The Diversity Risk of Using Credit Checks in Hiring

Kaplan Higher Education Corp., a provider of postsecondary education, has been facing some legal woes that serve as a cautionary tale for any businesses doing credit checks as part of their employment process. At the center of the dispute is a diversity issue.

By Deanna Hartley

The U.S. Equal Employment Opportunity Commission filed a lawsuit against Kaplan last month for allegedly discriminating against a class of black applicants by misusing credit history as a screening tool during its hiring process.

“The EEOC is contending that Kaplan’s use of credit information since Jan of 2008 was not job related and was not consistent with their business necessities and [it’s] also taking the position that there were less discriminatory alternatives that were available for Kaplan to use in the hiring and promotion and/or discharge process,” said Robert Yonowitz, a partner in the Irvine office of law firm Fisher & Phillips LLP.

At the crux of this case is the question of whether Kaplan’s use of credit history checks was job-related – that is, whether good credit was necessary to perform a particular job.

“[An] employer needs to assess whether for each individual job position they really need to have credit history information to determine the employee’s ability to perform successfully in the job,” he said. “Most employers that use it tend to use it in positions where trustworthiness as to money is an important factor in their job. So, for example, cash-handling functions within a business; clearly that’s job related. If you’ve got somebody that’s got horrible credit and is not keeping their promise to their creditors to pay their bills, an employer has an obligation to protect its business.”

In analyzing this case, Yonowitz said, it’s helpful to understand an important distinction between these terms: disparate impact and disparate treatment.

“Disparate treatment means I’m treating you as an individual in a certain way because of your membership in a protected category, like race or age or sexual orientation,” he said. “Actually engaging in misconduct [or] bad treatment toward somebody because of their membership in that class – that’s disparate treatment.”

This particular case, however, isn’t disparate treatment — it’s disparate impact.

“Disparate impact means there is a facially neutral policy or practice,” Yonowitz said. “At the surface, it doesn’t look like it’s intended to adversely impact anybody in particular because of their membership in a protected category, [but] in the actual application of the practice, it’s having a disproportionate impact on one particular ethnic group or minority group.”

As part of its claim that Kaplan’s use of credit history had a disparate impact on black applicants as well as existing employees, the EEOC is seeking damages, which includes back-pay for individuals who may have been adversely affected – even though Yonowitz explained it’s still premature to speculate how much that would amount to.

In the meantime, Yonowitz’ advice to employers who use credit histories as part of the hiring process is this: “Employers should use a broad-based consent form for all kinds of background checks in their applications. However, in terms of when they choose to use each background check, they’ve got to go back to the job relatedness,” he said. Conducting an analysis of each job function so as to understand and be able to articulate job relatedness is key. 

“For positions in which credit worthiness is not job-related, [they] should probably just restrict their background checks to things like felony convictions,” he said.

Deanna Hartley is an associate editor for Diversity Executive magazine. She can be reached at [email protected].