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Emerging growth companies and the at-risk employee: the viability of pre-employment honesty testing.

A Growing Concern

In recent years, identifying honest employees has become a business necessity. Employee participation in theft (shrinkage), destruction of property, substance abuse, and other criminal behaviors subject employers to great financial costs. These costs make it necessary to identify applicants who are prone to such criminal behaviors and remove them from further employment consideration. However, any procedure used to make honesty or risk predictions should be performed in a manner that does not violate the civil rights of any potential employee.

The basic tool for predicting honesty has been the polygraph examination or lie detector test. However, its effectiveness and legality has been questioned (Benson & Krois, 1979). The polygraph is said to violate the employee's civil rights because it lacks the reliability needed to make accurate and consistent predictions. In fact, the Employee Polygraph Protection Act, a federal law that became effective on December 27, 1988, has as its main objective outlawing the use of the polygraph exam for employee selection.

One possible alternative to polygraph tests is the paper-and-pencil honesty test. Tompor (1981) stated that paper-and-pencil honesty or integrity testing has grown into a multimillion dollar industry. As with any employee selection device, the use of paper-and-pencil honesty testing entails some risks. A paper-and-pencil test uses multiple choice and personal history questions to assess such issues as past drug and alcohol use, criminal behavior, attitudes toward theft, attitudes toward company policies, etc.

Sackett, Burris, and Callahan (1989) cite four important reasons to review the use of honesty tests: 1) a few state laws restrict their use (e.g., Rhode Island, Massachusetts, and Minnesota); 2) new honesty tests have been developed and marketed; 3) there has been a broadening of the criteria used in honesty research; 4) and a substantial amount of research exists on current tests. The goal of this paper is to present those aspects of honesty testing that would be of great concern to executives of smaller firms who would benefit greatly from the use of these tests. Specifically, this article examines the growing business necessity of pre-employment honesty tests, the reliability and validity of such tests, and the legal concerns that need to be taken into consideration.

The Environment for Honesty Testing in Smaller Firms

White collar crime accounts for approximately $41 billion in business losses per year, including $1.1 billion attributed to embezzlement and internal theft and $100 million to computer fraud (U.S. Department of Commerce; 1985). In addition, Price-Waterhouse (1986) attributed one half of the shrinkage in retailing inventory to employee theft and the other half to shoplifting and poor paperwork.

Small businesses suffer the effects of such crimes much more than larger firms. The Chamber of Commerce has reported that 30% of all small business failures result from employee dishonesty -- internal crime. In addition, statistics reveal that small businesses (under $5 million in sales) are far more likely to suffer the consequences of business crime than larger firms (Green & Berry, 1985).

In addition to employee theft, drug abuse is also a great concern to American businesses. According to the National Institute of Drug Abuse in Rockville, Maryland, drug abuse costs our economy $122 billion a year or approximately $538 million a week. These costs reflect declining production rates, increased absenteeism, increased work-related accidents, and increased health and medical costs. When these drug-abuse related costs are added to the costs of theft, the danger of dishonest employees can threaten the survival of a smaller firm.

To expand and grow, a small business needs to avoid these costs. A type of screening is needed that can accurately assess the honesty of job applicants. It could be argued that current questions on applications concerning honesty issues (e.g., Did you use any illegal drug(s) in the last three months?) must not be working if theft and drug abuse have reached the epidemic proportions implied by the cost figures cited above. Something more reliable is needed.

In the past, several methods have been used to uncover individuals who are bad employment risks, with the pre-employment polygraph the most popular. A pre-employment polygraph exam can be conceptualized as an in-depth interview of the applicant concerning his or her health, education, work history, use of drugs or alcohol, and past history of theft. However, even though licensed polygraph examiners will swear by their interpretations of the results, polygraph use is now illegal for selection purposes.

There are other ways to obtain honesty information. A company could hire a private investigator and conduct an in-depth investigation of each applicant. Included in the background check would be interviews with former employers, friends, relatives, etc. While investigations appear to be effective, they can also be extremely expensive, prohibitively so for smaller firms (a Southeastern security firm estimates the average cost at $200 per applicant). In addition, this method raises a number of ethical questions and considerations.

Another approach is reference or resume checks. These usually involve calling the individuals whose names were provided by the applicant as well as any previous supervisors and asking about the applicant's character and past work history. The goal is to verify the information provided on the resume and application and also to discover any additional information that may have been withheld by the applicant. However, while reference checks are much less expensive than background investigations, they also yield less useful information. Most applicants only provide the names of people who will give them good recommendations. Also, previous employers may not volunteer information because of fear of a lawsuit by the applicant (e.g., for defamation of character). Furthermore, that past employer may act as a good reference in order to get rid of a problem employee.

