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Consistent Reform Needed to
Block Credit Checks in Job Applications

The National Law Journal
Monday, June 29, 2015

ook County, Illinois, which includes Chicago, and New York City passed ordinances in May that generally bar the use of a person’s credit history as a criterion for hiring and other employment decisions. These enactments are significant, as they represent determinations by the second largest county and largest city in the country to address a major social problem. Ten states have similar statutes.

By contrast, the Equal Employment for All Act, their federal counterpart, introduced by Massachusetts Sen. Elizabeth Warren and Tennessee Rep. Steve Cohen in 2013, died in the 113th Congress. Given the extreme polarization at the national level, reform in this area will likely continue to be spotty and piecemeal.

Why has the use of credit checks to screen prospective employees, as opposed to applicants for personal loans or home mortgages, become controversial? Its proponents contend that it makes good sense as a means to avoid theft from a business or its clientele and to protect against liability for negligent hiring. Some simply equate good credit with good character, an indicator of trustworthiness.

The widespread acceptance of such rationales is reflected in the prevalence of credit inquiries. According to a 2012 survey by the Society for Human Resource Management, about 47 percent of employers use them in hiring—34 percent for certain positions and 13 percent in every case.

The practice erects a daunting obstacle for many otherwise qualified candidates. Blunderbuss policies can sweep in and potentially eliminate applicants for such diverse jobs as maintenance workers, delivery drivers and ice cream servers. A 2013 study by Demos, a public policy organization, reported that one out of seven respondents with poor credit said they had been told this circumstance kept them from obtaining a particular post.

Especially in an economy still struggling to recover from the 2008 recession, credit checks fuel a vicious cycle: People who were laid off and therefore cannot pay their bills are prevented from obtaining new employment that would enable them to do so.

This Catch-22 situation is cruel, not merely unfortunate. Research discloses no link between a person’s credit standing and his or her performance at work or proclivity to steal. That is hardly surprising, since weak credit often results from unemployment and medical debt due to lack of insurance coverage rather than profligacy or bad choices. (Indeed, a 2007 study, which was co-authored by Warren, found medical costs responsible for 62 percent of bankruptcy filings.) Even if an employer might be inclined to discount “no-fault” indebtedness, it often shows up, unrevealingly, in a consumer credit report as “credit card debt.” Moreover, employers do not necessarily afford an applicant the chance to explain adverse information. The lack of such opportunity is particularly troubling in the all too common cases of inaccurate data, which are notoriously hard to rectify.

Finally, like many invidious practices, this one affects minority communities disproportionately. According to the Demos survey, 65 percent of white respondents had good or excellent credit scores, while more than 50 percent of blacks reported fair or bad credit. The damage wrought by predatory lending in communities of color has only compounded historic problems of discrimination in employment. Yet the courts have not been receptive to challenges to credit checks in hiring based on the disparate-impact theory.

Unfortunately, the Equal Employment Opportunity Commission, which has spearheaded such litigation, has stumbled badly in its efforts. Within a few months of each other, two federal courts of appeal affirmed the dismissal on summary judgment of the EEOC’s complaints. Both decisions rested on the propriety of the district courts’ excluding testimony by the agency’s expert witness, Kevin Murphy, as unreliable. In EEOC v. Kaplan Higher Ed. Corp., the U.S. Court of Appeals for the Sixth Circuit wrote a blistering opinion, saying that the agency “brought this case on the basis of a homemade methodology, crafted by a witness with no particular expertise to craft it, administered by persons with no particular expertise to administer it, tested by no one, and accepted only by the witness himself.” The Fourth Circuit also excoriated Murphy for his error-riddled work—and the EEOC for proffering it in EEOC v. Freeman.

In light of this background, state and local legislatures provide a more promising path to reform than the courts or Con­gress. The federal Fair Credit Reporting Act, on the books for 45 years, accords job applicants certain protections. For instance, employers who wish to access credit reports must notify candidates that these may be used for employment decisions and obtain the subject’s written permission. Furthermore, before taking negative action based upon it, businesses must give applicants a copy of the report; if someone is rejected because of information in it, he or she must be told that fact. Yet nothing in the Fair Credit Reporting Act prevents an employer from grounding a refusal to hire on poor credit, or on a would-be employee’s withholding consent for a credit check.

The reform laws attempt to fill this gap. Typically, though, they contain exceptions of varying scope. Reformers should continue to press lawmakers to pass legislation that topples the barrier presented by abusive credit checks.