National News
Criminal Records Haunt Hiring Initiative
July 29, 2015 posted by Steve Brownstein
Louie Henry lost a sales-management position at a medical-technology company after one day on the job, when a background check revealed his 2001 conviction for misreporting the status of a loan on the books of a bank where he worked.
A May 1 letter from the employer, reviewed by The Wall Street Journal, said Mr. Henry’s record placed the company in violation of its insurance policies.
Employers face growing pressure to give the tens of millions of Americans with criminal records a chance to compete for jobs, with a skein of local and state laws aimed at barring the exclusion of ex-offenders from the hiring process.
But such efforts have run into a bedrock underwriting principle that still guides business insurers: Someone who has been dishonest in the past is more likely to be dishonest in the future—and expose a company to loss—than someone who hasn’t.
The unseen hand of commercial insurers influences businesses’ hiring decisions and gives employers a justification for maintaining broad prohibitions on hiring people with criminal records, employers and advocates for ex-offenders say.
While working at a community bank in Childersburg, Ala., in the 1990s, Mr. Henry reported in a regulatory filing that one of the bank’s loans was current when, in fact, it was 30 days past due. Mr. Henry said he had no relationship with the borrower but pleaded guilty to avoid legal costs, even though he knew that plea would lead to his being banned from the banking industry.
Financial institutions are largely prohibited by federal law from hiring employees with convictions for crimes of dishonesty, absent a waiver by the Federal Deposit Insurance Corporation. But Mr. Henry says he didn’t know the conviction would dog him in other industries, too.
“When do you quit paying for a mistake?” said Mr. Henry, who is 55 years old. “There’s got to be some sort of statute of limitations.”
A growing body of research has challenged the notion that ex-offenders are an indefinite liability to employers. In a widely cited 2009 study, professors Alfred Blumstein of Carnegie Mellon University and Kiminori Nakamura of the University of Maryland found that after 10 to 13 years, ex-offenders pose no greater risk of committing another crime than a person without a criminal record.
“I think insurance companies would probably agree with that research, but what they would not do is change a policy form that has been in existence for over 70 years and has had virtually everything in it litigated,” said Theodore M. Pappas, president of the McLaughlin Co., a Rockville, Md.-based insurance agency.
An employee is typically excluded from standard insurance policy against fraud, theft, embezzlement and other crimes—known as a fidelity bond—as soon as the employer discovers that he or she has committed a dishonest act, whether recently or in the past. Federal and case law has defined such acts as comprising larceny, theft, embezzlement, forgery, misappropriation and related crimes.
Background checks are widely used, and insurers take into account employee screening when underwriting a policy, according to insurers and employers. In a 2012 survey by the Society for Human Resource Management, two thirds of employers reported using criminal background checks. Roughly half of those said their top reason for conducting background checks was to avoid legal liability.
Run-of-the-mill business owner’s insurance provides limited fidelity coverage, but many companies also purchase a stand-alone policy, with company-wide premiums that begin at about $250 a year, agents said. Fidelity insurers earned more than $1.2 billion in premiums in 2013, the most recent year available from ratings agency A.M. Best Co.
Mr. Pappas said insurers often grant waivers, agreeing to cover employees with long-ago or low-level offenses, like shoplifting. “I think that a lot of times the insurance and the bond questions are used as an excuse not to hire an ex-offender,” he said.
Mr. Pappas’s firm is a federal contractor for the Federal Bonding Program, which helps place ex-offenders at jobs by arranging for them to be bonded with public funds at no charge to the employer.
Tracey Santor, a bond product manager at Travelers Bond & Specialty Insurance, said fidelity insurance has “evolved hugely” since the early 2000s, when any theft or fraud conviction in an employee’s background would have canceled coverage. Now, a theft conviction for which the amount stolen was less than $1,000 doesn’t automatically exclude an employee from coverage. Some employers negotiate a higher threshold—say $25,000 or less—by paying a higher premium, Ms. Santor said.
Since 1998, at least 17 states and more than 100 cities and counties have adopted limits on employment background checks, allowing ex-offenders to compete on equal terms with others in the initial hiring phase, according to the National Employment Law Project, a group that advocates for such policies. Some bar questions about a criminal history from employment applications, known as “ban the box” policies in reference to the box on some applications that job seekers must check if they have been convicted of a felony. The New York City Council banned such inquiries from job applications in June.
The U.S. Equal Opportunity Commission has put employers on notice, however, that categorical rejections of applicants with a criminal record could violate federal employment-discrimination laws. A company policy that says “‘We don’t hire felons’ is pretty much like saying, ‘Sue me,’” said Jonathan A. Segal, a partner at Duane Morris LLP, who represents employers. “And ‘the insurer made me do it’ doesn’t work.”
Shirley Patrick, a senior account manager at iLink Business Management, a Hasperia, Calif.-based staffing company, said her insurance through American Zurich Insurance Company won’t cover workers with a felony conviction. “We’ve got so many unemployed people in the state of California. Do I have to make exceptions for Jim when I might be able to talk to Joe and he’s qualified and I don’t have to mess with these issues?” Ms. Patrick said. “I don’t need baggage.”
Robyn Ziegler, a spokeswoman for the American Zurich Insurance Company, a subsidiary of Zurich Insurance Group Ltd., said the insurer doesn’t identify customers but that “most crimes policies do not cover employees with a known prior felony record.” Coverage may be reinstated, however, based on an employee’s “individual circumstances,” she said.
B.J. Patterson, chief executive and owner of Pacific Mountain Logistics LLC in Ontario, Calif., said six employees on his staff have criminal records and are barred under his liability-insurance policy from working in the warehouse that receives imports.
“Some of my best employees are what I call my second-chance guys and gals,” Mr. Patterson noted. “I think it’s a lot cheaper to give them a job than to keep building more prisons.”