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Meeting of October 20, 2010 - Employer Use of Credit History as a Screening Tool

Statement of Pamela Quigley Devata, Esq.
Seyfarth Shaw, LLP

Chairwoman Berrien, Commissioners, thank you for this opportunity to provide written testimony in connection with the public meeting to provide information related to Employer Use of Credit History as a Screening Tool.1 I ask that these written comments be made part of the official record of proceedings.

I. INTRODUCTION AND STATEMENT OF INTEREST

My name is Pamela Devata, and I am an employment attorney and partner in the law firm Seyfarth Shaw. Seyfarth Shaw is a national firm with ten offices throughout the country, and one of the largest labor and employment practices in the United States. Nationwide, over 325 Seyfarth Shaw attorneys provide companies—including employers, consumer reporting agencies, and human resource professionals—with advice, counsel, best practices, training of managers and employees generally, and litigation defense representation in connection with equal employment opportunities, as well as other labor and employment matters affecting employees in their workplaces.

I have practiced in the areas of employment discrimination counseling and litigation defense for approximately nine years in Chicago, Illinois. I have a special area of emphasis relating to the application of the safeguards and pre-conditions contained in the Fair Credit Reporting Act (FCRA) and various state and local laws affecting background screening.2 I counsel both employers and background screening companies on a daily basis regarding their compliance requirements under the FCRA and related state laws, and also provide defense counsel when issues are raised regarding the appropriateness of certain practices. I am the chair of Seyfarth Shaw’s FCRA Litigation and Counseling Team, and am a past member of the Board of Directors of the National Association of Professional Background Screeners.

My testimony seeks to clear up some common misperceptions about what is contained in a credit report, and to provide practical insight into how employers generally use credit reports when making employment decisions.

II. MISPERCEPTIONS ABOUT CREDIT REPORTS AND EMPLOYERS’ USE OF THEM

A. History of Use of Credit Checks in Employment Decisions

The use of credit checks has been an acceptable employment screening tool for over 40 years, since prior to the passage of the FCRA in 1970. Indeed, “employment purposes” is listed as an express, specific delineated purpose under Section 604 of the FCRA.3 The original conference report discusses the purpose of the legislation as intending to balance the rights of consumers by providing them “the chance to correct inaccurate information in their credit file, to preserve the confidentiality of such information, and to prevent undue invasions into the individual’s right to privacy.”4 Notably, no one debated the appropriateness of credit reports in employment decisions during the FCRA’s original Congressional debate. Moreover, although the FCRA has been amended twice (first in 1997, with the passage of the Consumer Credit Reporting Reform Act, and again in 2003 by the Fair and Accurate Credit Transactions Act), the issue of whether employment is a proper and permissible purpose to obtain a credit report was again never a subject of debate. The issue arose just recently with the proposal of the Equal Employment for All Act, H.R. 3149 111th Cong (Jul. 9, 2009).

The Federal Government is and has been requiring credit checks on its employees as a condition of employment. 5 For those employees seeking access to “classified information,” applicants must provide “relevant financial records,” and “information the employing agency deems credibly indicates the employee or former employee has incurred excessive indebtedness or has acquired a level of affluence that cannot be explained by other information.”6 According to Acting Solicitor General Katyal, “Background checks are a standard way of doing business. The Government has required them for all civil service employees since 1953 and for contractors since 2005.”7 Clearly, the legislature had a compelling reason in mandating that credit checks be used as a criterion for hiring such employees.

At least one Supreme Court justice, Justice Kennedy, recently made his thoughts clear about employers’ use of background information during oral argument in NASA v. Nelson, et al., No. 09-530 (Oct. 5, 2010), when he stated:

Well, I -- I have to agree with the implication of Justice Ginsburg’s remark, at least what I imply from it. Look at the private employment sphere. It seems to me that for a sensitive position, a bank who has people taking care of -- its employees taking care of other people’s money, or the medical profession, that the employer could be sued and would be remiss if it not ask this question. Do you know anything adverse about this person whom we are going to hire for a very sensitive position? This is done all the time, and we do it with the -- a judge said below, with our law clerk.

