About four years ago, hiring managers began asking recruiter Chris Ball to start screening prospective employees in a new way: “They’d call up and say, ‘Don’t send us anyone with a bankruptcy in the past five years,’ ” says Ball, operations manager for the Jackson, Miss., branch of Express Employment Professionals.
Those hiring managers were on the forefront of a practice that worries some state lawmakers: employers making hiring decisions based, in part, on applicants’ credit reports.

Seven states — California, Connecticut, Hawaii, Illinois, Maryland, Oregon and Washington — have recently restricted the practice, according to the National Conference of State Legislatures, and now, Colorado lawmakers are considering a similar measure. The laws generally contain exemptions for some positions, such as those responsible for handling large amounts of cash.

The Colorado bill’s sponsor, Sen. Morgan Carroll, an Aurora Democrat, says many people have bad credit through no fault of their own, such as a medical bankruptcy or an unexpected layoff. She says credit reports were never intended to be used for employment screening, and there’s no connection between someone’s work ethic and their creditworthiness.

“If it actually gave a clue about an employee’s job skills, that would be a different discussion,” Carroll says.

A 2010 study by the Society for Human Resource Management concluded that employers aren’t using credit reports to pre-screen large employee pools, and found that only 9% of employers saw a good credit report as one of the most important factors in hiring, behind more important factors such as experience, specific skills and a favorable interview.

The study also concluded that the number of managers using credit reports to make hiring decisions hadn’t changed “in any discernible way” from a similar survey conducted six years earlier. The Federal Fair Credit Reporting Act, first passed in 1970, requires that employers get permission from candidates before checking their credit.

But state lawmakers across the country argue the federal law doesn’t go far enough in protecting the growing number of people with bad credit, and Carroll worries that employers may be creating a permanently unemployable class of people by considering credit reports in hiring.

California lawmakers late last year passed one of these laws over the objection of a coalition of business interests, including the National Federation of Independent Business (NFIB), which argued that small employers need every tool they can use to make smart hiring decisions.

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