EEOC Takes the Offensive On Use of Credit Histories in Hiring

January 4, 2011

The use of credit histories in the hiring process is coming under increased scrutiny by the Equal Employment Opportunity Commission. On December 21, 2010, the EEOC filed suit against Kaplan Higher Education, alleging that Kaplan’s use of credit history as a selection device is discriminatory because it screens out a disproportionate number of black applicants. The suit seeks injunctive relief barring Kaplan from using credit histories, as well as lost wages, benefits and offers of employment for applicants who were not hired due to the practice.

The lawsuit is not surprising given the EEOC’s earlier attention to this issue. In October 2010, the EEOC held a public hearing on the topic to explore whether the practice is discriminatory. Critics of the practice describe it as a “Catch-22” for applicants: you cannot establish good credit unless you have a good paying job, but you cannot get hired if you have poor credit. The EEOC is concerned that minority groups typically have poorer credit, and therefore the practice has a disparate impact on those groups. There is also a question of whether credit histories have any real predictive value when it comes to employment.

The issue has the attention of Congress and state legislatures as well. In 2009, the Equal Employment for All Act was introduced in the House. This bill would prohibit an employer from using information regarding a person’s credit history or credit worthiness in employment decisions, with some exceptions. A similar bill was also introduced in New York in 2009. Several states already limit the practice, including Illinois, Hawaii, Oregon, and Washington.

In light of the position taken by the EEOC, employers should re-evaluate their use of credit histories. An across-the-board approach which uses credit checks for all applicants presents the greatest risk of a disproportionate impact claim, and it will be the most difficult to successfully defend. In a disparate impact suit like the one filed against Kaplan, the employer may have to show that the selection criteria is “job-related” and “consistent with business necessity,” and that there are no less discriminatory alternatives available. For that reason, employers should limit the review of credit history to positions where there is a strong nexus between a person’s credit history and the position for which he or she is applying. The most obvious examples are positions involving direct access to the employer’s or client’s funds, particularly for individuals in higher level positions such as a controller or store manager. Although such a limitation will likely make a lawsuit easier to defend, it may not be sufficient to avoid being sued. According to the Kaplan complaint, the company used credit checks only for employees whose responsibilities included financial matters, such as advising students on financial aid.

In addition, even in cases where it may be appropriate to review a credit history, that information should be used as a supplement to all the other information gathered in the interview and reference checking process. Employers should avoid making credit the determinative factor in denying employment.  Of course, all credit checks should be conducted in accordance with the requirements of the Fair Credit Reporting Act and similar state laws.