Assistant Legal Counsel for the EEOC recognized in a March 9, 2010 letter that “some courts,[] have determined that credit checks are appropriate for certain positions, such as where an employee handles large amounts of cash. See EEOC v. United Virginia Bank/Seaboard Nat’l, 1977 WL 15340, 21 FEP Cases 1392 (E.D. Va. 1977) (even if the defendant bank’s credit check policy disproportionately screened out African-American job applicants, the bank had a business need to conduct pre-employment credit checks because employees handle large amounts of cash).”8 Other courts who have examined this issue agree. As one court reasoned,

the use of credit checks by defendant served legitimate, important, and job-related business purposes. Many of defendant’s employees, particularly tellers, were exposed daily to a great deal of money. Although any employee in such circumstances might entertain occasional thoughts of stealing money, experience had taught defendant that individuals with credit problems found the temptation particularly difficult to resist. Moreover, customers would rapidly lose confidence in defendant if they knew that persons who lacked the ability to manage their own financial affairs were handling the money of others. The use of credit checks, therefore, was not a violation of Title VII.9

Another Court similarly held:

The Court believes that it is perfectly reasonable for the defendant to take note as part of a comprehensive background investigation of prospective State troopers that any given applicant had a bad credit record . . .The fact that consideration of these factors may weigh more heavily against black applicants than against white applicants (a fact not proven by the evidence in this case) does not by itself invalidate these questions as unlawful and discriminatory practices.10

B. Credit Scores Are Not Part of An Employment Credit Report

There seems to be a common misperception that employment credit reports include a credit score. They do not. Thus, before an employer is able to make a decision based on a credit report, the employer must review the content of the full report to obtain credit information and assess whether it is positive, negative, or neutral. This requires more than a mere glance at a numeric score; rather, employers must conduct thoughtful analyses of the information contained in the report. In my experience, employers rarely, if ever, make hiring decisions based on information in a credit report without giving an applicant the opportunity to explain the information on the report. These may also be some of the reasons, as discussed below, that many employers use credit reports as a final step in the hiring decision inasmuch as evaluating credit reports and talking to applicants about their credit report takes additional time generally not conducive to early stages of the hiring process.

C. The Law Provides Protections For Consumers

While some have argued that additional restrictions are needed with respect to the use of credit in employment, I believe that adequate protections are already in place with respect to an employer’s use of credit reports for employment purposes. The Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq., the Bankruptcy Code, 11 U.S.C. § 101 et seq., Title VII, 42 U.S.C. § 2000e et seq., and state laws11 all protect consumers’ rights. As Governor Schwarzenegger recently recognized in his September 23, 2010 veto message refusing to sign into law a California bill prohibiting an employer’s use of credit reports, “This bill is similar to legislation I have vetoed for the last two years on the basis that California’s employers and businesses have inherent needs to obtain information about applicants for employment and existing law already provides protections for employees from improper use of credit reports.”

Most notably, the FCRA has very stringent and detailed procedures that employers must follow before they use credit reports in whole or in part in making hiring or other employment decisions. The FCRA requires the following as it relates to an employer’s use of credit reports:

  • Before requesting a credit report, an employer must tell a consumer that a credit check will be requested, and must obtain the employee’s consent to obtain the credit information.12
  • Before obtaining a credit report, an employer must certify to a third party consumer reporting agency the following: (1) that it has a permissible purpose to obtain the information, (2) that the employer will comply with the disclosure and authorization and adverse action provisions in the FCRA, and (3) that the employer will not use “information from the consumer report … in violation of any applicable Federal or State equal employment opportunity law or regulation” 13
  • Before taking any adverse action, in whole or in part based on information in the credit report, an employer must follow a two-step adverse action process which requires that the consumer: (1) be given a copy of his or her report and a copy of the Federal Trade Commission’s “Summary of Your Rights Under the Fair Credit Reporting Act,” and (2) be told of his or her right to dispute the accuracy or completeness of information in the report prior to adverse action being taken.14

While those opposed to employers’ use of credit checks have sometimes opined that employers may not tell applicants that the reason they are being denied employment is based on a credit report, to not do so would both be contrary to federal and many state laws as well as my experience in working with employers large and small.

No employer could do so without leaving an informational trail of the credit search. Unlike a criminal record that has no research trail, every time a credit check is requested, it shows up as a “soft-hit” on a person’s credit history with the name of the entity requesting the report as well as the purpose for which it was requested. In my experience, employers are aware of this fact. They are also aware that if an applicant makes it to the final stages of the hiring process (for example, following completion of an application, an interview or conditional offer), and then is not hired, the applicant often assumes that the decision may have something to do with the final information received by an employer—oftentimes a background check.

Perhaps this is another reason why 87% of employers go above merely allowing an applicant to dispute information in his or her report, but also speak directly to applicants allowing them to explain the circumstances surrounding information in their credit report before making an employment decision.15 Finally, employers are knowledgeable of their responsibilities under the FCRA to provide a copy of the report to the applicant and allow an applicant to dispute information in the report. Employers who fail to follow the FCRA risk private actions from consumers for negligent non-compliance and/or willful non-compliance as well as possible investigation from the Federal Trade Commission.16

Similarly, opponents have argued that employers often have a knee-jerk reaction when they see a Bankruptcy on a credit report. But, the Bankruptcy Act specifically prohibits an employer from terminating an employee for seeking bankruptcy protections.17 In my experience employers apply this same prohibition to applicants for employment.

