Navigating the Murky Waters of Credit Checks: When They Are Appropriate to use in Employment Screening

Credit checks have been a hot topic in the employment screening industry for a number of years; however, two recent lawsuits involving the Equal Employment Opportunity Commission (EEOC) have drawn attention to the subject outside of the industry.

In the case of Equal Employment Opportunity Commission (EEOC) v. Kaplan Higher Education Corporation (Kaplan), the employer implemented credit checks for all positions involving “financial stress or burdens”, which the EEOC argued discriminated against African-American applicants. The lawsuit was dismissed by a federal district judge on the grounds that Kaplan did not record the race of applicants and conducted the screening only on relevant positions. The EEOC was subject to heavy criticism following the dismissal when it was revealed that they conducted credit checks, the same type of background check they sued the defendant for, as part of their screening process for 84 out of 97 positions they hired. More on the opinion can be found in the article by Scott J. Wenner of Schnader Harrison Segal & Lewis LLP.

Similarly in EEOC v. Freeman, U.S. District Court Judge Roger W. Titus dismissed the case alleging that the corporate events provider’s use of criminal and credit background checks had a disparate impact against African-American, Hispanic, and male job applicants.

While credit checks may be frowned upon by the EEOC, many employers and industry experts will attest to their value when screening candidates for positions involving fiduciary responsibility. They are a useful tool for limiting the potential liability of fraud, theft, and various white-collar crimes.

Companies are faced with a dilemma, either use credit checks as part of their screening process and risk hearing from the EEOC or avoid credit checks and open themselves up to potential loss or damages. So how does an employer go about credit checks?

Credit checks are useful in the right situations. The question employers need to ask themselves is “when is it appropriate to use credit checks as part of our screening process?” While a history of bad debt and financial duress may affect an applicant’s eligibility for investment advisor or comptroller roles, it may not be relevant for a receptionist, teacher, or maintenance worker. Some of the questions you may use to determine if an applicant’s credit is relevant to the position they’ve applied for are:

• Am I running a credit check out of business necessity?
• Does this position involve handling cash or financial accounts?
• Is this a senior level position (for example, high-level manager, corporate officer, etc.)?

Secondly, once you’ve received the results of the credit check you’ll need to determine what parts are relevant enough to disqualify an applicant from employment. For example, a missed credit card payment is much different than a history of collections, bad debt write-offs, and bankruptcies.

A background screening policy covering when and how background check components are to be used should be in place prior to hiring to ensure fairness to all applicants.