Use of Credit Checks to Screen Job Applicants: Do You Really Want to Know?

Checking job applicants' credit history, a common screening practice of many employers, has come under attack from state legislatures, private litigants and the U.S. Equal Employment Opportunity Commission (EEOC). In August 2010, Illinois enacted the Employee Credit Privacy Act, making it the fourth state to ban employers from inquiring about the credit histories of job applicants or employees, or obtaining copies of their credit reports. Three months later, Loudy Appolon, an applicant for employment at the University of Miami's Miller School of Medicine, filed a class action lawsuit against the university after it informed her she would not be hired because of her credit history. Just last month, the EEOC sued Kaplan Higher Education over its use of credit histories in the hiring process.

The common thread binding all of these challenges to the consideration of credit records in the hiring process is the claim that this practice discriminates against African Americans, Hispanics and perhaps other protected groups. They point to studies conducted by Freddie Mac in 2000 and by the Federal Reserve System in 2003 which concluded that on average Asians and whites have higher credit scores than Hispanics and African Americans. Thus, so the argument goes, use of applicants' credit information in the hiring process is bound to screen out a disproportionately high percentage of African American and Hispanic applicants thereby causing adverse impact discrimination against them.

As with most legal issues, there is another side to this debate. First, employers rarely learn an applicant's credit score when running a credit check. Instead, they receive a report of the individual's credit history, including delinquent accounts, accounts referred to collection agencies and other indicators of weak credit. Second, rather than using a credit check as an initial screening tool, most employers utilize it after they have narrowed the candidates under consideration down to a small number. Finally, most employers who run credit checks only do so for a fraction of their jobs, those in which they believe it would be too risky to have an employee with a bad credit record.

In the legal analysis for determining whether adverse impact discrimination exists, the fact that an employment practice affects one or more protected groups more negatively than the general population is not the end of the story. If the employer can show that there is a business necessity for this practice, it is not illegal. To this end, many employers argue that they have a business necessity for conducting credit checks on applicants for jobs where a bad credit record would present unacceptable perils. For example, many employers limit the use of credit checks to applicants for jobs in which the occupants would have direct access to the companies' and/or customers' funds. Other employers also seek credit records on applicants for positions involving access to Social Security numbers, banking or credit card information, or other positions in which a financially desperate employee could be susceptible to blackmail or tempted to engage in illegal acts to generate funds. In contrast, some employers indicate that they use credit checks solely or primarily to combat "resume fraud" by ascertaining whether applicants have omitted any prior employers from their application forms.

In Indiana and other states where the practice has not yet been outlawed, employers should be very careful about the solicitation and use of credit information about job applicants. Prudence compels that employers be able to demonstrate the relevance of an employee's credit record to the position in question. To do so, employers must be able to show for each job in which a credit check is used as a hiring tool an unacceptable risk of serious harm they could reasonably anticipate by selecting a candidate with a poor credit record. An employer may not justify use of credit checks based on the general perception that employees with good credit records perform their jobs better than those with bad credit records. For most jobs, there is no statistically significant evidence to support this belief. Unless an employer wants to go to the substantial expense of commissioning a validation study to prove the correlation between credit records and job performance in its workplace, it may not rely on this justification as a defense to an adverse impact discrimination claim.

In deciding whether to use credit checks for any position, the employer must ask itself, "Does the danger of not knowing the successful candidate's credit record outweigh the danger of knowing it?" As in other employment decisions, what you do know about an applicant's credit history can hurt you, and in defending against a hiring discrimination claim ignorance can be bliss.

Wayne "Skip" Adams is a partner in Ice Miller's Labor and Employment Group. Adams' practice has been devoted to the representation of employers primarily in labor and equal employment matters. He has substantial experience in defending employers in employment discrimination cases, wrongful discharge lawsuits and labor arbitrations.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.

Feb. 16, 2011