By Mark B. Wiletsky

Is checking an applicant’s credit history discriminatory?  According to the Equal Employment Opportunity Commission (EEOC), using credit checks to screen out applicants may be discriminatory if it has a disproportionately significant impact on a protected group.  Although a court recently dismissed an EEOC lawsuit against an organization concerning its use of credit checks, the case should serve as a reminder to review your own policies and procedures with respect to using background and credit checks in the hiring process, as this is likely not the last time the EEOC or the courts will address the issue. 

EEOC Sues Claiming Use of Credit Checks Has Disparate Impact on Black Applicants

In December 2010, the EEOC sued Kaplan Higher Learning Education Corporation (Kaplan), alleging that Kaplan’s practice of using credit history in making hiring decisions has a disparate impact on Black applicants in violation of Title VII.  In other words, the EEOC asserted that Kaplan’s use of credit histories—while not facially discriminatory—had a disproportionate impact in terms of screening out Black applicants.  Kaplan, however, defended its use of credit histories in the hiring process.  It claimed that it used credit reports to assess applicants for financial and operational positions after discovering system breaches that allowed business officers to misappropriate student funds.  Kaplan asserted that it reviewed an applicant’s credit history to determine whether the individual is under “financial stress or burdens” that might compromise his or her ethical obligations. 

In order to provide statistical analysis showing disparate impact on Black applicants, the EEOC relied on its expert, Dr. Kevin Murphy, to analyze the applicant pool and those rejected due to their credit report.  Because the race of each applicant was not known, the EEOC’s expert tried to use other means to make determinations about the applicant’s race, even when it was not known. 

Kaplan asked the Court to exclude Dr. Murphy’s testimony and report and ultimately, dismiss the EEOC’s case, arguing that Dr. Murphy’s method of determining race was scientifically unsound.  The Court agreed. In the absence of any reliable, scientifically sound evidence to link the use of credit reports to race, the Court granted summary judgment to Kaplan.

Use of Credit Reports Going Forward

In the last four or five years, the EEOC has made an issue out of employers’ use of credit reports and criminal history records in hiring decisions, resulting in the filing of a number of lawsuits.  The EEOC’s track record in these cases, however, is mixed.  In an earlier case alleging disparate impact related to the use of criminal history records, the EEOC finally agreed to dismiss the case after more than three years while the federal court ordered sanctions of over $750,000 against the EEOC for continuing to litigate when it knew of fatal flaws in proving disparate impact.  (See EEOC v. Peoplemark, Inc., No. 08-cv-907 (W.D. Mich. 2008)).  On the other hand, the EEOC was able to obtain a $3.1 million settlement and policy revisions from Pepsi when it challenged Pepsi’s use of background checks in 2011.

Despite the EEOC’s spotty results in proving disparate impact in these background check cases, employers need to be careful and deliberate in how they use credit reports for hiring purposes.  Credit reports should be used only where job-related, such as for applicants seeking positions involving financial responsibility, high level managerial decisions or as required by law.  Conduct credit checks only after making a conditional job offer so as not to weed out candidates prematurely on the basis of credit.  Finally, be aware that eight states currently have statutory restrictions on the use of credit history in employment decisions so if you are located or are hiring in California, Oregon, Washington, Illinois, Maryland, Connecticut, Hawaii or Vermont, you will need to comply with those restrictions.