Generally, employers who are considering obtaining background information in order to make personnel decisions should use credit checks only when credit information is job-related and can be shown to be a business necessity. For instance, a credit check may be permissible when there is a close relationship between credit information and job performance, like in employment positions that involve employees handling large amounts of money. If the credit information is not job-related and the policy turns out to have a disparate impact on people of a protected class under Title VII of the Civil Rights Act of 1964 (“Title VII“), employers may be sued for unlawful discrimination.
When obtaining or using credit background information, employers must ensure compliance with: (1) laws enforced by the Equal Employment Opportunity Commission (“EEOC“) such as Title VII (which prohibits discrimination based on protected characteristics such as race, color, national origin, and sex); (2) the Minnesota Human Rights Act (“MHRA“); (3) the Fair Credit Reporting Act (“FCRA“); and (4) any state laws that address background reports such as the Minnesota Fair Credit Reporting Act (“MFCRA“).
In addition to these established legal requirements, employers should keep track of any legal developments at the state and federal level that may affect their ability to perform credit checks on prospective and current employees. For example, Senator Elizabeth Warren introduced a bill called the Equal Employment for All Act in both 2015 and 2017 that would prohibit employers from conducting credit checks on prospective and current employees for employment purposes or for making an adverse action. In supporting this bill, Senator Warren explained that “an individual’s credit has little to no correlation with his or her ability to succeed in the workplace. Credit reports . . . are just a way to discriminate against people who have fallen on hard times.” Elizabeth Warren & Steve Cohen, Sen. Elizabeth Warren & Rep. Steve Cohen, It’s Time to Stop Employer Credit Checks, Credit Blog (Sept. 15, 2015), https://blog.credit.com/2015/09/sen-warren-rep-cohen-its-time-to-stop-employer-credit-checks-125468/. If the bill becomes law, the employer would not be able to conduct credit checks even if the candidate or employee gives consent to the employer to obtain or use the credit report for employment purposes or for making an adverse action.
EEOC Requirements for Using Credit Checks in Employment
If an employer obtains background information of an applicant or employee regardless of the source, the employer must comply with laws enforced by the Equal Employment Opportunity Commission (“EEOC“). The EEOC states that employers cannot decide to perform background checks based on the person’s race, color, national origin, sex, religion, disability, or age. For example, an employer cannot ask only women about their criminal or financial history as doing so would constitute discrimination. Further, any background information employers receive from any source must not be used to discriminate in violation of federal law. According to the EEOC, employers should:
- Apply the same standards to everyone, regardless of their race, national origin, color, sex, religion, disability, genetic information (including family medical history), or age (40 or older). For example, if you don’t reject applicants of one ethnicity with certain financial histories or criminal records, you can’t reject applicants of other ethnicities because they have the same or similar financial histories or criminal records.
- Take special care when basing employment decisions on background problems that may be more common among people of a certain race, color, national origin, sex, or religion; among people who have a disability; or among people age 40 or older. For example, employers should not use a policy or practice that excludes people with certain criminal records if the policy or practice significantly disadvantages individuals of a particular race, national origin, or another protected characteristic, and does not accurately predict who will be a responsible, reliable, or safe employee. In legal terms, the policy or practice has a “disparate impact” and is not “job related and consistent with business necessity.”
- Be prepared to make exceptions for problems revealed during a background check that were caused by a disability. For example, if you are inclined not to hire a person because of a problem caused by a disability, you should allow the person to demonstrate his or her ability to do the job – despite the negative background information – unless doing so would cause significant financial or operational difficulty.
See The EEOC and FTC joint publication, Background Checks: What Employers Need to Know, (https://www.eeoc.gov/eeoc/publications/upload/eeoc_ftc_background_checks_employers.pdf) (last visited March 18, 2019); see also The EEOC, Pre-Employment Inquiries and Financial Information, (https://www.eeoc.gov/laws/practices/financial_information.cfm) (last visited March 18, 2019).
As a general rule, to minimize the risk of discrimination claims, credit checks should be used by employers only when such information is job-related and can be shown to be consistent with a business necessity. For instance, a credit check may be permissible when there is a close relationship between credit information and job performance.
In this regard, the EEOC has provided guidance to employers regarding the use of financial information for employment purposes. According to the EEOC, “financial information” includes current or past assets, liabilities, or credit rating, bankruptcy or garnishment, refusal or cancellation of bonding, car ownership, rental or ownership of a house, length of residence at an address, charge accounts, furniture ownership, or bank accounts. EEOC, Pre-Employment Inquiries and Financial Information. The EEOC recognizes that federal law does not currently prevent employers from asking about a job applicant or employee’s financial information. But, the federal EEOC laws do prohibit employers from illegally discriminating when using financial information to make employment decisions. First, employers must not apply a financial requirement differently to different people based on their race, color, national origin, religion, sex, disability, age, or genetic information. Second, an employer must not have a financial requirement if it does not help the employer to accurately identify responsible and reliable employees, and if, at the same time, the requirement significantly disadvantages people of a particular race, color, national origin, religion, or sex. Third, an employer might have to make an exception to a financial requirement for a person who cannot meet the requirement because of a disability.
