The Equal Employment Opportunity Commission (EEOC) has filed a complaint in the U.S. district court in Maryland against Freeman Companies, a Dallas-based corporate event-planning company. The EEOC claims that Freeman’s use of credit histories and criminal background checks discriminates against black, Hispanic, and male job applicants in violation of Title VII of the Civil Rights Act of 1964.
Title VII and Disparate Impact
Title VII is the main federal law that prohibits you from discriminating against employees or applicants. The law covers discrimination based on race, color, religion, sex, or national origin (the “protected classes”) and generally applies to all members of those classes, not just minorities and women.
In addition to banning more obvious acts of discrimination, Title VII prohibits you from using hiring criteria that have a disparate impact on applicants who are members of a protected class. The phrase “disparate impact” means that certain hiring criteria have the effect of excluding, say, more whites than blacks from being hired. That doesn’t mean you must avoid any criterion that has a disproportionate impact on a protected class, but if you use such a criterion, you must prove that it’s “job-related” and “consistent with business necessity.”
Credit Histories and Criminal Background Checks
Employers often use credit history checks as a screening mechanism for job applicants, and in fact, the practice has become more common recently. According to a 2004 study by the Society of Human Resource Management, the percentage of employers using an applicant’s credit history as a part of the screening process rose from 19 percent to 35 percent between 1996 and 2003. The University of Florida also conducted a study in 2002, finding that 40.7 percent of retail employers used credit checks as “screening measures” for new employee hiring.
The problem with credit checks, as well as criminal background checks, some argue, is that you are more likely to find negative credit and criminal histories associated with black, Hispanic, and male applicants. Consequently, there is a disparate impact on each of those groups, meaning they are hired at a lower rate than whites, non- Hispanics, and females.
For example, a 2000 study by Freddie Mac found that almost twice as many blacks as whites had “bad” credit records (48% vs. 27%). The study found that this correlation was even stronger than the correlation between income and “bad” credit. Of those with an annual income below $25,000, 36 percent had a “bad” credit record. But having a higher annual income (between $65,000 and $75,000) reduced the percentage of people with “bad” credit by only 14 percent, to 22 percent.
For several years now, employers have been required under the federal Fair Credit Reporting Act to comply with certain notice and consent rules for obtaining a “consumer credit report” (which includes a criminal background check) and provide notice of any intent to take adverse action based on a report. If the EEOC prevails in the Freeman case, employers that use credit reports in the hiring process will have to establish specific job-relatedness and consistency with business necessity. The EEOC has long held the position that arrest and conviction records are subject to the disparate impact job-relatedness and business-necessity requirement. Thus far, however, there have been no validated studies that relate credit history to job performance.
EEOC Commissioner Stuart Ishimaru noted in an April 2009 meeting of the commission that he found arguments against the use of credit checks “compelling.” He said that without a specific study validating the relationship between credit history and job performance, using credit checks almost seemed to be a clear violation of antidiscrimination law. In addition, a number of states have been considering laws to prohibit the use of credit checks for employment purposes, and two states — Hawaii and Washington — have enacted such laws. Advocates are pushing even harder for these laws given the poor economy, which they say makes it more likely that a job applicant might have a bad credit history.
The EEOC claims that since at least February 2001, Freeman has “engaged in an on-going, nationwide pattern or practice of race, national origin, and sex discrimination against Black, Hispanic, and male job applicants.” The complaint states that the company uses credit history information as a selection criterion for hiring, and the use of that information has a “significant disparate impact” on black job applicants. The EEOC also says the company uses criminal justice history information (criminal background checks) in its hiring process, which results in a disparate impact on black, Hispanic, and male job applicants.
The EEOC claims that the effect of using credit histories and criminal background checks has been “to deprive a class of Black, Hispanic, and male job applicants of equal employment opportunities and otherwise adversely affect their status as applicants because of their race, national origin, and sex.” The agency is asking the court to prohibit Freeman from using credit histories and criminal background checks. It’s also requesting that the court order the company to hire applicants who were rejected on the basis of the reports and compensate them with back pay from the time they were rejected. EEOC v. Freeman Cos. , D. Md., No. 09-CV-02573, filed September 30, 2009.
The EEOC filed this case only recently, and it likely won’t be resolved for months, if not years. If the agency does prevail, however, it will mean that using credit histories and criminal background checks to screen job applicants could violate Title VII. In addition to the EEOC case, there is some movement among the states to adopt laws restricting or prohibiting the use of credit histories. At the federal level, a bill introduced in July in the U.S. House of Representatives would bar employers from using credit reports when making hiring or promotion decisions. If you currently use credit histories or criminal background checks in the hiring process, watch these developments carefully.