The EEOC’s decision to dedicate its first public meeting in more than a year, held on October 20, 2010, to employers’ use of credit history as an employment screening tool magnified the recent focus of legislators and regulators on that topic. As discussed in several recent posts, four states — Hawaii, Illinois, Oregon, and Washington — have recently imposed significant restrictions on employers’ use of credit history for employment purposes. Similar legislation is pending in more than fifteen states, and federal legislation, which would impose restrictions even broader than existing state laws, is pending in Congress. In light of these legislative developments, the EEOC meeting was particularly significant for two reasons.

First, none of the participants, comprising representatives of consumer and business interests as well as two academics, were able to cite a single study that proved or disproved the existence of a specific link between any particular credit profile and poor job performance or a propensity to engage in dishonest or criminal conduct. In fact, the two academics’ prepared statements emphasized the dearth of empirical data in this area.

For employers, the absence of reliable studies highlights the need to tread cautiously when using credit history to make employment decisions. Jumping to conclusions not supported by empirical data could, for example, result in the rejection of an applicant whose financial difficulties might actually have motivated the applicant to exceed expectations. In addition, the employer could open itself to allegations that its purported reliance on credit history was a subterfuge for discrimination against the rejected applicant.

For legislators, the danger is that they will write into law restrictions on the use of credit history that are far too broad. The recently enacted state laws generally prohibit the use of credit history for employment decisions based on the premise that credit generally is not a relevant factor in employment decision-making subject to certain narrow exceptions, such as jobs involving substantial financial responsibilities. If future studies demonstrate that credit history is a reliable predictor, these exceptions could, in retrospect, be far too narrow. Alternatively, the undeveloped state of the evidence arguably supports an approach, like Washington’s, which prohibits the use of credit history unless “substantially job related” without attempting to define that phrase’s meaning. This approach creates some uncertainty but also leaves room for interpretation by the courts as reliable, empirical data is developed.

The second reason employers should take note of the EEOC meeting is the expressed concern of the EEOC and consumer representatives that employers’ use of credit history has a “disparate impact” on African Americans, Hispanics, and the disabled. The term “disparate impact” connotes a facially neutral policy, such as disqualification of all applicants who have filed for bankruptcy or had wages garnished in the preceding twelve months, that disproportionately excludes from a benefit, such as employment, one or more classes of individuals protected by anti-discrimination laws.

Here again, the EEOC meeting highlighted the absence of reliable studies proving the point one way or the other. Participants in the meeting, for example, cited to studies by the Federal Reserve Board and Fannie Mae showing that African Americans and Hispanics tend to have lower credit scores than Caucasians. However, as representatives of business interests pointed out, the credit bureaus do not disclose credit scores to employers as part of a background check report that includes credit history. Consequently, studies that focus on disparities in credit scores based on race or ethnicity have little or no utility when addressing the question whether employers’ use of credit history has a disparate impact on any protected class.

At bottom, the EEOC meeting appears to be the start of the agency’s effort to scrutinize employers’ use of credit history for employment decisions. That effort likely will have momentum for as long as millions of Americans with damaged credit struggle to find work and provides yet another reason for employers to use credit history cautiously.

This entry was written by Philip L. Gordon.