Credit Checks Where Credit Checks Are Due

One of the more controversial applicant screening methods adopted by employers in recent years is the credit check. Traditionally reserved for situations in which a consumer seeks financing for expensive purchases (like houses or cars), credit checks are now a common hurdle for job-seekers.

After suffering a number of thefts by employees, Kaplan Higher Education Corporation added credit checks to their own applicant screening process ten years ago, ostensibly to identify and exclude applicants more inclined to steal. The Equal Employment Opportunity Commission took issue with this, and sued Kaplan in the United States District Court for the Northern District of Ohio (Cleveland), alleging that the credit check process had a "disparate impact" on African-American applicants. A disparate impact is a form of discrimination prohibited by Title VII of the federal Civil Rights Act.

To prove this, the EEOC attempted to introduce the findings of psychologist Kevin Murphy, who claimed to have developed a system of proving that African-Americans were more frequently - and unfairly - screened out of the hiring process by credit checks. Unfortunately for the EEOC, the district court rejected Murphy's expert testimony and ruled in favor of Kaplan.

So the EEOC appealed to the U.S. Court of Appeals for the Sixth Circuit (Michigan, Ohio, Kentucky, and Tennessee), arguing that the district court's exclusion of Murphy's findings was a reversible error. Unfortunately again for the EEOC, the Sixth Circuit disagreed and affirmed the district court ruling. Part of the reason (other than Murphy's insufficient expert credibility) was that the EEOC actually uses the same credit check system to screen their own applicants:

In this case the EEOC sued the defendants for using the same type of background check that the EEOC itself uses. The EEOC's personnel handbook recites that "[o]verdue just debts increase temptation to commit illegal or unethical acts as a means of gaining funds to meet financial obligations."

EEOC v. Kaplan, No. 13-3408, 2 (6th Cir. 2014).

Our legal system gives private businesses a lot of deference when it comes to their employment practices. As long as those practices aren't discriminatory, harassing, or otherwise unfair to people based on various classifications including race, age, sex, or religion, courts generally do not interfere with them.

In this case, the EEOC alleged that credit checks were a form of racial discrimination in the hiring process. The courts rejected this argument because the EEOC couldn't offer a reliable way to prove that allegation. What the courts didn't consider at all was whether or not credit checks really do identify potential theft risks among applicants; do overdue debts really increase the temptation to commit illegal or unethical acts at the workplace?

The Cato Institute, today gloating about the Sixth Circuit's ruling, and indeed the EEOC itself, assume as a fact that applicant credit checks truly are a "reasonable business practice." And certainly, the federal Fair Credit Reporting Act allows them. However, critics such as Amy Traub at Demos.org have studied the use of credit checks in the hiring process and find many faults: American health care, education, and daily living are expensive and lots of people (even honest ones who would never steal) carry lots of debt; the credit reporting system is flawed and often unreliable; and while Kevin Murphy couldn't prove it, there does seem to be discrimination - if not at the time of hiring, then in the underlying report itself. Other critics have specifically challenged the assumption that bad credit makes someone more likely to steal from their employers. And Massachusetts Senator Elizabeth Warren has introduced new federal legislation to ban pre-employment credit checks entirely, citing evidence that they have no reasonable business justification and unfairly exclude people from the job market.

In the wake of the Sixth Circuit ruling, this does appear to be a legislative issue, not a judicial one. Unless believable experts can prove in court that pre-employment credit checks create a disparate racial impact on job applicants, the best method for defeating them is through new laws. Otherwise, the courts will have little choice but to defer to business judgment. As long as a non-discriminatory business practice is "reasonable," a business can do whatever it wants, and mere "reasonableness" is a low standard indeed.