Despite the EEOC pronouncements cautioning employers against using credit reports and financial information to make employment decisions, the EEOC has failed to prevail in at least two cases involving allegations of Title VII violations arising out of an employer’s use of financial information for making employment decisions. In both cases, the EEOC alleged that the employers’ policies created a disparate impact on applicants of a protected class. The EEOC attempted to prove disparate impact with statistical evidence presented by an expert witness, which is the common way of proving disparate impact. Both the Fourth and Sixth Circuits, however, dismissed the cases due to the unreliability of the EEOC’s expert witnesses.
In E.E.O.C. v. Kaplan Higher Education, Corp., 748 F.3d 749 (6th Cir. 2014), the EEOC filed suit against Kaplan contending that Kaplan’s hiring policy created a disparate impact on African Americans. Kaplan had adopted credit checks in its hiring policy to combat misconduct by some of its financial-aid officers and executives. The EEOC alleged that Kaplan’s use of the applicants’ financial history resulted in more rejections of African American applicants than of white applicants. The EEOC provided the court with statistical evidence from an expert witness. The Sixth Circuit, however, affirmed the district court’s decision to exclude this evidence because the district court found the evidence to be unreliable according to Federal Rule of Evidence 702 and the expert witness admitted that the sample he used was not representative of Kaplan’s applicant pool.
In E.E.O.C. v. Freeman, 778 F.3d 463 (4th Cir. 2015), the EEOC filed suit alleging that the employer’s credit checks created a disparate impact on African American applicants. The employer looked into the financial history of applicants for positions that involved managing money, including access to financial information. The Fourth Circuit affirmed the district court’s decision in excluding the EEOC’s expert witness’s evidence because the district court identified an alarming number of errors and analytical fallacies in the expert’s reports, making it impossible to rely on any of his conclusions. The expert witness amended the report three times, but the reports still contained unfixed errors as well as new errors. Therefore, the Fourth Circuit held that the district court was correct in excluding this evidence and held for the employer.
While the EEOC has suffered setbacks in challenging employers’ use of credit checks in the employment context, these adverse rulings were based largely on the limitations contained in its expert witness testimony. It is conceivable that the EEOC or a private litigant, in a future case, could submit more reliable expert testimony and therefore proceed with a lawsuit alleging disparate impact due to an employer’s use of credit checks.
Avoiding Liability from Title VII Discrimination Claims When Conducting Credit Checks
While there is no comprehensive guidance on credit checks yet, both Kaplan and Freeman indicate that employers should only conduct credit checks when credit information is job-related and can be shown to be a business necessity in order to avoid potential liability for allegedly discriminatory practices. This is consistent with the EEOC’s statements found in its opinion letter and guide. The opinion letter states that an employer’s use of financial history is unlawful if it “disproportionately screens out racial minorities, women, or another protected group unless the practice is job related and consistent with business necessity.” The EEOC, Title VII: Employer Use of Credit Checks, (https://www.eeoc.gov/eeoc/foia/letters/2010/titlevii-employer-creditck.html) (last modified Mar. 29, 2010). It further explained that the employer would need to “establish that the practice is needed for it to operate safely or efficiently.” Id.
The EEOC’s guide advises against “[i]nquiry into an applicant’s current or past assets, liabilities, or credit rating, including bankruptcy or garnishment, refusal or cancellation of bonding, car ownership, rental or ownership of a house, length or residence at an address, charge accounts, furniture ownership, or bank accounts . . . because they tend to impact more adversely on minorities and females.” Sarah Crawford, Esq., Lawyers Committee for Civil Rights Under Law, (http://www.eeoc.gov/eeoc/meetings/10-20-10/crawford.cfm) (last modified Oct. 20, 2010). The EEOC further stated that employers may look into such financial information if they can prove that the information is “essential to the particular job in question.” Id. Therefore, it appears that the general rule is that employers may be liable for unlawful discrimination if there is a disparate impact on a protected class and no showing that the information is essential to the job.
MHRA Requirements for Using Credit Checks in Employment
At the state level, the Minnesota Human Rights Act protects the following classes:
- Race
- Color
- Creed
- Religion
- National origin
- Sex
- Marital status
- Familial status
- Disability
- Public assistance
- Age
- Sexual orientation
- Local human rights commission activity
Bills were introduced to include credit history as a protected class in Minnesota; currently, however, the MHRA does not prohibit credit checks. The Minnesota Department of Human Rights (“MDHR“), which enforces the MHRA, recognizes that the practice of conducting credit history checks is not discriminatory. MDHR, Use of Credit Checks on Applicants. In the view of the MDHR, however, credit checks on applicants may prove problematic. Applicants’ credit records could reveal characteristics protected by the MHRA such as marital status, date of birth or public assistance status. Rejecting applicants on the basis of poor creditworthiness or history could have a disproportionately adverse impact on applicants who receive public assistance or who are of a particular race or marital status. The MDHR has suggested that employers may choose to perform credit checks only on individuals being offered certain jobs where money handling is an essential job function. An employer may need to justify such inquiries, and it may want to minimize its exposure, should the practice occur and then be challenged.