In the area of employee drug abuse, the use of drug testing by companies has become a widespread tool for detection. However, like the polygraph examination, this test has been questioned because of problems with invasion of privacy and test reliability. Furthermore, random drug testing may decrease employee morale and loyalty (Rothman, 1988).

Finally, the use of graphology (handwriting analysis for employee selection purposes has increased over the past couple of years, due possibly to the outlawing of the polygraph. During 1988, 2000 U.S. businesses used graphology for this purpose. However, the legality of graphology as a selection tool will probably soon go the way of the polygraph, since its reliability and validity are subject to the same pitfalls, especially the expertise and experience of the interpreter.

If polygraph examinations, background investigations, reference checks, drug testing, and graphology are plagued by the problems cited above, what can be done to reduce the employer's chances of hiring an at-risk employee? One alternative might be some type of written test that assesses applicant honesty and potential for drug and alcohol abuse. In fact, the use of honesty tests by all types of businesses is on the rise. Articles in the Chicago Tribune (Lie Detector Loses ... 1988) and the Cincinnati Enquirer (Honesty Testing ... 1988) describe the use of many tests and how large publishing houses have taken over major honesty testing firms.

There are several instruments of this type. According to Sackett, Burris, and Callahan (1989), integrity or honesty tests fall into two categories: overt integrity and personality-based tests. Overt tests such as the London House Personnel Selection Inventory (undated), The Stanton Survey (Reed, 1982) and The Reid Report (Reid, 1967) are utilized to predict specific behaviors such as theft, chug use, and gambling. On the other hand, personality-based tests such as the Personal Outlook Inventory (Selection Research Publishing, 1983) and the Employment Inventory (Personnel Decisions, 1985) are used to predict more general activities, such as job performance. Also, many local and regional security and testing companies offer different types of honesty tests.

These tests try to probe honesty issues and at the same time assess whether the individual is attempting to lie or falsify any part of the exam. One advantage of a "verifiable" self-report exam could be that, if developed properly, it may yield reliable risk predictions at a low cost, both in time and money, to the small business. Usually a test of this nature can be administered and scored quickly. Most exams consist of approximately 100 items or less and take 20 to 30 minutes to complete. The employer's cost is low, usually $5 to $25 per applicant. The time and cost advantages of written honesty tests, coupled with the tremendous need to reduce losses from theft and substance abuse, make written honesty tests an attractive tool for today's emerging firms.

Honesty Test Reliability and Validity

To ensure that these tests are effective in identifying potentially dishonest employees, issues of test reliability and validity must be addressed.

Test Reliability. Test reliability deals with the issue of whether or not a test can reproduce the same score for the same person. Reliability is important because an unstable test score may cause the employer to make an incorrect selection decision. In most cases, test-retest reliability is the best indicator of stability. However, Sackett and Harris (1984) reviewed eleven honesty tests and found internal consistency to the be the most frequently used reliability measure (This is probably due to the ease of assessing internal consistency as opposed to test-retest reliability). In fact, all tests evaluated cited internal consistency reliability coefficients of .90 or higher. In addition, Sackett and Harris cited two other studies having test-retest reliability coefficients of .76 and .97. These results represent extremely high reliability; however, more test-retest reliability studies must be conducted to ensure an accurate assessment. In an updated review of honesty testing, Sackett, Burris, and Callahan (1989) found high internal consistency results (usually above .85) for most studies; however, they also found some evidence for test-retest reliability with correlations ranging from .65 to .91.

Test Validity. Once the reliability of a test is established, the test user should then be concerned with validity. The validity of a test refers to its ability to measure what it is supposed to measure (in this case employee dishonesty concerning theft, substance abuse, and abuse of company policies). Sackett and Harris (1984) cite five different ways to assessing test validity: polygraph comparisons, predictive validity, admissions, shrinkage reduction, and contrasted groups. Polygraphs are no longer a viable option for establishing test validity, as previously discussed. On the other hand, the four other approaches show some merit. Sackett and Harris surveyed several validity studies and found validity coefficients ranging from .06 to .86. However, most studies reported respectable validity coefficients ranging from .40 to .80.

The 1977 Uniform Guidelines on Employee Selection Procedures calls for any test that measures a construct, such as risk or dishonesty, to show predictive validity (e.g., when a test score must be highly correlated with job performance measures). Therefore, in order to make the screening exam defensible, a predictive validity strategy must be employed.

