether there is evidentiary proof that people with less than $3,000 of bad debt are less likely to commit fraud than those above this threshold; however, a private employer could take the position that tracking federal government standards serves as a “safe harbor” should an aggrieved applicant contend the bad debt disqualification standard has a disparate impact in violation of Title VII. See, e.g., EEOC v. Kaplan Higher Education Corp., 2013 WL 322116 (N.D.Ohio 2013) aff’d 748 F.3d 749 (6th Cir. 2014) (observing in a suit brought by the EEOC against a private employer for running credit checks that the EEOC itself runs credit checks on its applicants and employees).

Below is a chart showing the public record information provided by credit bureaus in employment-related credit reports:

With regard to bankruptcy, be aware that the United States Bankruptcy Code forbids employers from considering the bankruptcy status of an individual who is already an employee. Bankruptcy history and status should only be considered prior to an individual’s first day of employment. See, 11 U.S.C. § 525(b). Likewise, employers should exercise caution when considering garnishment history. Some statutes forbid employers from taking adverse or retaliatory action against individuals who are subject to garnishments. See, e.g., 15 U.S.C. § 1674; La. R.S. § 23:731(C); Okla. Stat tit. 14A, § 5-106.

A final note of caution should be observed. The following jurisdictions restrict or limit employers from considering credit in the employment context:

Before obtaining a credit report on an applicant who resides or will work in these jurisdictions, an employer will want to establish the job-relatedness and business necessity supporting the consideration of the applicant’s credit history. Many of these jurisdictions require the employer to notify the applicant or employee in writing of the intention to obtain a credit report and the basis under the law for doing so.

This publication is provided only for educational purposes; it should not be relied upon as legal advice, and it should not be used, in whole or in part, as a basis for establishing employment practices or policies, nor should it be used for resolving disputes or managing risk. Every reader’s circumstances are unique and legal advice should be obtained only from a lawyer with whom the reader has established an attorney-client relationship. All material contained within this publication is protected by copyright law and may not be reproduced without the express written consent of ESS.


[F1] The term “bad debt” refers to (i) past due accounts sent to collections; (ii) any unpaid balance reported as a loss to the creditor; (iii) a repossession; (iv) an unsatisfied court judgment; (v) a foreclosure on property or assets; (vi) unpaid tax liens; and (vii) debts not dismissed through a bankruptcy agreement. Sometimes “bad debt” is be defined to include any tax liens (paid or unpaid) and all amounts discharged through bankruptcy.

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