Under Title VII, an employer may use any information in evaluating an applicant as long as the employer does not intend to discriminate against the applicant on the basis of a protected class or the employer’s use does not have a disproportionately negative effect on people in a protected group.18 In the latter case, the practice having a “disparate impact” is unlawful unless the employer can show “job-relatedness.” The analysis then turns to whether a less discriminatory alternative exists that meets the employer’s business need.19 As discussed more fully herein, it is my experience that there is no other alternative available to employers that shows an applicant’s judgment as it relates to handling money. If there were, the Federal Government would likely utilize that alternative rather than require credit checks on its employees.

D. Credit Checks Provide Important Information – Not Readily Available in Other Sources – to Employers With Respect to Certain Positions and Responsibilities

Credit checks are useful to employers generally because they provide a variety of information not able to be confirmed by an employer by other sources and because they are viewed as a valid indicator of a person’s judgment and potential risk to the company. Employers are also extremely cognizant about possible claims of negligent retention and negligent hiring—a main reason they conduct employment screening in the first place. Employment credit reports contain an individual’s name (and other names associated with that person in credit files), social security number, past addresses, past employers, information related to past due accounts, accounts in collection, and charge offs.

If an applicant fails to disclose a former employer on his or her employment application, a prospective employer may be able to glean such information from a credit report. This allows employers to investigate into the circumstances of that employment. Additionally, credit reports illustrate how a person handles his or her finances. Employers that I counsel on these issues often express that having some debt is not a barrier to employment, but that multiple instances of charge offs, or large sums of debt from multiple sources may be an indication that a person has exhibited questionable judgment or an inability to manage their finances. For example, employers consider the following types of questions in considering taking an action based on a person’s credit report:

  • Did one large event cause debt to be incurred, or were there multiple sources of debt over different time periods?
  • Has the applicant attempted to consolidate or pay back any of the debt?
  • Does the applicant have multiple accounts in collection?

For those positions dealing with cash handling responsibilities or company finances, such information may be extremely relevant to an employer. In other words, if an applicant cannot manage his or her own finances, why would a company allow him or her to be in charge of its finances? Additionally, some employers believe that putting applicants with poor credit in positions with access to large sums of money or merchandise may create unnecessary risk of fraud or theft.20

Importantly, one must consider the timing of an employers’ use of credit reports in the hiring/promotion process. Overwhelmingly in my practice and based on other data, employers do not use credit checks as a litmus test for hiring or promotion.21 Rather, according to a recent study conducted by the Society for Human Resource Management, 87% of employers use credit reports after an interview is conducted or a conditional offer has been made.22 Additionally, the vast majority of employers in my experience use credit reports for a very limited number of positions such as jobs dealing with company finances, positions in accounting departments, high level executives or positions dealing with sensitive personal data of customers or employees. As such, it is my experience that employers more often than not do not request credit checks on applicants or employees unless they feel it is related to the position in question. Moreover, the vast majority of employers whom I counsel allow applicants to explain information contained in their credit report.

E. Practical Examples of An Employer’s Use of Credit Checks

Much has been debated about whether information in a credit report is an accurate predictor of a person’s judgment, propensity to engage in theft or fraud, or ability to perform specific jobs. We have set forth below specific anecdotes from employers with respect to the relevancy of having access to a credit report for employment purposes:

In Example Number 1 a company became concerned when a sales employee whose salary was approximately $80,000 began displaying lavish spending habits, including purchases of a new Mercedes, expensive jewelry, and exotic and lavish vacations, which the employee discussed at work. As part of a promotion, the company ran a credit check on the employee and learned she was heavily in debt. After an investigation, the company then learned that the employee was involved in a fraudulent scheme against the company that also involved two other company employees. The employees were stealing and selling company product on the black market. One of the employees was in quality control, and the other employees were in sales.

In Example Number 2 a financial services firm employed a security officer to monitor the activities of traders. A routine credit check that the company periodically ran on its security officers revealed that he had $800,000 in debt. The company then began monitoring his activities, and discovered that he was involved in a money laundering scheme with a rogue trader.

In Example Number 3, an applicant applied for a job as a student loan officer in the Financial Aid Department at a college. The employer ran a credit check on the applicant and saw large amounts of unpaid debt, some of which was attributed to his own student loans that were outstanding as well as other accounts in collections. The employer hired the individual only to learn that six months into employment, the employee had attempted to process fraudulent loans by stealing the identity of a student.