Sackett and Harris (1984) and Sackett, Burris and Callahan (1989) found encouraging results for the predictive validity of honesty tests. Of the 13 such tests reviewed by Sackett and Harris, only four were below. 40. Eight of the studies found respectable validity coefficients of .68 or higher. On the other hand, Sackett, Burris, and Callahan reported the results of 24 additional predictive validity studies, with coefficients ranging from .62 to - .49. While the results of these studies are more varied than the initial findings of Sackett and Harris, most of the validity coefficients were positive, offering further evidence for the validity of honesty tests. The authors concluded: "Thus a more compelling case that integrity tests predict a number of outcomes of interest to organizations can be made today than at the time of the earlier review."

The issue of reliability and validity continues to be questioned, as evidenced by a recent study of The Congressional Office of Technology Assessment (OTA) (The Use of Integrity tests ... 1990). Specifically, the report raises concerns over errors in test results that may have potential discriminatory impact. There has even been a recent case (EEOC v. Atlas Paper Co. (1989)) where an honesty test was found to be discriminatory. In light of these developments, the small business owner should pay attention to the types of questions asked and whether they are really related to actual job performance.

While test reliability and validity are important issues, there are other legal concerns that need to be addressed before using an honesty test.

The Legal Environment of Pre-employment Honesty Testing

Potential legal liability could arise from any of the following: the requirement of an applicant or employee to take an honesty test; the administration and scoring procedures used for the test; and the handling of test results. Employers are subject to liability for the commission of a tort. A tort is a civil wrong and gives rise to a right of civil action by the injured person. This would apply to the issue of administering and handling the test more than the nature of the test itself. However, there is no recognized tort action that would give rise to potential liability in asking a potential employee to answer a series of questions, because there is no compulsion to answer any question. Each question standing on its own asks the potential employee to reveal information, and with the voluntary answer to each question the potential employee consents to revealing such information. The types of torts that might be committed in administering the test or handling the results are invasion of privacy, defamation, intentional infliction of emotional distress, and negligent maintenance of employment records. Since the most likely torts to be violated by the use of honesty tests are invasion of privacy and the negligent maintenance of employment records, these are described in detail.

The four generally accepted concepts of the tort of invasion of privacy as defined by Prosser (1971) in his handbook on the Law of Torts include intentional intrusion into a person's privacy, publication of true but embarrassing private information, representing a person in a false light in the public eye, and commercial appropriation of a person's name or likeness. Commercial appropriation seems inapplicable, so the first three privacy concepts are described in Table 1.

The second tort discussed here concerns the negligent maintenance of employment records. Information obtained from honesty tests must be kept confidential, and only those parties with a need to know the information (i.e., personnel representative or immediate supervisor) should have access to the results. If the information in the candidate's file is inadvertently revealed, the company is subject to court action based on the tort of negligent maintenance of employment records.

Several other considerations are pertinent to a decision to use pre-employment honesty testing. A company is susceptible to a negligent hiring action if it hires a job candidate whose questionnaire showed tendencies to be dishonest and that candiate later steals from another employee or a customer (D.D.R. v. English Enter, 1984). Also, if the job candidate reveals that he or she has committed a crime, there is a statutory duty in most states to report this knowledge to the proper prosecutorial authorities. Any assurances of confidentiality made to the candidate are voided by the greater statutory duty to report knowledge of a crime, but the company nevertheless will find itself in an unwelcome bind.

A number of federal and state statutes deal with the issues of what information may be sought from a job candidate and how that information may be used. For example, the questionnaire should not reveal a bias which could be construed as forming the basis for refusal to hire for reasons that violate Title VII of the 1964 Civil Rights Act. Generally questions that cannot in good faith be related to the job requirements are suspect. State fair employment practices statutes should also be consulted to insure that the nature of the questions does not violate any provisions of these statutes. The following is a list of some of the important federal and state statutes to be considered:

1. Section 503 of the Rehabilitation Act of 1973 restricts the collection of medical information about job applicants unless the employer is a government contractor.

2. The National Labor Relations Act restricts the collection of information about a job applicant's union activities or religious affiliations.

3. California, Illinois, Massachusetts, and New York forbid employers to ask applicants about arrests that did not result in convictions.

4. A few states, such as Wisconsin and Massachusetts, have enacted substantive privacy rights that may prohibit the use of honesty tests.

Awareness of the need to guard against the misuse of pre-employment honesty testing can benefit from the example of the legislative response to improper polygraph testing.

