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Lawmakers take aim at employer credit-check policies

August 7th, 2009  |  Pamela Wolf

>The practice of running credit checks on potential employees poses a substantial threat to increasing numbers of job applicants given the harsh economic climate that has rendered so many unemployed, uninsured, facing home foreclosures, or the impossibility of meeting credit card payments, and the rising number of employers relying on credit histories to make employment decisions. How will the jobless get back to work if they’re barred from employment because of financial difficulties caused by job loss? You see the vicious cycle here.

It turns out that July 2009 was a good month for would-be employees with financial problems. On the 15th, despite the governor’s veto, the Hawaii legislature amended the state’s Fair Employment Practices Act to make it an unlawful discriminatory practice for an employer to base employment decisions on an individual’s credit history or credit report, unless the information directly relates to a bona fide occupational qualification. (H. 31, L. 2009) There are exceptions for employers that are expressly permitted or required to inquire into credit histories under federal or state law, employers that are financial institutions in which deposits are insured by a federal agency having jurisdiction over the financial institution, and for managerial or supervisory employees.

Speaking to the State Senate Committee on Labor, Acting EEOC Chair Stuart J. Ishimaru explained that credit-check policies have a disparate impact based on race. Under Title VII standards, employers must be able to show that any disparate impact is justified by business necessity and that there is no less discriminatory alternative. Thus, employers must be able to “show that a credit check policy accurately measures whether applicants possess the qualifications needed for the positions from which they are excluded,” he said.

Employer credit-check policies would have much difficultly meeting this standard, according to Ishimaru. Credit histories often contain inaccuracies and errors that are serious enough to prompt denial of a loan or employment. Moreover, negative credit information may not account for circumstances that were beyond an individual’s control, such as developing a disability, divorce, death of a spouse, a family member’s illness, identity theft, or an employer’s downsizing. Finally, even if a credit report accurately reflects an individual’s credit history, “there is little, if any, evidence that credit information will generally be predictive of successful job performance,” Ishimaru, pointed out.

Recognizing similar problems, Rep. Steve Cohen (D-Tenn), on July 9, introduced a bill in the U.S. House of Representatives that would amend the Fair Credit Reporting Act to bar the use of consumer credit checks of current and prospective employees for the purpose of making employment decisions. (HR 3149). “In recent years, the number of employers using credit checks on potential employees has risen to 43%,” Cohen said in a press release. “According to a recent report, one-third of individuals making less than $45,000 a year have poor credit scores caused by the result of bankruptcies, loan delinquencies, divorce, medical problems or unemployment.”

Dubbed the “Equal Employment for All Act,” the bill has 34 cosponsors and is endorsed by many civil rights and consumer protection organizations. It has been referred to the House Committee on Financial Services.

It seems that what used to be a “protected category” problem with an adverse impact felt most strongly along racial lines is growing into a more universal problem. Employers should anticipate that credit-check policies will increasingly be on lawmakers’ radar – everyone has an interest in getting the jobless back to work.