In my May 13, 2010 column,”What’s in Your Wallet, Job Applicant,” I addressed increased government scrutiny of employers who rely on credit checks to screen applicants. The Equal Employment Opportunity Commission has decided to turn up the heat.

The EEOC recently filed a class action against Kaplan Higher Education Corp. The agency’s basis for doing so is contained within one paragraph of its short complaint, now pending in U.S. District Court for the Northern District of Ohio (Case no. 1:10-cv-02882): “Defendant has used [as] a selection criterion for hiring and discharge…credit history information, that…continues to have, a significant disparate impact on [b]lack job applicants and incumbents, is not job-related and consistent with business necessity, and for which there are appropriate, less-discriminatory alternative selection procedures.”

To paraphrase, the EEOC claims Kaplan’s reliance on credit checks results in the exclusion of a disproportionate number of black job applicants. As such, the EEOC maintains, the practice is illegal under a “disparate impact” theory, because Kaplan cannot adequately justify it as “job-related and consistent with business necessity.”

The lawsuit against Kaplan is the latest salvo in the EEOC’s war against credit checks. As noted in my May 13 article, the EEOC in March 2010 issued a non-binding opinion letter noting that credit checks may cause a disparate impact. See Dianna B. Johnston, Esq. “Title VII: Employer Use of Credit Checks,” Office of Legal Counsel, Equal Employment Opportunity Commission (March 9, 2010) (See www.eeoc.gov/eeoc/foia/letters/2010/titlevii-employer-creditck.html). In October 2010, the EEOC held public hearings on the practice, in which the commissioners heard from employment lawyers, civil rights advocates, and scientists on the use of credit checks in employment. (See www.eeoc.gov/eeoc/meetings/10-20-10/index.cfm).

Under Title VII of the Civil Rights Act of 1964, a plaintiff may prove discrimination is intentional, e.g., “I was fired because of my race.” But a plaintiff alternatively may assert that a facially neutral policy, which applies to everyone, has a disparate or adverse impact on a protected group.

To prevail on its disparate impact claim against Kaplan, the agency first will have to establish that black applicants are turned down for jobs on the basis of bad credit at a greater rate than other applicants. The EEOC in 1978 issued its “Uniform Guidelines on Employee Selection Procedures,” located at 29 CFR Part 1607. There, the EEOC stated that if a neutral practice disqualifies applicants on the basis of race, sex, or any other protected characteristics, at a rate of 4-5 or less than the most successful group, the policy is prima facie unlawful.

The agency likely will rely on applicant data it obtains from Kaplan to make out a prima facie case. However, Kaplan will be able to submit its own statistical evidence to show no disparity exists, or that any disparity is not statistically significant. In disparate impact cases, there frequently are disputes over the statistical methods employed, sample size, and other aspects of the proof used to establish a statistically disparate impact. The analysis becomes more complex if the credit check is just one factor used in hiring, or is part of a more comprehensive background investigation. Unfortunately, the EEOC’s complaint is silent on these issues.

If the EEOC establishes a prima facie disparate impact claim, then Kaplan will have the burden of proving the job-relatedness of credit checks. To do so, Kaplan will have to submit admissible evidence that the use of credit information is “valid,” i.e., that there is a correlation between the credit check and the jobs involved.

The EEOC typically files lawsuits to set precedent or otherwise make a point that goes beyond the employer and employees involved in the particular case. And the EEOC’s interest in credit checks is well established. For example, in EEOC v. United Virginia Bank/Seaboard Nat’l, 21 Fair Empl. Prac. Cas. (BNA) 1392 (E.D. Va. 1977), the district court held that the bank’s reliance on credit checks was lawful, even though the credit checks may have had a disparate impact on minorities. That is because, the court noted, the banking business involves handling other people’s money. The court in EEOC v. American Nat’l Bank, 21 Fair Empl. Prac. Cas. (BNA) 1532 (1979), reached a similar conclusion.

It may be that the EEOC selected Kaplan for litigation because it is not in the banking business and does not handle money. However, it is unclear from the complaint whether Kaplan conducts credit checks for all positions, or only those involving sensitive personal information, finances, etc.

Credit checks are widely used by employers, but not for all positions and not in all industries. The Society for Human Resources Management recently published results of a survey in which it concluded that approximately 60 percent of employers use credit checks in some manner. However, very few use them for all jobs. (See www.shrm.org/Research/SurveyFindings/Articles/Pages/BackgroundChecking.aspx ). As one might expect, the survey revealed employers use credit checks most frequently when jobs involve financial transactions, confidential information, and for higher-level positions in an organization. The federal government itself uses credit checks as part of its background screening processes for certain jobs.

Will the EEOC prevail against Kaplan? It is impossible to tell. There have been studies that show African-Americans and Hispanics have lower credit “scores” on the whole than Caucasians and Asians. However, credit checks do not typically reveal a credit “score,” but rather a history of credit, debts and payments. The EEOC cannot rely on abstract claims that credit checks historically have had harsher consequences on minorities. Rather, the agency will have to prove that the credit check Kaplan uses has a disproportionate effect on the black applicants seeking employment with Kaplan.

On the issue of job-relatedness, considering how prevalent credit checks are, and how long they have been of concern to the EEOC, there are few studies evaluating their “validity” as predictors of success at the job. The absence of proof of a correlation may help the EEOC win. However, Kaplan may be able to show via expert testimony that there is a correlation between financial pressures and reliability, or that employees with poor credit are more susceptible to dishonest behavior at work. But that will depend on many variables, including what categories of jobs require credit checks and why.

Finally, the EEOC may or may not be able to prove there are alternatives to credit checks that have a less profound impact on black applicants. The EEOC’s chief psychologist, Dr. Richard Tonowski, testified before the commission in the October 2010 hearing. He suggested that validated personality testing may be a better predictor of reliability at work than credit checks. However, personality tests also have been attacked as discriminatory or violative of privacy. Tonowski also suggested that employers should focus on improving security at the job site to address potential losses. Again, however, employee monitoring and other security measures involve additional employment laws and different risks.

Given the EEOC’s aggressive stance against credit checks, and the increasing number of states that are limiting or banning them, the day may be coming when employers must devise new methods of screening applicants for trustworthiness and reliability. At a minimum, employers should consider whether conducting a credit check for a given job is warranted because the job involves cash handling, exposure to sensitive company or customer data, trade secrets, or other confidential information.

Before implementing new procedures to replace credit checks, employers must be mindful that even selection criteria and methods that are applied to all applicants equally can result in adverse impact claims. The EEOC and private plaintiffs have challenged testing for a variety of skills, personality traits, medical condition, and other purported indications of future performance. Employers should plan to monitor whether they may be vulnerable to claims of unintentional discrimination and whether they have been properly validated for the particular jobs involved.