Employers Relying on Background Checks Face Increased Scrutiny

Laws limiting an employer’s use of criminal background checks and credit histories are nothing new.  The Fair Credit Reporting Act (FCRA) requires employers conducting background checks to obtain written authorization from the applicant (or employee) and provide disclosures when an adverse action is anticipated based on information obtained from the background check.

State laws add additional restrictions.  For example, Illinois prohibits employers from basing employment decisions on an employee’s arrest (not conviction) record. In New York, it is illegal to base employment decisions on arrests that did not result in a conviction, though employers may base employment decisions on pending arrests.  Moreover, New York employers cannot make adverse hiring or termination decisions based upon a conviction record unless:  (i) there is a direct relationship between one or more of the previous criminal offenses and the specific employment sought or held by the individual; and (ii) the employment would involve an unreasonable risk to property or to the safety or welfare of specific individuals or the general public.

Employers should take note, however, of a number of new laws under consideration that would further restrict how and when employers use criminal and other background information to make employment decisions.  Additionally, state and federal agencies appear to be increasing enforcement efforts of existing laws.

EEOC Steps Up Litigation Efforts

The EEOC, while recognizing an employer’s right to consider arrest information in certain circumstances, nevertheless maintains that the automatic exclusion of applicants on the basis of arrest or conviction is a violation of Title VII.  To this end, the EEOC has launched its “E-RACE” (Eradicating Racism and Colorism in Employment) initiative, which is geared toward eliminating “systematic discrimination.”  Employers can expect that the EEOC will pay more attention to pre-employment inquiries, especially job application questions regarding convictions, that may have a disparate impact on protected classes of applicants.  Two recently filed lawsuits shed some light on the types of claims the Commission will pursue.  In Tennessee, the EEOC filed a race discrimination lawsuit against Franks, Inc., accusing the company of refusing to hire two African-American applicants with felony convictions, despite hiring a white applicant with multiple felony convictions a year earlier.  In Maryland, the EEOC filed a race and national origin discrimination lawsuit against Freeman Companies, challenging the company’s use of criminal background checks and credit histories in making hiring decisions.

Pennsylvania Human Rights Commission Presumes Disparate Impact

The Pennsylvania Human Relations Commission (PHRC) recently issued draft “Policy Guidance” stating that it will, going forward, presume that an employer’s policy of excluding individuals from employment on the basis of a prior criminal conviction has a disparate impact on African-Americans and Hispanics.  In order to rebut that presumption, an employer would have to produce conviction data from a narrower geographic area than Pennsylvania or conviction data for the specific crimes being screened by the employer, to show that African-Americans and Hispanics are not convicted at a disproportionate rate in those instances.  An employer may also rebut the PHRC’s presumption if it can demonstrate that its practice of rejecting some job applicants based on conviction records is justified by a legitimate business necessity, which must be established through “some level of empirical proof” that the applicant was convicted of a crime that poses an “unacceptable level of risk.”  But even if the employer establishes a business necessity defense, the employer may still prevail on a disparate impact theory if it can demonstrate that the employer could have employed an alternative, less discriminatory policy or procedure to satisfy its legitimate business needs.

Proposed Federal Legislation Concerning Credit Checks

A bill titled the “Equal Employment for All Act,” which would amend the FCRA to prohibit the use of consumer credit checks to make adverse employment decisions on current and prospective employees, would allow for the use of credit checks only in the following circumstances:  (i) when the consumer applies for, or currently holds, employment that requires national security or Federal Deposit Insurance Corporation clearance; (ii) when the consumer applies for, or currently holds, employment with a state or local government agency that otherwise requires use of a consumer report; (iii) when the consumer applies for, or currently holds, a supervisory, managerial, professional or executive position at a financial institution; or (iv) when otherwise required by law.

On May 12, 2010, the House Subcommittee on Financial Institutions and Consumer Credit held a hearing on the subject of “Use of Credit Information Beyond Learning:  Issues and Reform Proposals.”  The subcommittee’s chairman expressed concern that bad credit reports in this economy are linked more closely to an individual’s inability to get a job than to an individual’s bad judgment with respect to personal finances.  The chairman stated that “the current system facilitates the denial of employment to those who have bad debt, even though bad debt oftentimes results from the denial of employment.”  The subcommittee also focused on the effect of negative credit reports due to delinquent medical payments, because medical debt does not indicate the same kind of bad decision making that credit card debt implies.  The bill was referred to the House Committee on Financial Services, where it is still pending.

State Laws

Not to be outdone by their counterparts in Congress, a number of state legislatures are considering laws that would proscribe an employer’s ability to obtain and use information obtained through credit checks.  In March 2010, the Illinois House passed the Employee Credit Privacy Act (ECPA), which would prohibit employers from inquiring about or using an employee’s or prospective employee’s credit history as a basis for hiring, recruitment, discharge, or compensation.  Employers would also be prohibited from retaliating or discriminating against a person who opposes a violation of the ECPA or participates in the investigation of the violation.  Excluded from the ECPA’s coverage would be financial institutions, public safety agencies and government agencies that otherwise require use of the employee’s or applicant’s credit score.  This bill is now being considered in the Illinois Senate.

What Should Employers Do

Employers should review their policies concerning the use of background and credit checks and ensure that they are using them for legitimate business reasons.  Employers taking action based on criminal arrests or convictions should ensure they are aware of any state or local laws governing such decisions, and consider whether the conviction (or arrest) is truly related to the individual’s job.