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Employers should brace themselves for more legislation curtailing their use of credit reports in checking out job applicants as well as lawsuits alleging civil rights violations for using the reports in hiring decisions, observers warn.
Observers say an Oct. 20 hearing by the U.S. Equal Employment Opportunity Commission signals increased agency focus on the issue and could herald more litigation by the EEOC and plaintiffs attorneys acting in response to the EEOC's interest.
Already, a proposed class action has been filed in Miami federal court by a woman who was denied a job because of her credit report and observers say plaintiffs attorneys will closely watch how the case develops.
While only four states have enacted laws in this area, legislation was pending in 20 states and the District of Columbia as of September, according to the Denver-based National Conference of State Legislatures.
Complying with existing federal and state laws likely will be a challenge for multistate employers because of differing language, observers say.
On the federal level, the Fair Credit Reporting Act addresses issues related to credit checks. A U.S. House committee held a September hearing on H.R. 3149, the Equal Employment for All Act, which would amend the FCRA to prohibit the use of credit reports in making employment decisions. However, the bill never got out of committee and now is given little near-term chance of passage because of the midterm elections.
According to a survey earlier this year by the Alexandria, Va.-based Society for Human Resource Management, about 60% of employers use credit checks in evaluating job applicants, usually after a contingent job offer or job interview. Only 13% conduct credit checks for all candidates.
For example, rather than cashiers, retailers focus running credit checks on higher-level individuals who are “working unsupervised in a position of trust,” said Laura Randazzo, vp of global services at Lake Forest, Calif.-based Accurate Background Inc. and chair of the Morrisville, N.C.-based National Assn. of Professional Background Screeners.
A key issue for the EEOC, observers say, is whether using credit checks has a disparate impact on minorities and other protected classes because they have a higher poverty rate and are therefore more likely to have lower credit scores.
Furthermore, said Dianna Johnston, EEOC senior attorney adviser, “There's no evidence that there's any relationship between credit history and job performance. It's just that employers have an instinctive feeling that it might be a proxy” for qualities of integrity and reliability, she said of the issue that the EEOC is still studying.
Defense attorneys, though, say there is little if any credible evidence as to whether credit checks have a disparate impact on these groups.
Enhancing concern by the EEOC and supporters of legislation in this area is the extent to which the recession may have damaged workers' credit histories, observers say. But they also say employers' ability to screen applicants who could damage or even bankrupt their firms also is critical. The issue is “of tremendous concern to employers,” said Jerrold F. Goldberg, a shareholder with law firm Greenberg Traurig L.L.P. in New York.
“Obviously, this is something they feel can really help them in determining whether an applicant is appropriate; and the more the government restricts their ability to do that kind of checking, the more they feel it's restricting their right to get the best people,” Mr. Goldberg said.
While it is only one of several factors used by employers in evaluating a candidate, it is an “extremely valuable piece of information,” such as in evaluating managerial applicants, said Nate J. Kowalski, a partner with law firm Atkinson, Andelson, Loya, Ruud & Romo P.L.C. in Cerritos, Calif.
Meanwhile, on Nov. 22, a private lawsuit was filed in Miami federal court on behalf of Loudy Appolon, who is black, alleging that her job offer as a senior medical collector was withdrawn after the defendants, the University of Miami and its Leonard M. Miller School of Medicine, learned of her credit history, even though it “did not in any way reflect poorly on her character or her ability to do the job defendants had offered her.”
It alleges the defendants violated Title VII of the Civil Rights Act of 1964 and seeks class action status. A medical school spokeswoman had no comment.
“My guess is, a lot of people will be watching” this case to see its outcome, said Philip C. Gordon, a shareholder with law firm Littler Mendelson P.C. in Denver.
Meanwhile, more litigation can be expected, say observers.
“You're apt to see a fairly large number of cases being filed” in light of credit check reports' widespread use and the EEOC and plaintiff bar's interest in the issue, said Michael W. Fox, a shareholder with law firm Ogletree, Deakins, Nash, Smoak & Stewart P.C. in Austin, Texas.
State legislation also is a concern. Washington and Hawaii enacted laws limiting employers' use of credit checks in 2007 and 2009, respectively; Oregon's law took effect in July and Illinois' law will do so in January. More states approving such laws will lead to more litigation, Mr. Fox said.
State laws also could lead to compliance issues for multistate employers, say observers.
“The challenge for employers with all this state legislation is that (it) starts with the premise that employers cannot use credit history for employment decisions, and then carves out exceptions,” Mr. Gordon said.
But because the statutes' language varies by state, “it's very hard for a multistate employer to establish a national policy for using credit information in employment decisions,” Mr. Gordon said.
Meanwhile, Pamela Q. Devata, a partner with law firm Seyfarth Shaw L.L.P. in Chicago, said employers should be sure to apply their background-screening policies consistently and talk with applicants about any issues that arise concerning their credit reports.