Do credit and criminal checks discriminate against minorities?

Over the past few years, the Equal Employment Opportunity Commission (EEOC) has aggressively challenged the use of credit reports and criminal history checks in hiring decisions, alleging that use of the information results in a discriminatory impact on candidates in protected groups. In 2012, the commission successfully negotiated a $3.13 million prelawsuit settlement of a race discrimination charge against Pepsi in which the soda giant’s criminal background check policy was called into question for allegedly discriminating against African Americans. However, the agency has been less successful pursuing similar cases in court, mainly because of its struggle to proffer reliable evidence of discriminatory impact. Despite the EEOC’s mixed results, the recent settlements and case filings indicate that the use of credit and criminal history checks in the hiring process is a hot topic.

Applying Title VII to background checks
Title VII of the Civil Rights Act of 1964 doesn’t directly prohibit or restrict the use of credit or criminal history checks by employers. In fact, Title VII doesn’t even mention background checks. However, an employer’s use of background checks can create Title VII liability if the report adversely affects an applicant or employee on the basis of one or more characteristics that are protected from discrimination under Title VII (e.g., race, gender, or national origin).

It has long been the EEOC’s position that employers that use credit checks and/or criminal history records in employment decisions may violate Title VII. The theory goes like this: Employers have a policy of rejecting job candidates who have bad credit, an arrest, or a conviction. Statistics show that individuals of certain races (1) are more likely to have negative information in their credit reports and (2) are arrested and convicted at a higher rate than persons of other races. Therefore, employers that make hiring decisions based on credit and criminal history reports reject more individuals in affected racial groups than persons of other races. Because the employer’s background check policy causes a discriminatory impact on the basis of race, it violates Title VII.

For that theory to succeed, the EEOC first must identify the specific employment policy or practice causing the discriminatory impact―for example, an employer’s blanket policy of rejecting all candidates with an arrest or a conviction. Next, it must provide statistical evidence establishing that the identified policy or practice caused the exclusion of candidates because of their membership in a protected group. Establishing both elements has proven problematic for the commission.

Judge throws out Kaplan case
In December 2010, the EEOC sued Kaplan Higher Education Corporation, alleging that its practice of using credit histories in making hiring decisions had a disparate impact on “black” applicants (the term used by the parties) in violation of Title VII. In other words, the agency asserted that Kaplan’s use of credit histories―while not discriminatory on its face―had a disproportionate impact in terms of screening out black applicants.

Kaplan defended its use of credit histories in the hiring process, claiming that after it discovered system breaches that allowed business officers to misappropriate student funds, it began using credit reports to assess individuals applying for financial and operational positions. Further, it claimed it reviews credit histories to determine whether individuals are under “financial stress or burdens” that might compromise their ethical obligations.

To show there was a disparate impact on black applicants, the EEOC relied on its expert, Dr. Kevin Murphy, to conduct a statistical analysis. In doing so, he analyzed the applicants rejected by Kaplan based on their poor credit reports. Because there was insufficient information to identify the race of all the applicants, Murphy attempted to use other methods to determine the applicants’ race. Specifically, he sought records from state motor vehicle departments. However, in some cases, the records provided only a picture of the applicant and didn’t specify race. He then used a group of five “race raters” to determine the applicants’ race from the pictures.

Kaplan asked the court to exclude Murphy’s report and testimony and dismiss the EEOC’s case, arguing that his method of determining race was scientifically unsound. On January 28, 2013, the court agreed. Based on a lack of reliable, scientifically sound evidence to link the use of credit reports to race, the court dismissed the case before trial in Kaplan’s favor. EEOC v. Kaplan Higher Edu. Corp., No. 1:10-cv-2882 (N.D. Ohio, 2010).

EEOC slapped with $750,000 sanction in PeopleMark case
In its first high-profile background check lawsuit filed in 2008, the EEOC filed a class action lawsuit against PeopleMark, a temporary staffing company, alleging it maintained a policy prohibiting the hiring of any person with a criminal record. According to the commission, the blanket no-hire policy had a disparate impact on African Americans. However, as the case progressed, it became clear that assertion was false.

Additionally, the EEOC claimed that certain individuals were “victims” of the allegedly discriminatory policy when in fact they either didn’t have criminal records or had been hired by PeopleMark. After two years of investigation and a year and a half of litigation, the EEOC finally acknowledged it could neither prove that PeopleMark had a blanket no-hire policy nor identify candidates against whom the staffing agency had discriminated, so it agreed to dismiss the case.