The legal environment of pre-employment honesty testing can be complex since it deals with the rights of people. Fair and honest conduct for a legitimate purpose should not be discouraged by such an environment, but it often is. Therefore, it is important to carefully review the types of questions asked in the light of federal and state legislation, to have a rational basis for each question included, to safeguard the answers from dissemination among those without an immediate need to know, and to avoid drawing conclusions that characterize the candidate or the results of the test in an unfavorable light.

Recommendations for Managers

This article has examined the viability of pre-employment honesty testing in light of the rising cost of dishonest employees, reviewed the reliability and validity of paper-and-pencil honesty tests, and discussed the legal environment surrounding such tests. These tests can provide an affordable and viable alternative (as long as test users follow the legal guidelines described in this paper) to the more expensive measures employed by large firms. Therefore, smaller, growing firms should examine the feasibility of using these tests as one possible tool for effective employee selection at minimal costs. The use of honesty tests may not only enhance the caliber of the selection process but also provide another competitive edge for the entrepreneur.

Pre-employment honesty tests are most effective when used as an integral part of a multi-component selection process. This process should include the following:

1) The Application -- used to collect previous education and employment information to screen for minimal qualifications.

2) Employment interview -- used to clarify information from the application and to assess a match between the individual and the company.

3) Honesty Test -- used to assess applicant integrity and reduce the risk of a poor employee selection decision.

4) Background Check -- used to verify negative honesty test findings.

In the context of this process, the following are more specific recommendations for the use of honesty tests.

Review the company's needs. For example, if the business is prone to high shrinkage or there is suspicion of employees using drugs or alcohol, then expense of using pre-employment honesty tests is justified. The small fee for each honesty test is a nominal cost compared with the damages that can be incurred by an individual who is dishonest or a substance abuser.

Select an honesty test. The business owner should refer to Sackett and Harris (1984) or Sauser, Hornsby, and Benson (1988) for lists of some of the most common honesty tests, addresses of the companies marketing them, and their validity and reliability scores. Test selection should be based on a match between the business situation and the types of dishonest behaviors measured by the test. Selecting a test that measures the particular honesty factors (e.g., theft, substance abuse, etc.) needed by the firm will also increase its validity or predictability.

Evaluate test companies based upon service. Make sure the testing company provides prompt service regarding the scoring and evaluation of tests. To maintain test security, most companies do not give scoring keys to their clients. However, there are procedures for the use of computer or telephone scoring that allow for short turnaround times.

Conduct a validity study. In many cases, an owner may be able to convince the test company to do this. Most testing companies use this information as a sales tool for potential clients. Employee performance records, shrinkage rates, and so on must be maintained to assess validity. Small business owners, especially fast-growing enterprises, should not shy away from this procedure or use their smaller size as an excuse. If the firm marketing the test will not assist in the validity study, perhaps a different testing firm should be chosen.

Follow legal guidelines. The key issue here is to maintain a high level of confidentiality regarding test scores to avoid civil damages for defamation of character, invasion of privacy or neglect maintenance of employment records.

Adhering to this five-step process will enable a growing business to use honesty tests as an integral tool for employee selection.

Conclusion

The increased use of honesty testing is evidenced by the coverage this topic is receiving in the popular press as well as academic journals. The use of honesty tests as a selection procedure appears to fulfill a business need as well as meet the legal requirements set forth by federal, state, and local governments. Therefore, smaller, growing firms need to examine the viability of these tests as a possible tool for employee selection.

References

Benson, P. G. & Krois, P. A. (1979). "The Polygraph in Employment: Some Unresolved Issues." Personnel Journal, 58, 616-621.

Bratt v. International Business Machines Corp., 392 Mass. 508, 467 N.E. ed 126 (1984).

D.D.R. V. English Enter., LATV, 356 N.W. 2d 580 (Iowa Ct. App. 1984).

E.E.O.C. v. Atlas Paper Box Co., 868 E 2d 1487 (1989).

Gorman, Christine (1989). "Honestly, can we trust you?" Time, January 23.

Gouch, H. G. (1972). Manual for the Personnel Reaction Blank. Palo Alto, CA: Consulting Psychologist Press.

Green, M. & Berry, J. F. (1985). Corporate Crime (Part One). The Nation, June 15.

Gretencord v. Ford Motor Co., 538 F. Supp. 331 (D. Kan. 1982). "Honesty Testing," Cincinnati Enquirer, December 25, 1988.

