As we reported earlier this year in a previous Pepper@Work, “EEOC’s Renewed Focus on Criminal Background Checks,” the Equal Employment Opportunity Commission (EEOC) has shown increased interest in challenging practices that it believes create discriminatory barriers to employment. In that connection, the EEOC’s E-RACE (Eradicating Racism and Colorism from Employment) initiative seeks, among other things, to address “21st century manifestations of discrimination” which, according to the EEOC, include credit and background checks. Credit checks are used frequently by employers in their hiring processes. According to a survey by the Society for Human Resources Management, 47 percent of the responding organizations conduct credit checks for applicants to particular jobs and 13 percent conduct credit checks on all applicants.

On October 20, the EEOC held a public hearing to hear testimony from various stakeholder groups on the growing use of credit histories as a selection criterion in employment. EEOC Chair Jacqueline Berrien explained the reason for the hearing: “High unemployment has forced an increasing number of people to enter or re-enter the job market. … As a result, an ever-increasing number of job applicants and workers are being exposed to employment screening tools, such as credit checks, that could unfairly exclude them from job opportunities. Today’s discussion provided important input into our agency’s work to ensure that the workplace is made free of all barriers to equal opportunity.”

Some of the speakers at the hearing presented data showing that the use of credit checks has a disparate impact on African-Americans and Hispanics. If an employer’s use of credit histories has a disparate impact on African-Americans and Hispanics, then the policy likely violates Title VII unless the employer can demonstrate that the policy is job-related and consistent with business necessity. 42 U.S.C. § 2000e-2 (k)(1)(A). The EEOC has filed at least one lawsuit against an employer that uses credit checks, arguing that the use of credit histories violates Title VII because it has a disparate impact on African Americans. See EEOC v. Freeman, No. 09-2573 (D. Md. 2009).

Not surprisingly, the speakers at the hearing had differing views as to whether credit histories are predictive of job performance. As the EEOC has recognized, some courts have upheld the use of credit checks to screen applicants for positions that involve handling a large amount of cash (see letter from Assistant General Counsel Dianna B. Johnston, dated March 9, 2010, The use of a credit check for such positions may pass muster even if it causes a disparate impact; Ms. Johnston’s letter also stated that “if an employer’s use of credit information disproportionately excludes African-American and Hispanic candidates, the practice would be unlawful unless the employer could establish that the practice is needed for it to operate safely or efficiently.” (emphasis added). Proving that credit checks are necessary can be quite difficult, however, especially for jobs that do not involve handling money or sensitive information.

Some of the speakers at the hearing opined that restrictions on credit checks are not needed because the Fair Credit Reporting Act already requires that employers observe certain safeguards. The Fair Credit Reporting Act permits employers to order credit checks only with prior written authorization from the applicant or employee. Further, before an employer takes adverse action based on the results of a credit check, the employer must advise the applicant or employee of his or her rights to dispute information in the credit report.

The issue of using credit checks for employment purposes may be moot if a bill pending in Congress is ultimately passed. The Equal Employment for All Act would amend the Fair Credit Reporting Act to prohibit the use of credit checks for employment purposes except for applicants subject to national security or FDIC clearance, applicants for supervisory or management positions at financial institutions, applicants for jobs at state or local public agencies that require a credit check or as otherwise required by law.

Given the EEOC’s increased scrutiny of employers’ use of credit history information as a selection tool, employers who conduct credit checks should evaluate whether the credit checks are job-related and necessary for their business. If employers decide to continue using credit checks, they should do so only for jobs in which credit is a legitimate job-related factor to consider in making an employment decision. Employers should review carefully the applicants’ or employees’ credit reports to get a sense of the full picture, so that employers are not screening out individuals who may have poor credit because of unemployment or high medical bills. Finally, employers should check the applicable state’s law to determine if it regulates the use of credit checks by employers, like Washington, Hawaii, Oregon and Illinois do.