PeopleMark responded by asking the court to impose sanctions on the EEOC because it continued to pursue litigation despite overwhelming evidence that the case had no merit. In March 2011, the court agreed, awarding PeopleMark $750,000 for partial attorneys’ fees, expert witness fees, and other litigation expenses. EEOC v. Peoplemark, Inc., No. 08-cv-907 (W.D. Mich., 2008).

3rd EEOC class action nearing crucial decision
A third class action lawsuit alleging disparate impact based on the use of criminal and credit records was recently decided in Maryland federal court. In September 2009, the EEOC filed a class action against Freeman Companies, a convention and trade show production company, alleging it commits gender and race discrimination when it considers candidates’ credit and criminal history during the hiring process.

To show that male and African-American candidates were disproportionately adversely affected by Freeman’s background check practices, the EEOC presented reports from two experts, one of them Murphy, who testified in the Kaplan case. Just as Kaplan did, Freeman has asked the court to exclude the experts’ reports and dismiss the case on grounds that their opinions aren’t based on sufficient data or reliable methods.

The court granted summary judgement to Freeman. In making a summary judgment determination, a court examines whether there are any genuine issues of material fact. If there’s no dispute, the court can decide to grant summary judgment and dismiss the claims without a trial. In its decision, the court noted:

Because of the higher rate of incarceration of African-Americans than Caucasians, indiscriminate use of criminal history information might have the predictable result of excluding African-Americans at a higher rate than Caucasians. Indeed, the higher incarceration rate might cause one to fear that any use of criminal history information would be in violation of Title VII. However, this is simply not the case. Careful and appropriate use of criminal history information is an important, and in many cases essential, part of the employment process of employers throughout the United States. As Freeman points out, even the EEOC conducts criminal background investigations as a condition of employment for all employees, and conducts credit background checks on approximately 90 percent of its positions. ECF No. 114-44 at 7-8.

Thus, it is not the mere use of any criminal history or credit information generally that is a matter of concern under Title VII, but rather what specific information is used and how it is used. Because of this, it is simply not enough to demonstrate that criminal history or credit information has been used. Rather, a disparate impact case must be carefully focused on a specific practice with an evidentiary foundation showing that it has a disparate impact because of a prohibited factor.

EEOC v. Freeman, No. 8:08-cv-02573 (D. Md., 2009).

Private litigation alleges discriminatory use of credit checks
The EEOC isn’t the only party pursuing discrimination claims based on an employer’s use of background check information. Private litigants are filing their own class action lawsuits as well. A pending class action filed against the University of Miami alleges that the school’s use of credit checks had a disparate impact on African-American and Latino candidates. Two proposed class representatives, one African-American and one Latino, filed the case on behalf of all similarly situated candidates.

In March 2011, the court dismissed all claims related to Latino candidates after ruling that the Latino litigant failed to exhaust her administrative remedies before joining the lawsuit. Thus, the case proceeded on the claim of discriminatory impact on African Americans only. Appolon v. Univ. of Miami, No. 1:10-cv-24166 (S.D. Fla., 2010).

In early 2011, an African-American laborer filed a race discrimination class action against an Illinois construction company alleging that the company’s use of credit reports in hiring had a disparate impact on black applicants. After four months, the parties entered into a private settlement, and the court dismissed the case. Sutton v. Berglund Constr., No. 1:11-cv-152 (N.D. Ill., 2011).

Bottom line
Despite the EEOC’s struggles in court, it is clear that the use of credit reports and criminal history records in hiring decisions is ripe for litigation, with both the commission and individuals pursuing claims and seeking damages. As evidenced by the EEOC’s $3.13 million settlement with Pepsi based on its use of criminal history checks, the cost associated with disparate impact claims can be high.

Employers need to be careful and deliberate in how they use credit reports and criminal history information for hiring purposes. In April 2012, the EEOC published new guidance on the use of arrest and conviction records in employment decisions. It recommends that employers develop a targeted background check policy that, at a minimum, considers the nature of the crime, the time elapsed since the offense, and the nature of the job for which the individual is applying. It also recommends conducting an individualized assessment before making a final employment decision, including discussing an individual’s criminal record with him.

Additionally, you should request and use credit reports only when the information is job-related―for example, when obtaining a report is required by law or an individual applies for a position involving financial responsibility or high-level managerial decisions. Further, you should conduct credit checks only after making a conditional job offer so you can’t be accused of weeding out candidates prematurely on the basis of bad credit.

Finally, it’s important to note that eight states currently have statutory restrictions on the use of credit histories in employment decisions, so if you have operations in California, Connecticut, Hawaii, Illinois, Maryland, Oregon, Vermont, or Washington, you must comply with those restrictions.