A commonly used pre-employment screening method--conducting credit checks--has drawn increased scrutiny in recent months. Legislatures at the state and federal levels are considering bills that would limit employer use of credit checks. Moreover, two recently-filed lawsuits, one of which was filed by the EEOC, seek to challenge the use of pre-employment credit checks in hiring decisions.

Only four states--Hawaii, Illinois, Oregon, and Washington--currently have laws regulating employer use of credit history data. Sparked by the downturn in the economy, fourteen additional states--California, Colorado, Connecticut, Indiana, Kentucky, Maryland, Missouri, Nebraska, New Jersey, New Mexico, New York, Pennsylvania, Texas, Vermont--are considering similar measures.

At the federal level, Congress is considering its own limit on employment-related credit checks. In January 2011, the “Equal Employment For All Act” (H.R. 321) was introduced in the House. The bill seeks to amend the Fair Credit Reporting Act to “prohibit the use of consumer credit checks against prospective and current employees for the purposes of making adverse employment decisions.”

Proponents of the bills argue that job applicants with poor credit are being unfairly excluded from the job market. They assert that it’s a Catch-22--the unemployed can’t get a job with poor credit and can’t improve their credit without a job.

And the EEOC is not sitting on the sidelines. This past December, the EEOC filed suit against Kaplan Higher Education alleging that the company’s practice of conducting pre-employment credit checks has a disparate impact on racial minorities. According to the lawsuit, Kaplan’s use of credit history data in the hiring process is “not job-related and consistent with business necessity.” The lawsuit comes only months after the EEOC held a public meeting to discuss the use of credit history data in employment decisions.

A similar lawsuit was filed in November 2010 by a private plaintiff challenging the University of Miami’s use of pre-employment credit checks. Similar to the EEOC’s lawsuit, the plaintiff alleges that the University’s use of credit checks has a disparate impact on minorities.

Given the increased scrutiny of pre-employment credit checks, employers should consider reviewing their pre-employment credit check practices. To minimize potential liability, employers should limit credit checks to positions where there is a “business necessity” and the applicant’s credit history is relevant to the position.