Dorsey’s Analysis of Quirky Question #189, Are Pre-Employment Background Checks Discriminatory?


I am the Human Resources Director at a mid-size company, with employees in eight states.  We’ve recently read about the U.S. Equal Employment Opportunity Commission (“EEOC”) bringing suit against employers based on pre-employment background checks, as well as some states prohibiting pre-employment credit checks.  We certainly don’t want to create potential liability for ourselves based on our pre-employment screening, but feel that criminal and credit checks are a valuable part of our recruiting process.  We are beginning to feel that no matter how we proceed, we face potential liability in one way or another.  Do you have any advice?


You are not alone in your sentiment that choosing whether, when, and how to conduct pre-employment background checks can feel like being asked whether you would prefer to stay in the frying pan or jump into the fire.  While pre-employment background checks offer strong benefits in potential avoidance and defense of employees’ improper conduct, the way such checks are conducted and how information revealed by them is used can lead to unintended consequences.  These consequences may include, among other issues, potential liability based on a background check policy or practice that causes a disparate impact on job applicants in protected classes.  This was demonstrated by the recent announcement that Pepsi Beverages Co. will pay a $3.13 million settlement to resolve a race discrimination charge filed with the Minneapolis office of the EEOC based on Pepsi’s use of applicant arrest records.

Discrimination Issues

In addition to federal and state laws restricting the use of or procedure for conducting pre-employment background checks, federal and state non-discrimination laws may limit an employer’s ability to use credit or criminal background checks in pre-employment decision making.  Practices that may be neutral on their face (such as conducting credit checks on all job applicants) could have a disparate impact on certain protected groups and therefore potentially could lead to disparate impact discrimination claims.  Cf. Albemarle Paper Co. v. Moody, 422 U.S. 405, 431 (1975) (adopting the EEOC’s determination that test results must predict or correlate with “important elements of work behavior which comprise or are relevant to the job or jobs for which candidates are being evaluated.”) (quoting 29 C.F.R. § 1607.4(c)); El v. Southeastern Pennsylvania Transp. Auth., 479 F.3d 232, 242 (3d Cir. 2007) (holding that “employers must show that a discriminatory hiring policy accurately – but not perfectly – ascertains an applicant’s ability to perform successfully the job in question”).  In fact, as part of its E-RACE Initiative, the EEOC recently has focused on cases involving alleged disparate impact on minority groups through employers’ use of credit checks in employment decisions.

The EEOC has taken the position that employers should not conduct applicant credit checks unless doing so is needed for the employer “to operate safely or efficiently.”  See Letter from Dianna B. Johnston, Assistant Legal Counsel, EEOC, “Title VII: Employer Use of Credit Checks” (March 9, 2010).  For example, courts have held that credit checks are appropriate for positions with responsibility for handling large amounts of cash.  Courts, however, frown upon employers’ use of credit checks when the information revealed by the credit check is not linked to job requirements or job performance.  See, e.g., Terry v. Elec. Data Sys. Corp., 940 F. Supp. 378, 386 (D. Mass. 1996) (stating that credit history did not correlate with job performance when an applicant for a computer operator position worked at the organization as a computer operator for five months in a temporary role before he was recommended for the position on a regular basis and required to undergo a credit check); see also EEOC v. American Nat’l Bank, 1979 WL 25, at *33 (E.D. Va. June 25, 1979), rev’d in part on other grounds.

Criminal Arrests and Convictions

At issue in the Pepsi settlement referenced above was the company’s policy prohibiting the hiring of job applicants for permanent jobs at its bottling plants anyone who had been arrested for any offense, even if the arrest did not result in a conviction.  Pepsi also routinely denied employment to applicants who had been arrested or convicted of minor offenses.  According to the EEOC, its investigation revealed reasonable cause to believe that these facially-neutral policies disproportionately excluded African-American applicants from permanent employment in violation of Title VII of the Civil Rights Act of 1964.