Thus, Minnesota employers wishing to utilize credit reports for making employment decisions face risks under the MHRA similar to those posed by the federal laws enforced by the EEOC. Further, the potential liability for using credit reports under state law is even greater than that under federal law, because the MHRA recognizes certain protected characteristics (e.g., status with respect to public assistance, marital status, and familial status) that are not recognized under federal law. Conceivably, a plaintiff may be able to establish a claim for disparate impact discrimination against job applicants and employees receiving public assistance based on an employer’s policy against individuals with poor credit histories. Further, information contained in credit reports frequently reveals marital and familial status information, and conceivably plaintiffs could allege that employers unlawfully used such information to make employment decisions such as whether to extend an employment offer.
FCRA Requirements for Using Credit Checks in Employment
Minnesota employers that obtain credit reports on applicants and employees must comply with the federal Fair Credit Reporting Act. The FCRA provides that if an employer obtains background information, including credit reports, from a consumer reporting agency, the employer must:
- Obtain written consent from the applicant or employee to conduct a background check;
- Give written notice to the applicant or employee that the information obtained may be used for decisions about his or her employment;
- Certify to the company providing the credit report that the employer will:
- Use the information for employment purposes only;
- Not use the information in violation of any federal or state equal opportunity law;
- Obtain all necessary disclosures and consents from the applicant;
- Provide the applicant with the appropriate notices in the event that adverse action is taken against the applicant based, in whole or in part, on the contents of the consumer report; and
- Provide additional information required by law if an investigative consumer report is requested.
- Before taking adverse action based on a credit report:
- Give the applicant or employee notice and a copy of the background report on which the decision was based; and
- Present a copy of the Consumer Financial Protection Bureau’s disclosure entitled, “A Summary of Your Rights Under the Fair Credit Reporting Act.”
- After taking the adverse action based on the credit report, inform the applicant or employee orally, in writing, or electronically:
- That the adverse action was based in whole, or in part, on the information in the consumer report;
- The name, address, and telephone number (including a toll-free telephone number) of the consumer reporting agency that provided the information to the employer;
- That the consumer reporting agency did not make the decision to take adverse action and cannot provide the applicant with specific reasons as to why adverse action was taken;
- That the consumer may request a free copy of the consumer report from the consumer reporting agency requesting it within 60 days (pursuant to 15 U.S.C. § 1681j); and
- That under 15 U.S.C. § 1681j, the consumer may dispute any information in the report with the consumer reporting agency. If a copy of the consumer report is requested, a copy of the document, “A Summary of Your Rights Under the Fair Credit Reporting Act” must be included.
Minnesota FCRA Requirements for Using Credit Checks in Employment
States may also impose their own requirements for background checks. Minnesota’s FCRA, Minn. Stat. § 13C.02, is similar to the federal law except it requires employers to:
- Provide notice in the application that the employer will obtain background information;
- Allow the applicant to indicate on the application whether he or she would like a copy of the report; and
- Notify the consumer reporting agency to send a copy of the report directly to the applicant for free if the applicant requests a copy.
Key Takeaways for Minnesota Employers Conducting Credit Checks
Currently, Minnesota employers are allowed to perform credit checks on job applicants and employees, but they may not use such credit checks to intentionally discriminate against protected groups or by creating an “adverse impact” against protected groups such as minorities and those receiving public assistance. The best way to minimize such claims is to ensure that the request for a credit report is job-related and consistent with a business necessity (e.g., limiting the requirement to employees with money-handling duties or financial responsibilities). Further, Minnesota employers must comply with the intricate requirements of the FCRA and MHRA when utilizing credit reports in the employment context. Finally, employers should continue to monitor legal developments regarding credit checks at the state and federal level, such as the proposed Equal Employment for All Act of 2017 sponsored by Senator Elizabeth Warren that would prohibit all employers from conducting credit checks on candidates and employees for employment purposes or for making adverse action.
If your Minnesota business has questions regarding the requirements for obtaining credit reports from job applicants or employees, or wishes to develop a lawful procedure for requiring such credit reports in the employment context, contact one of the Minnesota employment law attorneys at Trepanier MacGillis Battina P.A.
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About the Author:
Minnesota employment attorney Craig W. Trepanier advises employers in a number of areas, including pre-employment screening, credit checks, criminal background checks, and compliance with the Fair Credit Reporting Act (FCRA) and Minnesota Fair Credit Reporting Act. Craig may be reached at 612.455.0502 or craig@trepanierlaw.com. Trepanier MacGillis Battina P.A. is a Minnesota employment law firm and located in Minneapolis, Minnesota.
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