The Equal Employment Opportunity Commission and some state and local governments became concerned with employers’ use of credit checks following the 2008 economic crisis. Many people found themselves out of work, negatively affecting credit scores. Others were unable to pay their mortgages when subprime mortgage rates adjusted, which also lowered their credit ratings.

Government officials worried that employers placed too much emphasis on credit checks to screen out otherwise qualified applicants. Their concern is that minority workers are more likely to have poor credit. Employers’ overreliance on credit scores as a hiring criterion therefore could have a disparate impact on minority applicants.

Credit Reports and Disparate Impact

Even when an employer has a policy that applies to all applicants or workers, the policy may be the basis for a claim of unlawful discrimination. Actionable discrimination may be found if the policy disproportionally affects a protected class of employees, and the employer cannot demonstrate a sufficiently important business need for the policy.

Even before the recent economic turmoil, the EEOC identified neutral hiring practices such as conducting criminal background checks, credit checks, and some pre-employment tests as potentially having an unlawful disparate impact on minority applicants.

EEOC’s Aggressive Stance Rebuffed

After the 2008 economic collapse, the EEOC stepped up efforts to limit use of credit checks. Almost immediately after holding a public meeting to explore whether the use of credit checks discriminates against minorities, the agency began filing discrimination lawsuits premised on credit checks’ alleged disparate impact.

Not all of their efforts succeeded. In EEOC v. Kaplan Higher Education Corp., the EEOC alleged that Kaplan’s use of credit checks had a disparate impact on African American job applicants. Because Kaplan did not collect demographic information on job applicants, the EEOC tried to prove its case by using a “race rating” system to review applicants’ DMV photos and assigning them a race. The court rejected this approach, ruling that it was too scientifically unsound to be admissible. Absent the race-rating data, the EEOC was unable to produce disparate impact evidence. The court entered summary judgment in Kaplan’s favor.

The EEOC did not back off, though. It filed a motion for reconsideration, arguing that Kaplan ignored Title VII guidelines asking employers to maintain race data on applicants. This practice, according to the EEOC, made it virtually impossible for the EEOC to prove disparate impact. The court refused to consider this argument because the EEOC did not raise it in connection with the underlying motion.

Not surprisingly, the EEOC has appealed the Kaplan decision, and appears ready to continue targeting employers that use credit checks as a hiring criterion.

California and Other States Move to Limit Use of Credit Checks

State and local regulators have also taken measures to limit employers’ use of credit reports for employment purposes. In California, for example, the Legislature enacted Labor Code Section 1024.5. Employers may not conduct credit checks of current and prospective employees unless the position sought involves access to finances, trade secrets, personal data (such as social security numbers), and other confidential information. Credit checks are also authorized for certain law enforcement and Department of Justice positions, and a very limited set of high-level management positions.

Similar laws exist in Oregon, Hawaii, Colorado, Connecticut, Illinois, Maryland, Oregon and Vermont. Several other states have introduced similar legislation. It is also expected that the EEOC will issue enforcement guidelines in the near future regarding the use of credit checks for employment purposes.

Considerations for Employers Moving Forward

While the Kaplan case represented an employer victory, credit checks remain on government radars. Employers should be careful to use credit checks only where permitted by law and when the employer can justify a credit report as job-related. For example, if a job involves a position of trust with customers’ or the employers’ financial data, a credit report may well be justified. If the employer seeks a credit report merely to verify an applicant’s personal integrity, but the job itself involves no confidential or financial responsibilities, the employer may have a harder time justifying the practice.

Different states and localities restrict credit checks in different ways. It will be difficult to apply a uniform policy without careful scrutiny of these laws, and anticipation of new laws to come. Employers should periodically review their policies and practices to ensure compliance with evolving state and local laws.

Many employers likely rely on vendors to conduct credit checks. But employers are responsible to ensure these vendors are staying current on the law.

Employers should also conduct credit checks only after extending conditional employment offers to avoid prematurely rejecting candidates based on their credit.