Further, perhaps counter-intuitively, employers may not even exclude all applicants with criminal convictions from consideration for employment.  When recruiting for positions in which there is a direct relationship between the prior criminal offense(s) and the specific position sought or for positions in which hiring an applicant with convictions for particular crimes would pose an unreasonable risk to property or the safety or welfare of specific individuals or the general public, however, employers may exclude applicants on that basis.  See Bolden v. City of New York, 2005 WL 2759843, at *2 (2d Cir. Oct. 26, 2005) (upholding summary judgment for employer in police officer’s claim that his automatic termination as a result of his conviction for federal tax fraud was impermissible discrimination).  For example, the exclusion of applicants with convictions for violent crime has been held valid for positions in close contact with populations that are vulnerable to violent crime, such as children or elderly or disabled individuals.  See El, 479 F. 3d at 245-46.

In all other situations, employers are required to make individual determinations of whether a criminal conviction is a permissible basis on which to exclude an applicant from further consideration.  Employers must be able to demonstrate consideration of three factors in assessing whether such an exclusion was justified by business necessity: (1) the nature and gravity of the offense(s); (2) the time that has passed since the conviction or completion of the sentence; and (3) the nature of the job held or sought.  EEOC, “Policy Statement on the Issue of Conviction Records under Title VII of the Civil Rights Act of 1964” (Feb. 4, 1987, last modified on Sept. 11, 2006) (citing Green v. Missouri Pacific R.R. Co., 523 F.2d 1290 (8th Cir. 1975)).  State laws may place additional requirements on employers’ consideration of applicants with criminal convictions, such as the age of the applicant at the time of the conviction or whether the applicant has produced information regarding his or her rehabilitation and good conduct. See, e.g., N.Y. Correct. Law § 753.

State Laws Regarding Credit Reports As A Pre-Employment Screening Tool

Because of increasing concern over the potentially disparate impact of employers’ use of credit checks as a pre-employment screening tool, a number of states restrict employers’ use of credit checks.  Many states have recently adopted laws prohibiting employers (subject to certain exceptions) from failing to recruit or hire a person based on a credit report, or inquiring into an applicant’s credit history, or even ordering a credit report on an applicant unless a satisfactory credit history is a bona fide occupational requirement.  Several states (including California, Connecticut, Hawaii, Illinois, Maryland, Oregon, and Washington) currently place significant restrictions on employer use of credit information, such as requirements that the credit check be “substantially related” to the job duties of the position being considered or providing limited categories of positions for which applicant or employee credit checks are permissible. Additional states are considering or in the process of passing such legislation.

Pending Federal Legislation Regarding Applicant Credit Checks

Due to the increasing numbers of employers conducting applicant and employee credit checks and the difficult economic conditions many individuals are experiencing, the EEOC and others have stated concerns that, in addition to other issues, individuals with poor credit history may be rendered permanently unemployable through employer use of credit checks as part of their applicant screening processes.   In response, a bill to amend the federal Fair Credit Reporting Act (“FCRA”) has been introduced in the U.S. House of Representatives.  The Equal Employment for All Act would amend the FCRA to prohibit employer use of credit checks outside of specific circumstances.   These circumstances would include employment that requires national security or FDIC clearance, employment with a state or local government agency, and management positions with financial institutions.  See H.R. 321, Equal Employment for All Act (introduced Jan. 19, 2011).  Given the fact that 2012 is an election year, coupled with the divisive environment of Capitol Hill, it seems unlikely that there will be much legislative progress this year on this issue.

Practical Guidelines

There are several steps employers can take to minimize the risk of potential liability when using credit or criminal background checks as a pre-employment screening tool.

1) Conduct Pre-Employment Background Checks Only When There is a Sound Business Reason to Do So:

We recommend that employers first determine the positions for which a credit or background check is warranted and appropriate, documenting the business purpose for the credit or background check.  In determining which positions should be subject to a credit check, consider the responsibilities of the position and the potential negative implications of placing a person in the position who has a problematic credit history (or other negative information in his or her background).  For example, background checks for employees with access to large amounts of cash and/or confidential information will likely not only be supported by a sound business reason, but may be important to avoid liability for claims of employee theft of customer money or identity.

