As employers increasingly use credit reports to help screen out applicants who may be unreliable or un-trustworthy, the number of regulations governing the use of such reports is expanding. Most employers are aware that they must comply with the rigid procedural requirements of the federal Fair Credit Reporting Act (“FCRA”) before seeking to procure and use a credit report for employment purposes. But the FCRA is not the end of the inquiry.

State and federal legislators have intensified their focus on employers’ use of credit history as an employment screening tool. Four states—Hawaii, Oregon, Washing-ton, and, most recently, Illinois—have already passed laws imposing significant restrictions on employers’ use of credit history information for employment purposes. These laws generally prohibit covered employers from inquiring about an applicant or employee’s credit history or obtaining a credit report. There are, however, exceptions in these laws to allow the use of credit information in certain circumstances and for certain positions. Similar legislation is pending in more than a dozen states, including New Jersey, Pennsylvania and Connecticut.

On the federal level, Representative Stephen Cohen (D. Tenn.) reintroduced a bill on January 19, 2011 concern-ing the use of credit history for employment purposes. The proposed Equal Employment for All Act (H.R. 321) would amend the Fair Credit Reporting Act to prohibit the use of consumer credit checks in making adverse employment decisions against employees or prospective employees, with only a few exceptions. According to Representative Cohen, “using a job applicant’s credit history to deny employment is not fair because personal credit history is not an accurate predictor of job performance.” H.R. 321 is supported by numerous civil rights and consumer advocacy groups and has over twenty Democratic supporters.

The Equal Employment Opportunity Commission has likewise stepped up its enforcement efforts in this area. For years, the EEOC, like many state fair employment practices agencies, has taken the position that the use of credit reports in employment decisions has a disparate impact on certain minority groups. Recently, however, the EEOC has become much more aggressive in trying to curb employers’ use of credit checks. In an attempt to send a firm message to employers, the EEOC brought a class action suit in December 2010 against Kaplan Higher Education Corp. in the Northern District of Ohio, alleging that the company engaged in a pattern or practice of discrimination by refusing to hire appli-cants based on their credit histories. The EEOC con-tends that this practice has an unlawful disparate impact on African Americans and is neither job-related nor justified by business necessity. Kaplan responded by asserting that it conducts background checks on all prospective employees and that these checks are job-related and necessary for its organization to ensure “that staff handling financial matters, including financial aid, are properly screened.”

The EEOC’s highly publicized lawsuit against Kaplan follows its October 20, 2010 public meeting, where it heard testimony from various stakeholders on the growing use of credit history information in making employment decisions. Representatives of civil rights groups cited studies showing that racial minorities and women tend to have lower credit scores and argued that there is no evidence of any correlation between bad credit and job performance. It is unclear whether the EEOC will issue formal guidance following the October 2010 meeting, but the EEOC has nevertheless empha-sized that employers should ensure that their credit history practices are entirely job related and consistent with business necessity.

In one victory for employers, the United States Court of Appeals for the Third Circuit recently held that § 525(b) of the Bankruptcy Code, 11 U.S.C. § 525(b), which prohibits discrimination against an individual solely because he or she is or has been a debtor or bankrupt, does not apply to failure to hire claims. See Rea v. Federated Investors, 627 F.3d 937 (3d Cir. Dec. 15, 2010). While private employers may not discharge an employee because he or she files for bankruptcy, the anti-discrimination provision for private employers (contained in § 525(b)) is silent as to whether an applicant’s bankruptcy status may be considered when making a hiring decision. Noting that Congress crafted § 525(b) more narrowly than § 525(a) (which prohibits governmental entities from discriminating against certain debtors and specifically lists “deny employment to” among its prohibitions), the Third Circuit joined the majority of courts and concluded that the bankruptcy code does not prevent private employers from declining to hire job applicants because they filed for bankruptcy protection. To date, only one court has found to the contrary. See Leary v. Warnaco, Inc., 251 B.R. 656 (S.D.N.Y. 2000).

Given the recent state legislative activity concerning the use of credit history as a hiring criterion, employers should review their credit history policies and practices and ensure that they are in compliance with any applicable state laws. Additionally, in light of the EEOC’s recent activity, employers in all cases should proceed with caution when making employment decisions based on credit histories. Employers who use credit histories in their selection decisions should ensure that they are directly related to the job in question and necessary for a legitimate business purpose.