EEOC Urges Caution on Unnecessary Credit Checks

The Fair Credit Reporting Act (FCRA) shouldn’t be employers’ only compliance concern when they screen applicants out because of bad credit, according to Paula Bruner, special assistant to Equal Employment Opportunity Commission (EEOC) Chair Naomi Earp.

Unnecessary credit reports should trouble employers under Title VII too, she asserted in an HR News interview on the agency’s new E-RACE (Eradicating Racism and Colorism from Employment) Initiative, which takes aim not only at blatant race and color discrimination, like racial slurs and harassment, but also at subtler forms of discrimination.

If there is a legitimate business need for credit checks, then there’s no Title VII problem, noted Bruner, an attorney adviser who is the agency’s point person on the E-RACE Initiative.

But Bruner believes that too often credit checks are used when they aren’t really needed and unlawfully screen out a disproportionate number of black and Hispanic applicants. This view was reflected in an EEOC’s E-RACE release on Feb. 28, which cautioned that “some facially neutral employment criteria are significantly disadvantaging applicants and employees on the basis of race and color. Studies reveal that some employers make selection decisions based on names, arrest and conviction records, employment and personality tests, and credit scores, all of which may disparately impact people of color.”

Employers should pay attention to the items highlighted in this list, according to Don Livingston, an attorney with Akin Gump and former general counsel with the EEOC, even though he does not think employers frequently use credit checks, except as needed. He said that “it’s reasonable to think that the EEOC will target those areas” listed in the E-RACE initiative “and other similar policy questions.”

Credit Checks and Title VII

Title VII challenges of credit checks may come as news to employers more accustomed to their obligations under the FCRA when conducting credit checks. How does Title VII factor in?

Bruner cautioned that absent legitimate business reasons, credit checks exclude too many black and Hispanic applicants to pass muster under Title VII.

Suppose an employer is looking for a clerical employee who has no financial responsibilities, she hypothesized. A credit check for this position would not be permitted by Title VII if it had a disproportionate impact on black and Hispanic applicants.

Do credit checks have this kind of impact? A Dec. 30, 2004, report by the Texas Department of Insurance concluded that they do.

“In general, blacks have an average credit score that is roughly 10 percent to 35 percent worse than the credit scores for whites. Hispanics have an average credit score that is roughly 5 percent to 25 percent worse than for whites. Asians have average credit scores that are about the same or slightly worse than those for whites,” the report stated.

The relevant comparison for disparate impact analysis should be among qualified applicants when the employer can identify its qualified applicant pool, Livingston noted. But he said that if this group cannot be identified, the EEOC may look at some proxy population gathered from Census data.

The E-RACE Initiative is not the first time that the EEOC has scrutinized credit checks under the disparate impact theory. The EEOC Compliance Manual section on race and color discrimination asserts that “other employment policies that relate to off-the-job employee conduct also are subject to challenge under the disparate impact approach, such as policies related to employees’ credit history.”

And as Dianna Johnston, EEOC assistant legal counsel, noted in a Feb. 14, 2005, advisory letter, “rejecting applicants on the basis of financial criteria such as poor credit ratings has sometimes been found to disproportionately exclude minority groups.” The letter noted that a district court as far back as 1974 found that “a police department could use financial information in background checks of applicants only if using the information does not have an ‘adverse impact’ or is job related and consistent with business necessity” (United States v. City of Chicago, 385 F. Supp. 543 (N.D. Ill. 1974)).

The letter observed that Title VII is not violated even if there is an adverse impact when financial criteria is job related and consistent with business necessity. Another district court found in another case, for example, “that a bank had a business need to conduct pre-employment credit checks because employees handle large amounts of cash” (EEOC v. United Virginia Bank/Seaboard National, 1977 WL 15340 (E.D. Va. 1977)).

Harvard Charge

Title VII challenges of credit checks have bubbled to the surface again not only in the E-RACE Initiative, but also, the Christian Science Monitor reported, in a charge filed with the EEOC in November 2006.

Lisa Bailey tried, unsuccessfully, to go from temp to regular for a clerical job in the Harvard alumni office that involved access to donations. After a bad credit report, Harvard did not hire her. Bailey challenged the decision, claiming that Harvard relied on the credit report in violation of Title VII.

Did Harvard have a legitimate business reason for the credit check? Harvard suggested it did, stating in a release that “credit history reviews are conducted, with the consent of the applicant, only for positions with access to sensitive financial information or involvement in significant financial transactions.”

The EEOC does not confirm or deny the existence of any charge filings unless or until it files suit. It had not, as of publication time, sued Harvard in this case.

Although Title VII challenges of credit checks are not new and the Harvard charge is unresolved, the fact that the E-RACE Initiative mentions credit checks is something that should, along with other practices mentioned in the initiative, get employers’ attention, according to Livingston in a March 23 interview.

“If employers are engaged in practices that are listed, they need to be alert,” he said, because they might be on the agency’s “hot-button list.”

Allen Smith, J.D., is SHRM’s manager of workplace law content.