EEOC Getting Tough On Employer Use of Credit Reports

EEOC Files Disparate Impact Lawsuit Based on Use of Credit Records in Hiring

In a press release today, the EEOC (Equal Employment Opportunity Commission) announced the filing of a nationwide hiring discrimination lawsuit against Kaplan Higher Education Corp.

The EEOC alleges that Kaplan’s use of applicants’ credit history discriminates because of race, under the disparate impact theory of employment discrimination.

In the lawsuit, filed by the EEOC’s Cleveland Field Office in the U.S. District Court for the Northern District of Ohio, the EEOC alleges that Kaplan engaged in a pattern or practice of unlawful discrimination by refusing to hire a class of black job applicants nationwide. The core allegation is that:

Since at least 2008, Kaplan Higher Education has rejected job applicants based on their credit history. This practice has an unlawful discriminatory impact because of race and is neither job-related nor justified by business necessity.

The national scope and “pattern-and-practice” allegation virtually guarantee that this will be a very costly case to defend.

Applicable Law on Disparate Impact, Generally

The EEOC press release states the law simply:

It is a violation of Title VII [of the Civil Rights Act of 1964] to use hiring practices that have a discriminatory impact because of race and that are not job-related and justified by business necessity.

More Precisely, Title VII, as Amended by the Civil Rights Act of 1991, Provides:

An unlawful employment practice based on disparate impact is established . . . if:

(A)(i) a complaining party demonstrates that a respondent uses a particular employment practice that causes a disparate impact on the basis of race, color, religion, sex, or national origin and the respondent fails to demonstrate that the challenged practice is job related for the position in question and consistent with business necessity; or

(ii) the complaining party makes the demonstration described in subparagraph (C) with respect to an alternative employment practice and the respondent refuses to adopt such alternative employment practice.

(B) (i) With respect to demonstrating that a particular employment practice causes a disparate impact . . . , the complaining party shall demonstrate that each particular challenged employment practice causes a disparate impact, except that if the complaining party can demonstrate to the court that the elements of a respondent’s decisionmaking process are not capable of separation for analysis, the decisionmaking process may be analyzed as one employment practice.

(ii) If the respondent demonstrates that a specific employment practice does not cause the disparate impact, the respondent shall not be required to demonstrate that such practice is required by business necessity.

(C) The demonstration referred to by subparagraph (A)(ii) shall be in accordance with the law as it existed on June 4, 1989, with respect to the concept of “alternative employment practice”.

(2) A demonstration that an employment practice is required by business necessity may not be used as a defense against a claim of intentional discrimination under this subchapter.

More Detail on Credit Reports and Disparate Impact From EEOC Informal Discussion Letter

In a letter dated February 14, 2005, the EEOC stated this explanation:

Rejecting applicants on the basis of financial criteria such as poor credit ratings has sometimes been found to disproportionately exclude minority groups. For example, in United States v. City of Chicago, 385 F. Supp. 543, 557 (N.D. Ill. 1974), the court held 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. Note that courts will not assume that an employer’s exclusion based upon financial criteria disproportionately excluded a protected class. That would have to be proved.

Even if such “adverse impact” on a protected group is proven, Title VII is not violated if the employer can show that requiring the financial criteria is job related and consistent with business necessity. For example, in EEOC v. United Virginia Bank/Seaboard National, 1977 WL 15340, 21 FEP Cases 1392 (E.D. Va. 1977), the court concluded that a bank had a business need to conduct pre-employment credit checks because employees handle large amounts of cash.

The Bottom Line on Lawfulness of Employer Use of Credit Record in Hiring

The answer here is the famous lawyer non-answer: “It depends.”

If a very strong correlation between credit history and job performance can be established, as in the case of the bank example above, then the potential of liability for disparate impact can be overcome.

But in many situations, if not most, using credit records as a selection tool in hiring is very risky.

Relatively well-off business owners and managers may think that financial problems necessarily show irresponsibility and reflect poorly on character and integrity, but they don’t necessarily show that at all. People may have trouble paying bills for many other reasons, including having no or inadequate medical coverage and getting hit with high medical bills, one of the most common causes of personal bankruptcy.

The Bigger Lesson About Disparate Impact

Regional Attorney Debra Lawrence of the EEOC’s Philadelphia District Office, which oversees Pennsylvania, Delaware, West Virginia, Maryland, and portions of New Jersey and Ohio, said: “Employers need to be mindful that any hiring practice be job-related and not screen out groups of people, even if it does so unintentionally.”

Fair Credit Reporting Act Adds Further Challenges

Aside from the above discrimination issues, employer use of credit reports implicates the Fair Credit Reporting Act (FCRA) and its detailed consent and notification requirements.

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