In addition to checking professional references, conducting interviews, and running criminal background checks, many business owners also conduct credit checks on potential new hires to assess their suitability for the job. Such screening is obviously important for hiring high-level positions or those directly involved with handling money and/or making fiduciary decisions. But starting a couple decades ago, credit checks became fairly commonplace for even menial jobs—maintenance person and warehouse staff—that entail no fiscal duties whatsoever.

More recently, however, some companies have started reducing their use of pre-employment credit checks. This may be due to increased scrutiny from state legislators or the fact that so many Americans were negatively impacted by the recession that even those with otherwise excellent credit now have some blights on their record.

Whether or not to run credit checks on potential hires is still something that every business owner must decide for themselves based on the need to protect their company, balanced with the cost of such checks and the potential liability they present if not done correctly. For instance, Whole Foods paid out more than $800,000 in 2015 to settle a class-action lawsuit alleging the company didn’t properly disclose it was running credit checks on potential employees.

To help business owners weigh the risk and rewards, here are some steps companies should take before running pre-employment credit checks.

Even though the Fair Credit Reporting Act (FCRA) makes it legal on a federal level for employers to use pre-employment credit checks, several states have passed legislation that’s much more strict and overrides these federal allowances.

Currently, 11 states have enacted laws that restrict how and when employers may use credit checks to make hiring decisions—and two of those states (Hawaii and Washington) bar employers from pulling such reports at all. Major metropolitan areas like New York City and Chicago also regulate employment credit checks.

According to the National Conference of State Legislatures (NCSL), some 20 states are on considering passing similar laws, so make sure you’re familiar with your state’s policies. Much of what you need to know can be found by checking with your state’s department of labor.

If your state allows such credit checks, you must still abide by FCRA’s guidelines, which require employers to take three actions:

1. Obtain an applicant’s consent before pulling a credit report.
2. Issue applicants advance notice—and a copy of the credit report—if the company is considering rejecting them on the basis of their credit.
3. Provide applicants with an adverse action notice if the company decides not to hire them because of the credit check.

Keep in mind, if you request a credit report for a potential hire, you won’t get the same report sent to lenders. Instead, you’ll get a report designed for employers, offering a brief summary of the candidate’s credit history, but no credit score. Included in the report are current and past debts, bankruptcies, late payments, and the candidate’s debt-to-income ratio.

Before running a credit check on a potential hire, you must notify them and get their written permission to do so. The credit check notice and authorization should be provided in a separate document that doesn’t hide the terms inside a bunch of other information, such as within a standard employment application.

If you’re thinking of not hiring the applicant over their credit, FCRA requires you give them a written notice stating as much. Additionally, you must give them a copy of the credit report as well as a copy of the Federal Trade Commission's "A Summary of Your Rights Under the FCRA," which explains how they can challenge any incorrect information in their history.

Although not required by law, it’s a good idea to use this opportunity to meet with the applicant and allow them to explain and/or correct their information. This make sense given that consumer groups have found up to one-third of all credit reports contain errors. Moreover, recent studies show that more than half of all unpaid consumer debt is for medical procedures, which are far less likely to be caused by a candidate’s reckless spending.

If you ultimately decide not to hire an applicant based on their credit history, you must give them another document known as an "adverse action notice." This informs them of the reason for not being hired and provides additional information on their consumer rights, including the right to dispute the report’s accuracy.