Credit Checks, Employment Screening and the Law

Nick Fishman

I think it’s safe to say that the employment background screening buzz in 2010 clearly belongs to the use of credit reports and the corresponding legalities.  Yes, employers have the right to conduct a credit check on prospective and current employees under the Fair Credit Reporting Act.  However, the states of Hawaii and Washington have laws that strictly limit their use and Oregon will follow suit this July.  There are also 28 pending bills in 19 other states to do the same.

The EEOC has also been actively pursuing litigation on grounds that credit reports have a disparate impact on minorities. Navigating this legal minefield can be difficult and those who use credit reports are encouraged to take a close look at their practices.  (We address this in our most recent white paper, Credit Reports and The Hiring Process: The Value (and Risk) to HR Professionals.

I just saw a helpful post on HR-BLR that sheds some light on these laws and is worth the read.  See below:

Running Credit Checks? Be Careful


Do you usually include credit history as part of your background checks on all job applicants? What if you also rerun those checks on employees you hope to promote? Tony Campiti, employment law attorney in the Dallas, Texas, office of Thompson & Knight, explained to us the causes for concern with such practices.

It’s all about E-RACE. Beginning in 2008 and ending in 2013, the Equal Employment Opportunity Commission (EEOC) is focusing on facially neutral employer practices that may have a disparate impact on minority groups. Examples of such practices include use of arrest and conviction records, employment and personality tests, and credit scores in hiring.

The reasons are clear: Latinos and African Americans are statistically more likely than Caucasians to have poor credit history or a criminal conviction in their records. By automatically excluding candidates with poor credit, bankruptcy, or a felony conviction, an employer risks blocking many more minority candidates than whites from being hired.

Where does federal law stand? Campiti points out that the arena of the potential disparate impact of background and credit checks on minority groups has several facets. On one hand, for example, the federal Bankruptcy Code (11 USC 525b) prohibits employers from discriminating against anyone who has filed for bankruptcy. That generally holds for public employers, says Campiti, but not for private ones. However, there’s an important distinction here: The law bars biased treatment of employees—even those of private employers—but not of applicants.

So generally under federal law, private employers may run credit checks on job applicants and have a blanket policy of turning down those with poor credit history or a bankruptcy filing. Doing so for an existing employee being considered for promotion is riskier: That can violate the Bankruptcy Code. But here’s the rub: Even in the case of applicants, EEOC is concerned that blanket policies barring hire of people with bankruptcy filings will have a disparate impact, and in 2009 it sued some employers for such practices.

And state laws? So far, says Campiti, only Hawaii and Washington have laws limiting employers’ bars on hiring anyone with a bankruptcy filing. But such a law for Oregon becomes effective July 1, and some 28 bills in 19 states were proposed in 2009. New Jersey, Wisconsin, Iowa, and Michigan have been active on the issue. And, state laws fall far short of EEOC’s objectives. Such laws typically make exceptions not only for applicants to federally insured financial institutions and employers that are required by federal or state law to conduct credit checks—but also for all managerial or supervisory positions.

We said that seems like a huge loophole, and Campiti agreed. His advice? To avoid EEOC scrutiny, ensure that whenever you use credit checks to bar the hire of applicants, you can show job-related criteria and/or a business necessity for the practice.

Campiti describes a case recently decided on appeal in Texas as an example of how courts treat charges of bankruptcy bias. Sent by a recruiter, a woman applied for a job at a firm in which she was qualified to do legal work. The firm made her an offer conditioned on the results of a background check and credit history. But finding she had declared bankruptcy in the recent past, the firm withdrew the offer, and the applicant sued. The appeals court agreed that the Bankruptcy Code does not bar private employers from refusing to hire someone who has filed for bankruptcy. (Burnett v. Stewart Title, U.S. District Court for the Southern District of Texas, No. H-08193, (3/29/10)).

In a similar case, Florida courts ruled against a would-be restaurant manager who sued for bankruptcy bias when his prospective employer abruptly withdrew its job offer after he’d given notice to his previous employer. Courts ruled he wasn’t yet an employee when the new chain turned him down, so the chain wasn’t liable.

Campiti notes that Hawaii’s bankruptcy-protection law requires that credit checks be run only after an applicant has been given a conditional offer of employment. But that is not true, he asserts, under the federal Fair Credit Reporting Act, which governs background checks for employers in states that don’t have their own laws. As HR pros are aware, applicants must be told in writing that one or more third parties will be consulted regarding the applicants’ credit history or other background, and must then be notified if the prospective employer makes a negative decision based on the information it obtained. Further, the candidate must be given a chance to rectify any inaccurate data in the reports. But such investigations can be done at any time in the process, not just after a job offer has been made.

Let’s say you are a public employer reviewing an applicant’s credit history, or a private employer reviewing an employee’s history. You can’t refuse to hire or promote the person solely on the basis that he or she has filed for bankruptcy protection. Instead, you must show that you turned the person down on the basis of his or her negative credit history, not the bankruptcy.

And, Campiti advises, stand ready to cite job-related or business necessity reasons for doing so. But he acknowledges that avoiding bankruptcy bias is currently a contentious issue. “I wouldn’t be surprised,” he says, “if Congress moves to amend the Bankruptcy Code to make it harder for employers to reject applicants just because they have declared bankruptcy at some point.”

Nick Fishman
Follow Me

Nick Fishman

Nick Fishman is the co-founder of EmployeeScreenIQ, a leading, global employment background screening provider, and serves as the company’s executive vice president and chief marketing officer. He pioneered the creation of EmployeeScreen University, the #1 educational resource on employment background checks for human resources, security and risk management professionals. A recognized industry expert, Nick is a frequent author, presenter and contributor to the news media. Nick is also a licensed private investigator in the states of Ohio and Texas.
Nick Fishman
Follow Me
Tweet
Share
Email
Share
  • Name Julie

    Florida needs to change this immediately as good people who need jobs are losing that opportunity. The well being of the people come first.