Using Credit History Wisely

With concern mounting by federal and state officials about the adverse impact of the use of credit checks as part of the hiring process, HR leaders should take the time to rethink -- and possibly revise -- their background-screening procedures and policies.

Tuesday, January 5, 2010
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Making hiring decisions, particularly in light of the recent increase in job applicants, is often a challenging task for employers. While the use of background checks can be extremely effective, employers should be cautious in their use of credit checks, based on recent state and federal legislation and litigation, as well as the current E-RACE initiative by the U.S. Equal Employment Opportunity Commission.

Given the current economic climate, employers have undoubtedly seen an increase with "issues" related to applicants' credit information -- and they need to be cognizant of the law in this area on both a state and federal level to ensure that they do not open themselves up to unnecessary liability when making hiring decisions.

Specifically, employers should evaluate their background-screening procedures and policies to consider what, if any, job-relatedness exists between an individual's credit information and the position sought, so as not to create a discriminatory, disparate impact on people in certain protected classes.

Federal Legislation and Action

Recently, U.S. Rep. Steve Cohen, D-Tenn., sonsored the Equal Employment For All Act, a bill that proposes to amend the Fair Credit Reporting Act to ban employers from using credit reports entirely in making hiring or promotion decisions. The bill, HR 3149, was introduced on July 9, 2009 and has been referred to the House Committee on Financial Services.

While the bill is still in the preliminary stages of the legislative process, the federal government, by way of the EEOC, has already increased its focus into an employer's use of an individual's credit (and criminal history) in hiring decisions.

As part of the E-RACE (Eradicating Racism and Colorism from Employment) Initiative, the EEOC has determined that employer policies or practices based on an individual's criminal or credit history may have an overall adverse impact on certain protected classes, namely, African-American and Hispanic applicants/employees.

To this end, national employers have been experiencing an increase in EEOC requests for information concerning background-screening procedures and policies -- and it has been bringing lawsuits challenging such procedures.

Most recently, in EEOC vs. Freeman, filed in September 2009, the EEOC alleged that the use of credit and criminal-justice history has had, and continues to have, a significant disparate impact on African-American applicants, and that the company's use of criminal history has had an adverse impact on Hispanic and male applicants.

Similarly, in EEOC vs. Peoplemark, the EEOC filed a complaint on behalf of African-American applicants alleging the company's policy denies hiring or employment to any person with a criminal record -- and that such a policy has a disparate impact on African-American applicants.

Employers need to be aware -- particularly in light of the EEOC's emphasis on investigating employer practices on a nationwide basis -- of the possibility that their background-screening practices, employment applications and hiring criteria may be requested and reviewed in an effort to examine whether such practices have a disparate impact on certain groups.

Indeed, the EEOC has ostensibly taken the position that "it seems likely that in most cases credit-check policies will be legally problematic" in Title VII cases where adverse impact is shown, according to the testimony of EEOC Commissioner Stuart Ishimaru before the Hawaii State Senate Committee on Labor on March 19, 2009.

State Legislation

As with the federal government, state legislatures have also identified the use of credit in employment-making decisions as a concern.

Both Washington and Hawaii have laws in place that restrict an employer's ability to rely on an employee's or applicant's credit history in making personnel decisions. Specifically, Washington employers may only secure credit information for employment decisions if such information is substantially related to the job. Even further, employers in Hawaii can only conduct a credit check if such information has a direct relationship to a "bona fide occupational qualification" and a conditional job offer has been made to the employee.

Many other state legislatures are taking action to pass similar laws protecting individuals from being unnecessarily impacted in their employment as a result of their credit histories.

In California, such a bill was actually passed by both the House and the Senate, only to be vetoed by Gov. Arnold Schwarzenegger. In Connecticut, a proposed bill places the burden of proving the necessity of implementing a credit check on the employer, while Wisconsin's legislature has introduced a bill that would add credit history to the list of unfair discriminatory employment practices prohibited under state law. There would, however, be exceptions for instances in which a person's credit history is substantially related to the circumstances of a particular job.

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Similarly, a pending bill in New York prohibits the use of a job applicant's credit history unless a "reasonable nexus" exists. Missouri, Ohio, New Jersey and Michigan all have proposed similar legislation which, if passed, would restrict an employer's ability to rely on a credit report when making hiring decisions.

As a result, employers need to be particularly aware of the status of the state law in each of the states in which they do business.

What Employers Can Do

* Evaluate Pre-employment Inquiries and Hiring Procedures

HR leaders should review key documents and processes to make sure they comply with the various state laws and the EEOC's E-RACE initiative. Include in the review all documents beginning with employment applications and throughout the pre-employment/background-screening process.

For example, employers should evaluate when credit information is being sought and how it is being applied. Of course, employers obtaining and evaluating such information must also continue to ensure that the requisite disclosures are provided to the employee/applicant under the FCRA and applicable state laws.

* Consider Using Credit History More Narrowly

To comply with the new limits set by state laws and prepare to defend employment practices in the event of EEOC investigation, employers should reconsider the manner in which they are using credit. For instance, reliance on credit history may be a substantial concern for a high-level financial executive, while its application to a clerical position who does not handle cash may be more attenuated.

* Review Background Check Criteria with Counsel

The most critical proactive measure employers should take is to have their background-screening policies, employment applications and hiring criteria reviewed by counsel. Without doing so, employers are vulnerable to the possibility that the EEOC will become the first set of eyes to review them -- and then it will simply be too late.

Pamela Q. Devata is a labor and employment partner in the Chicago office of Seyfarth Shaw LLP, where she specializes in Fair Credit Reporting Act and background-screening compliance, counseling and litigation defense. She is the Chair of Seyfarth's Single Plaintiff FCRA Subject Matter team and is a former board member of the National Association of Professional Background Screeners (NAPBS). Caitlin A. Senff is an associate in the labor and employment department in the New York office of Seyfarth Shaw LLP. For more information about Seyfarth Shaw LLP,

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