Why Credit Checking for Employment is a Discriminatory Hiring Practice

By: Samantha Alexander

Disclaimer: The views expressed in this post are those of the author, and do not necessarily reflect views of the Journal, the William H. Bowen School of Law, or UA Little Rock.

Discrimination in the workplace has long been an evil that civil rights advocates push back on. In 1964, Title VII of the Civil Rights Act was passed, prohibiting employment discrimination based on race, color, religion, sex, and national origin. The passage of this act was a huge victory, but it hardly came close to a complete eradication of discrimination in the workplace. For example, Title VII failed to adequately address discrimination based on disability. To fill this hole, in 1990, the Americans with Disabilities Act was passed, Title I of the act forbids workplace discrimination based on disability. The ADA was touted as “the most sweeping anti-discrimination measure” since Title VII. Even still, protections against discrimination were lacking. The law continued to evolve and the most recent development in the area was Bostock v. Clayton County. This landmark case refined Title VII by adding sexual orientation and gender identity to the list of prohibited grounds for discrimination.

When considering the progress that has been made, it would be easy to think that workplace discrimination has become a thing of the past. At first glance, this might appear true, but unfortunately, discriminatory hiring still occurs, and there is still much room where the law must evolve even more than it has. The difficulty is that the discriminatory hiring  practices that exist today are subtle and go mostly unrecognized. Take, for example, the practice of credit checking in the workplace. While credit checking is not often associated with discrimination, the use of such in the workplace provides a new guise for discriminatory hiring practices.

Those who suffer the most harm from this practice are minorities. BIPOC individuals commonly fall prey to predatory lending practices that then create adverse effects on their credit score. Women, facing the famed pay gap and making 22% less than men, tend to use a larger portion of their credit, leading to an average lower credit score. Not to mention, reports that have found flaws in more than 34% of Americans’ credit reports. Errors on credit reports are commonplace and they disproportionately harm minorities who lack the resources to fix the mistakes and instead must live with these undeserved marks against them.

In addition, when an employer uncovers a bad credit report, a deeper inquiry may reveal a background that is uncomfortable for the applicant to share. Often, circumstances such as domestic abuse or incarceration are contributing factors to lower credit scores. Revealing and subsequently reliving these traumatic circumstances is unnecessarily harmful for jobseekers and inappropriate for employers to delve into.

The Fair Credit Reporting Act does impose some safeguards on the practice. First, applicants must give written permission to the employer seeking a credit check, and the employer must certify that they will not use the information to discriminate against the applicant. Employers must also inform the applicant that the information obtained may factor into an employment-related decision. It’s also important to note that employers do not see a numbered score like a lender would. What they do see are late or missed payments, loans in default, and lines of credit that are open. These safeguards seem fair enough with one major exception: credit reports have no bearing on job performance.

Employers claim trustworthiness and dependability as their grounds for use of this tactic. It is important to note that the credit system was built for lenders, not employers. A credit score serves as an indicator of financial risk and exists for lenders to decide whether to extend a loan to a particular individual. The factors that speak to an individual’s ability to repay a loan are the fields typically seen on a loan application; such as existing debt to income ratio, assets, employment status, and payment history. Factors like productivity levels or dependability are not measured when a lender is considering a loan application. Nevertheless, employers continue to use credit reports as a proxy for assessing character.

There are mixed feelings on whether credit reports can truly be the measuring stick employers seem to believe they are. Not surprisingly, the companies who provide credit checking services are the biggest advocates of the existence of a link between credit checking and positive character traits. An advertisement for one such service reads, “hire trustworthy and reliable candidates…” On the other side, lobbyists and legislators advocating for change, such as Rep. Maxine Waters, cite research that claims, “there is no benefit from using credit history to predict job performance…”. Assuming for the sake of argument that credit checks are an accurate predictor of these characteristics, there is still an argument for the prohibition of the practice. The discriminatory effects far outweigh the benefits and, if it is a judgment regarding an individual’s character that is needed, there are less harmful ways to obtain this information.

States are just beginning to wake up to the discriminatory effects of the practice. Eleven states currently limit employers’ use of credit information: California, Connecticut, Delaware, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont, and Washington. These are admirable and welcome policies, but on the national level, credit checking for this purpose is still widely accepted. In 2020, 38% of employers reported credit checking for at least some employment candidates. The practice is so far-reaching that it merits a federal prohibition in line with the ADA, Title VII, and Bostock.

In 2019, The House introduced legislation for this very purpose. The committee report cites many of the same concerns outlined in this article. While the bill passed the house, it lost momentum and critics cite the bill as too broad. When comparing the bill with similar state legislation, the concerns about overbreadth seem exaggerated. Narrowing the scope would be relatively easy. For example, the bill could allow exemptions for jobs in the financial industry or jobs that handle large amounts of money like the existing law in New York. This solution addresses the concerns while still broadly eliminating the practice. Unfortunately, the bill ultimately failed due to session adjournment and a lack of urgency.

Prohibiting employer credit checking is only one more step towards full eradication of workplace discrimination, but it is a step that must be taken. Until this happens, the issues of racial, gender, and sex discrimination will continue to be a barrier to fair hiring.

Posted in: Blog Posts, Legal Comentary

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