F. Adverse Impact Analysis and Possible Alternative Sources of Information

Another common argument raised is that an employer’s use of credit checks frequently results in a disparate impact on certain minority groups. However, as discussed earlier, 87% of employers utilize credit checks only after interviews and/or conditional offers.23 As such, a traditional adverse action analysis may not be appropriate given that: 1) credit reports are not generally used at the beginning of employment, and 2) the numbers of employees per employer on whom credit reports are run is small. Consumer reporting agencies with whom I work have also indicated that in their experience, as compared to total background checks requested, employers’ use of credit reports occurs in only approximately 7% of all checks.

After counseling employers daily on the use of credit histories in employment decisions, I believe that the ultimate answer to the question of why employers use credit checks for certain positions is that they are seeking insight into an applicant’s judgment as it relates to finances, and that information is unavailable from any other source. This seems reasonable especially since, if there was an alternative means of determining a person’s judgment as to finances, the Federal Government would likely be using such information in making its hiring decisions.

I greatly appreciate the opportunity to provide this testimony to you and would welcome any additional questions you may have.


Footnotes

1 I would like to formally thank my colleagues, Camille Olson and Bonnie Puckett, for their invaluable thoughts and research assistance.

2 The FCRA is a consumer protection statute that regulates an employer’s ability to obtain and use information relating to a consumer’s credit history, character, personal reputation and mode of living, while also proscribing obligations to the third-party consumer reporting agencies that provide such information.

3 15 U.S.C. §1681e.

4 116 Cong. Rec. 36941-35943 (1970).

5 See National Security Directive 63, Single Scope Background Investigations, signed by Pres. Bush (Sr.) (Oct. 21, 1991) (stating that applicants’ “financial status and credit habits” will be reviewed).

6 Exec. Order No. 12,968, 60 Fed. Reg. 40245 (Aug. 2, 1995).

7 General Neal K. Katyal, Esq., Acting Solicitor General, Department of Justice, Washington, D.C., arguing on behalf of Petitioners in Nasa v. Nelson, Docket No. 09-530, in oral argument October 5, 2010.

8 Letter from Dianna B. Johnston, Assistant Legal Counsel, EEOC, “Title VII: Employer Use of Credit Checks” (March 9, 2010), http://www.eeoc.gov/eeoc/foia/letters/2010/titlevii-employer-creditck.html.

9 EEOC v. American Nat’l Bank, No. 76-26-N, 1979 WL 25, 12, 33 (E.D.Va. June 25, 1979), rev’d in part on other grounds.

10 U.S. v. Commonwealth of VA, 454 F.Supp. 1077, 1103-04 (D.C. Va. 1978).

11 Employers who use credit information also must be aware of state law requirements on the specific use of credit checks in employment. These laws are in addition to the state and federal laws that exist covering background checks that also govern the receipt and use of credit checks. In addition, currently four states: Washington, Hawaii, Oregon, and Illinois – effective January 2011, have laws that also specifically regulate an employer’s use of credit information. Wash. Rev. Code §19.182.020, Hawaii Rev. Stat. §238.-1, Or. Rev. Stat. § 659A, Ill. Pub. Act 96-1426 (Aug. 10, 2010). All of these restrictions focus on job relatedness—similar to the EEOC’s Uniform Selection Criteria.

12 15 U.S.C. § 1681b(b)(2)(A)

13 Id. § 1681b(b)(1)(A)

14 Id. at § 1681b(b)(3)

15 Society of Human Resources Management, Background Checking: Conducting Credit Background Checks, available at http://www.shrm.org/Research/SurveyFindings/Articles/Pages/BackgroundChecking.aspx (Jan. 22, 2010).

16 Id. §§ 1681n-1681s.

17 11 U.S.C. § 525(b).

18 42 U.S. C. §§2000e-2(k)(1)(A)(ii) & (k)(1)(C); Griggs v. Duke Power Co., 401 U.S. 424, 431 (1971).

19 Id.

20 Association of Certified Fraud Examiners’ “2010 Report to the Nation on Occupational Fraud and Abuse (citing “financial pressures” as a “key motivating factor” behind check tampering, theft, and fraudulent reimbursement).

21 In my experience, I have never seen a credit report used as a basis for compensation.

22 See Society of Human Resources Management, Background Checking: Conducting Credit Background Checks, available at http://www.shrm.org/Research/SurveyFindings/Articles/Pages/BackgroundChecking.aspx (Jan. 22, 2010).

23 See Society of Human Resources Management, Background Checking: Conducting Credit Background Checks, available at http://www.shrm.org/Research/SurveyFindings/Articles/Pages/BackgroundChecking.aspx (Jan. 22, 2010).