2) Develop – And Adhere To – Procedures for the Use of Credit or Criminal Background Check Results:

Employers should consider the nature of the negative credit information, such as whether debt was from one large event or was incurred over time from multiple sources; the time since the negative credit event occurred; and whether the applicant attempted to consolidate or repay the debt.  See Terry, 940 F. Supp. at 386 (holding that an applicant’s “failure to explain why he had not repaid the loan, coupled with his lack of concern and remorse about the delinquent loan,” was a legitimate reason for the employer’s decision to revoke its job offer).  A particular credit score should not be used as an automatic “cut-off” point for applicant consideration. In each case there should be an individualized consideration of whether the negative information is relevant to a hiring decision based on the position involved and the specifics of the information revealed by the credit or background check. These considerations will differ depending on the employer’s industry, as well as the role within the organization.

3) Conduct Credit and Criminal Background Checks Only After a Preliminary Hiring Decision Has Been Made Based on Other Considerations (experience, education, etc.):

A “best practice” in this area is to conduct applicant credit and criminal background checks only after making a conditional offer of employment to the candidate.  Then, if a problem is identified in the credit or background check, the offer can be withdrawn if it ultimately is determined the negative information should preclude hiring the person.

4) Ensure That Background Checks are Conducted for All Similarly Situated Applicants in the Recruiting Process:

If you make conditional offers to multiple candidates for a position, whether at the same time or over time while filling multiple positions with the same title and responsibilities, make sure that you make the same background inquiries for all candidates at that stage in the hiring process. Race-based, gender-based, ethnicity-based, age-based, or religiously-based differentiation for conducting background checks will not withstand scrutiny.

5) Share Background Check Results on A Limited Basis:

To protect candidates’ privacy, the internal sharing of information revealed by background checks should be as limited as practiable.  When a credit or criminal background report contains no negative information, the details of the report should not be shared with the hiring manager for there is no need to do so.

If negative information is uncovered by a credit or criminal background check, a preliminary determination should be made whether the information is relevant and needs to be shared with the hiring manager.

6) Consider The Context For Information Revealed By the Background Check:

As part of this preliminary determination, the timing of the events described in the report should be considered. The more remote in time the negative credit event or criminal conviction occurred, the less weight it should be given in the hiring decision. Likewise, minor negative credit events and criminal convictions should be given less weight than long-standing patterns or unexplained credit issues or convictions for major crimes. A general guideline is that minor, negative credit events and low-level criminal convictions should not be considered if more than five years in the past. However, more serious issues or those that closely relate to the position’s duties may warrant consideration for a longer period of time. The weight given to negative information may also vary, based on the relevance of the negative information to the employer’s industry. It is important that consistent standards are applied to such determinations and that all candidates are treated equally. Once a determination is made that the negative information may be a relevant consideration in the hiring decision, it can and should be shared with the hiring manager

7) Give Candidates An Opportunity to Respond to Negative Information Revealed By the Check:

The FCRA requires that employers provide certain information regarding credit check results and the candidate’s rights under the FCRA before any adverse action is taken based on a credit report.  We recommend allowing applicants the opportunity to provide employers with additional information, explanation, and/or context for negative information obtained in credit or background reports before finalizing hiring decisions.  This could be done in an interview or separately by written communication.  Providing the opportunity for explanation will ensure compliance with the statute and may lead you to hire the applicant.  Conversely, however, if the explanation proffered by the applicant lacks credibility or is otherwise inadequate, you may decide not to hire the applicant.

8)  Re-visit the Business Purpose for Excluding A Candidate Based on Negative Information:

Before a candidate is excluded from further consideration because of negative information in his or her credit or criminal background check, employers should confirm that that there is a sound business reason justifying the use of such information for the particular position.

9) Document Your Decision-Making Process:

We advise employers to maintain records of employment decisions based on the results of information in credit or criminal background reports, including the timing and reasoning for the decisions. See Dalton v. Capital Associated Indus., 257 F. 3d 409, 418 (4th Cir. 2001) (considering the role of false information in a criminal background report used in a hiring decision that the employer argued was ultimately based on the applicant’s misrepresentation of dates of prior employment).

While balancing these multiple considerations may be difficult, doing so should decrease the likelihood of future liability based upon your pre-employment background checks.

Dorsey & Whitney

Dorsey is a business law firm, applying a business perspective to clients' needs. We make it our first priority to know the context in which you do business - your market, your competitors, your industry.

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