Should You Use Credit Reports on Applicants and Employees

By Renee Myers

Jun. 26, 2007

A class-action lawsuit was recently filed against RadioShack alleging that the company’s practice of using credit information in hiring decisions discriminated against minorities. The lawsuit specifically asserts that the practice of using such credit information, while neutral on its face, has a disparate impact on African Americans and Hispanics, resulting in individuals from those minority groups being denied employment more frequently than non-minority applicants.

    In the employment context, the Federal Fair Credit Reporting Act allows employers to use consumer reports for “employment purposes,” which include employment, promotion, reassignment or retention as an employee. But an employer does so at its own risk, which can be substantial.

    If an employer wants to utilize a consumer report in making employment decisions, it must strictly adhere to the following FCRA procedures:

  • Clearly and conspicuously disclose in writing that a consumer report may be obtained, and the purpose for which the information will be used.

  • Obtain written authorization from the individual before obtaining the report.

  • Certify that the required disclosure has been made to the applicant or employee, that the information will not be utilized in violation of state or federal EEO laws, and that a copy of the report and summary of rights will be provided if an adverse decision is based on the report.

    While a person may refuse to release his or her credit report, courts have made it clear that an employer is permitted under the Fair Credit Reporting Act to take adverse action against an employee or applicant who refuses to sign an authorization for an employer to obtain a report. (The act “does not prohibit an employer from taking adverse action against an employee or applicant who refuses to authorize the employer to procure a consumer report.”)

    One court noted: “It is clear that Congress desired to give employers the right to obtain consumer reports on their employees, since that information might bear on their qualifications for employment. Congress recognized a legitimate need on the part of employers to review their employees’ credit standing, as well as their character and general reputation.”

    The court held that it would be inconsistent with the intent of the law to allow applicants to be able to refuse an employer’s request for authorization and still maintain eligibility for hiring consideration. Therefore, while an employer may not obtain a consumer credit report on a job candidate without having a properly executed authorization, the employer may require the authorization to be executed as a condition of employment.

    If, after receiving the report, the applicant or employee is subjected to an adverse decision or action (such as a refusal to hire or promote, a demotion, or an employment termination) that is in any way based on the report (in whole or in part), the employer must provide the employee or applicant with:

  • The name, address and toll-free telephone number of the agency from which it received the report.

  • Assurance that the agency itself did not make the adverse decision.

  • Confirmation that a copy of the consumer credit report relied upon can be obtained from the agency free of charge during the next 60 days.

  • An explanation of the right to dispute the completeness or accuracy of the information contained in the report.

  • Failure to comply with any of the provisions of the Fair Credit Reporting Act can lead to litigation and awards for damages, including punitive damages and reasonable attorneys’ fees.

    While these requirements presumably provide restrictions on the proper use of consumer credit reports by employers and allow employees or applicants an opportunity to respond or correct inaccurate or misleading information contained in the credit reports, it is interesting to note that once the adverse action is taken, there is no legal obligation on the part of the employer to reverse the decision if the employee or applicant ultimately establishes the information relied upon in the report was inaccurate.

    Despite the rather burdensome procedural aspects of using consumer credit reports in employment decisions, employers often continue to rely on them because of the belief that people with good credit make good employees. Specifically, employers believe that employees with good credit histories are less likely to steal or commit other crimes and are more responsible.

    Credit reports can reveal bankruptcies, late payments, overdrawn credit and debt collection activity. Such information may be evidence of the suitability of an applicant for positions that deal with cash, corporate finance or sensitive client information. It is reasonable to expect employees who handle large funds, such as payroll, to have backgrounds free of criminal activity or debt or credit issues that may motivate theft.

    However, the real danger of relying too heavily on information contained in such reports comes in the form of discrimination claims like the RadioShack complaint noted above. In such cases, the plaintiff generally alleges that the employer’s reliance on credit reports for hiring or promoting individuals has a disparate impact on minorities in violation of Title VII of the Civil Rights Act of 1964.

    In its Guide to Pre-employment Inquiries, the EEOC has previously stated that rejecting applicants based on credit records has a disparate impact on minority groups because such groups tend to be poorer and have more credit difficulties than non-minority groups. The EEOC therefore advised employers that relying on credit reports to make employment decisions is unlawful unless the employer can demonstrate business necessity. Business necessity means tying it to the particular duties of the job in question.

    In the pivotal case of Griggs v. Duke Power and Light, the U.S. Supreme Court found that the employer’s practice of requiring a high school diploma and successful scores on two aptitude tests for all applicants except those in the lowest-paying jobs was unlawful. The court found that the requirements operated to disqualify minority applicants at a substantially higher rate than non-minority applicants and were not related to successful job performance and therefore violated Title VII. As a result, employers are cautioned to use mechanical testing and measuring devices (such as credit scores) only if they can demonstrate a “reasonable measure of job performance.”

    So while there are many valid reasons for employers to request and review credit reports of current and prospective employees—most importantly where the employees will hold positions of financial responsibility—these benefits must be weighed against not only the limitations imposed by the Fair Credit Reporting Act but also the risks of being accused of utilizing screening methods that have a disparate impact on minorities. Employers should not require credit reports for all applicants or employees, but limit requests to those positions where it has been demonstrated that an employee’s credit history has a meaningful relationship to job performance.

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