"Lie detector loses its muscle: U.S. polygraph limits spawn new 'honesty' test." Chicago Tribune, August 22, 1988.

London House, Inc. (Undated). The London House Personnel Selection Inventory; Research, Client List, Legal Review, Fee Schedule. (Available from London House, Inc., 1550 Northwest Highway, Park Ridge, IL 66068. (a)

London House, Inc. (Undated). The London House Personnel Selection Inventory: Test Administration Manual (Available from London House, Inc., 1550 Northwest Highway, Park Ridge, IL 66068. (b)

Personnel Decisions, Inc. (1985). Development and validation of the PDI Employment Inventory. Minneapolis, MN: Personnel Decisions, Inc.

Price Waterhouse Report on Inventory Shrinkage (1986). Executive Edition Retail Newsletter, April.

Prosser, W. (1971) Handbook of the law of torts (4th ed.). St. Paul: West.

Rawlinson, H. (1989). "Pre-Employment testing." Small Business Reports. April, 20-27.

Reed, H. (1982), "The Stanton Survey: Description and validation manual." (Available from the Stanton Corporation, 507 S. Dearborn St., Chicago, Ill 60605.

Reid, J. E. (1967). The Reid Report. Chicago: John E. Reid and Associates.

Rhodes v. Graham, 238 Ky. 225, 37 S.W. 2d 46 (1931).

Rothman, M. (1988). "Random Drug Testing in the Workplace: Implications for Human Resource Management." Business Horizons, 31, 23-27.

Sackett, P. R., & Harris, M. M. (1984). "Honesty testing for personnel selection: A review and critique." Personnel Psychology, 37, 221-245.

Sackett, P. R., Burris, L. R., & Callahan, C. (1989). "Integrity testing for personnel selection: An update." Personnel Psychology, 42, 491-529.

Sauser, Hornsby, & Benson (1988). "Psychometric characteristics of a pre-employment screening device." Psychological Reports, 63, 971-977.

Selection Research Publishing. (1983). Development and validation of the Personal Outlook Inventory. (Available from Selection Publishing, 520 N, Michigan Ave., Chicago, IL 60611.

The Uniform Guidelines on Employee Selection Procedures, Federal Register, 1977.

The use of integrity test for pre-employment screening. (1990). Office of Technology Assessment, Congressional Report. U.S. Government Printing Office.

Tompor, S. (1981). "More employers attempt to catch a thief by giving job applicant honesty exams." Wall Street Journal, August 3, Sec. 2, p. 1.

U.S. Department of Commerce (1985). Costs Of Crimes Against Business. Washington, D.C.

United States vs. Mara, 410 U.S. L41, LW4185, 1973.

Wells v. Thomas, 569 F. Supp. 426 (E.D. Pa. 1983).

A Description of the Three Privacy Concepts Which Apply to Honesty Testing

1. Intrusion into a person's privacy. Intrusion generally includes such activities as searching a person's car or hiding a microphone in a person's home. However, according to Prosser, the privacy of one's physical space is emphasized; therefore, asking job applicants to volunteer information regarding their past behavior or attitudes does not constitute intrusion. See Rhodes v. Grahm (1931) and Gretencord v. Ford Motor Co. (1982) for a more detailed legal description of Intrusion.

2. Disclosure of true but embarrassing information. The issue here centers around disclosing true information when the information is by its nature private and there is no justification for publishing such information. For example, the disclosure of honesty test results to a third party who has no active role in the selection process would be a violation (Wells v. Thomas, 1983). However, in the absence of malice, there is a qualified privilege to reveal such information to someone within the SAM Organization who has a need to know such information (Bratt v. International Business Machines Corp., 1984).

3. Representing a person in a false light (defamation of character). Defamation could occur when the results of the honesty test are released when they are in fact not true. This is important if an honesty test is proven to lack reliability and validity.

Dr. Hornsby, author or co-author of numerous articles, concentrates his research in areas of compensation, honesty testing, personnel for small business, and intrapreneurship. Dr. Kuratko, also an expert in small business, intrapreneurship, and entrepreneurship, has published several books, including Entrepreneurship; A Contemporary Approach (Dryden 1992). Dr. Honey, an attorney, is editor-in-chief of the Mid-Atlantic Business Law Journal.
COPYRIGHT 1992 Society for the Advancement of Management
No portion of this article can be reproduced without the express written permission from the copyright holder.
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Author:Hornsby, Jeffrey S.; Kuratko, Donald F.; Honey, William
Publication:SAM Advanced Management Journal
Date:Sep 22, 1992
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