Are Credit Checks Illegal?

Even seemingly neutral hiring criteria may inadvertently have an adverse effect on a protected group of people.  Using credit histories when evaluating applicants for employment has come under the watchful eye of government agencies, because, among other things, it may have a disparate impact on certain minority job applicants.  Insurance industry human resources executives should be aware of these rules.  The Equal Employment Opportunity Commission (“EEOC”), for example, recently filed suit against an employer alleging that the company engaged in a pattern or practice of unlawful discrimination by refusing to hire a class of black applicants nationwide based on their credit histories.  The company has historically conducted background checks on all applicants, regardless of race, if applicants would be dealing with financial matters.

According to the EEOC, however, this justification is insufficient.  It maintains that the company’s practice is neither job related nor justified by business necessity and thus violated Title VII of the Civil Rights Act of 1964.  Denying jobs to applicants with imperfect credit histories was not directly relevant to the job, said the EEOC in its suit.

Although it is legal for employers to review applicants’ credit histories, if they are used to evaluate applicants, employers should determine whether there is a sound business reason to obtain such information.  Discrimination could be found if the credit background is not directly job related.  Indeed, running credit reports on all applicants, regardless of the positions they seek, can have the effect of discriminating against protected classes, as alleged in the lawsuit.

Moreover, employers should be aware that credit checks are not necessarily accurate indicators of a person’s qualification for a particular job or a valid predictor of job performance.  Responsibility on the job and whether or not someone is paying his or her bills are not the same thing, according to the EEOC.  Several states, including New York, have restricted the use of credit checks in the hiring process.  Bills seeking to limit such use are being introduced elsewhere and you need to check out the specific law in your state as these are more restrictive than federal laws.

The Fair Credit Report Act also imposes certain consent and notice obligations on employers who request and/or rely upon “consumer reports” within the meaning of the Act.  In using credit history to make employment decisions, management should accordingly exercise caution and carefully evaluate whether the inquiry is job related and necessary for business in order to defend a claim that a practice has an unlawful discriminatory impact on minority groups.