• EEOC Warns of Increased Scrutiny Over Employers’ Use of Credit Reports As A Screening Tool
  • July 13, 2011 | Authors: Rebecca Williams Shanlever; Laura D. Windsor
  • Law Firms: Troutman Sanders LLP - Atlanta Office ; Troutman Sanders LLP - Richmond Office
  • Reviewing a job applicant’s credit report can serve as a useful tool in the candidate screening process. Indeed, the common rationale for doing so is that individuals who have large debts or other credit problems may be less responsible and more likely to steal from the company or commit fraud. Generally, under current law, it is not unlawful for an employer to make hiring and other employment decisions based on an individual’s credit history, provided the employer complies with the Fair Credit Reporting Act (FCRA). Recently, however, use of credit histories in making employment decisions has been subject to greater scrutiny.

    For the past few years, the EEOC has expressed its belief that relying on applicants’ credit histories could disproportionately exclude minority groups. Early last year, the EEOC noted in an informal opinion letter that, although it had no authority to prohibit use of credit checks in making employment decisions, if an employer’s reliance on credit history had a disparate (i.e., disproportionate), adverse impact on a protected class (such as women, minorities, or particular ethnic groups), it could be unlawful under Title VII of the Civil Rights Act of 1964 (Title VII). The EEOC’s concern about the potential for misuse of credit reports has been percolating for years, and in the face of current high employment and an unstable economy, the EEOC recently took action.

    EEOC Files Lawsuit Challenging Use of Credit Reports

    On December 21, 2010, the EEOC filed a lawsuit against a nationwide provider of career-oriented education programs. In the lawsuit, the EEOC alleges that the employer “engaged in an on-going, nationwide pattern or practice of race discrimination against Black job applicants and incumbents in violation of Title VII.” The EEOC contends that, since at least January 2008, the manner in which the employer evaluated credit reports had a “significant disparate impact” on African American applicants and incumbent employees, which was neither job-related nor based on business necessity.

    In response to a critical reaction to this case from employer groups and associations, an EEOC spokesperson stated: “It’s not clear that employers who are relying on credit histories know if someone has never paid a bill for 10 years or if someone was a very responsible bill payer for years until they lost a job or someone in their family had a medical emergency and they suddenly couldn’t make a payment.  We don’t think it’s a good marker for responsibility in employment.” The EEOC stated its belief that credit reports have little or no bearing on an employee’s ability to do the job—just on his or her ability to pay bills—which it contends may have a disparate impact on African American applicants. This case is one of the few cases that the EEOC has ever brought relating to credit reports, and it is a strong signal that the EEOC is willing to dedicate more time and resources to eradicating this employment practice.

    The EEOC is not alone in its concern about the potential negative effect of using credit reports as a basis for disqualification from a job.  A growing movement in state and federal legislatures is attempting to restrict employers’ use of credit reports. Several states, including Hawaii, Washington, Oregon, and Illinois, have banned or severely limited the use of credit reports for hiring decisions. Other states, including Connecticut, Georgia, Maine, Maryland, Michigan, Missouri, New Jersey, New York, Ohio, Oklahoma, Pennsylvania, South Carolina, Vermont, and Wisconsin, have proposed similar legislation. The California Legislature passed a bill limiting the use of credit reports in hiring, but it was vetoed by the Governor. Finally, earlier this year, the U.S. House of Representatives introduced a bill to amend the FCRA to “prohibit the use of consumer credit checks against prospective and current employees for the purposes of making adverse employment decisions.”

    Tips for Employers

    Given this increased scrutiny, employers should be cautious when using credit history as a basis for employment decisions. Below are some best practices:

    • Ask why the credit history is needed for each job.  Ensure that a clear, objective business need exists for using an applicant or employee’s credit history when making a decision regarding employment. Evaluate each job position individually and determine what background checks and information are relevant to the particular position before obtaining any credit histories. There may be a legitimate business reason for obtaining credit reports on company executives or financial officers, but a credit report may not be necessary for information technology professionals, sales employees, or administrative support professionals.

    • Don’t rely on a credit report as the primary screening tool.  An applicant’s credit history should be considered, if at all, only one of many factors when making an employment decision. Focusing on other factors, such as personal or professional references, may provide a broader snapshot of the applicant.

    • Consider auditing your applicant disqualification records. Employers who use applicants’ credit histories as a screening tool should consider auditing records of applicants who were disqualified due to their credit history to ensure that there is no statistically significant disparity regarding factors such as race, gender, or national origin. 

    Remember, the best of intentions are largely irrelevant in a disparate impact case. Instead, the focus is on the effect of an employment practice on a particular group, not the employer’s intent. As the EEOC Regional Attorney stated in a press release: “Employers need to be mindful that any hiring practice must be job-related and not screen out groups of people, even if it does so unintentionally.”