The Equal Employment Opportunity Commission announced settlement of a charge it brought against Pepsi Beverages on behalf of black applicants whom Pepsi had declined to hire due to arrests that had not resulted in convictions or to minor convictions that were not relevant to the position. Pepsi will pay over $3.1m and offer jobs to anyone in the class who is still interested in working for Pepsi.

The EEOC appears to have successfully pressed two theories:

1. According to the EEOC, “Pepsi’s former policy also denied employment to applicants from employment who had been arrested or convicted of certain minor offenses. The use of arrest and conviction records to deny employment can be illegal under Title VII of the Civil Rights Act of 1964, when it is not relevant for the job, because it can limit the employment opportunities of applicants or workers based on their race or ethnicity.”

This is consistent with the EEOC’s long-held position that, to hold a conviction record against an applicant, and employer must show that excluding the applicant based on the conviction is job-related and consistent with business necessity.

In explaining this position, the EEOC cited its long-standing guidance: “When employers contemplate instituting a background check policy, the EEOC recommends that they take into consideration the nature and gravity of the offense, the time that has passed since the conviction and/or completion of the sentence, and the nature of the job sought in order to be sure that the exclusion is important for the particular position.  Such exclusions can create an adverse impact based on race in violation of Title VII.”

2.    According to the EEOC, “Under Pepsi’s former policy, job applicants who had been arrested pending prosecution were not hired for a permanent job even if they had never been convicted of any offense.”

This is consistent with the EEOC’s long-held position that, to hold a non-conviction against an applicant, an employer must do something beyond finding the criminal history record to determine that the applicant actually committed the offense. Once the employer concludes that the applicant actually committed the offense, then the employer must ensure that excluding the applicant is both job-related and consistent with business necessity, just as it would for a conviction record.

The EEOC’s press release on the subject is available at http://www.eeoc.gov/eeoc/newsroom/release/1-11-12a.cfm.

Pamela Davata, an attorney who represents the National Association of Professional Background Screeners (NAPBS), commented on the action in an Associated Press article available at http://tinyurl.com/7bjamxv.

For more information on how this may affect your screening program and how backgroundchecks.com can help, please contact your client relationship representative.

The use of credit reports in employment decisions has recently become a controversial issue. It has been put up for debate whether or not making hiring decisions based on credit history could have a disparate impact on racial and ethnic minorities with the end result of hiring fewer minority applicants. A recent report from the Federal Reserve Board calls into question the generally held belief that hiring decisions based in part on credit histories have a disparate impact on racial and ethnic minorities. Rather than analyzing the potential disparate impact in hiring decisions, the October 12, 2010 report analyzed a parallel question: whether the use of credit scores in lending would have a disparate impact on applicants for loans. An important distinction between these two questions is that employment-purpose credit reports do not show a credit score; but they do show the types of information that credit bureaus use in their calculations of credit scores.

What makes the new report interesting for employers is:

1. The report found no evidence that credit scores create a disparate impact based on race or gender. Since credit scores generally add information not available on the face of an employment-purposes report, a reasonable inference is that credit history does not create a disparate impact either.
2. The report did find limited evidence that credit scores create a disparate impact based on age. Usefully, it identified the variable that caused the credit scores to create a disparate impact. That variable was the average age of the person’s credit accounts on file. Inclusion of this variable lowered credit scores with age, causing younger people, foreign nationals, and recent immigrants to have lower credit scores and older people and native-born citizens to have higher scores. This means that the average age of credit account is potentially misleading and might cause a disparate impact if used in employment decisions. For users of employment-purpose credit reports, a reasonable precaution would be to avoid placing any weight on any available information about the age of accounts. (The age of the oldest account appears on sample reports we reviewed; average age did not.)

We strongly urge that our clients have their equal employment opportunity lawyers review this paper (available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1726601) and the criteria they use for making decisions based on credit history.

The Federal Reserve Board has issued a new report entitled “Does Credit Scoring Produce a Disparate Impact?”

The use of credit reports in employment decisions has recently become a controversial issue. It has been put up for debate whether or not making hiring decisions based on credit history could have a disparate impact on racial and ethnic minorities with the end result of hiring fewer minority applicants. A recent report from the Federal Reserve Board calls into question the generally held belief that hiring decisions based in part on credit histories have a disparate impact on racial and ethnic minorities. Rather than analyzing the potential disparate impact in hiring decisions, the October 12, 2010 report analyzed a parallel question: whether the use of credit scores in lending would have a disparate impact on applicants for loans. An important distinction between these two questions is that employment-purpose credit reports do not show a credit score; but they do show the types of information that credit bureaus use in their calculations of credit scores.

What makes the new report interesting for employers is:

1. The report found no evidence that credit scores create a disparate impact based on race or gender. Since credit scores generally add information not available on the face of an employment-purposes report, a reasonable inference is that credit history does not create a disparate impact either.
2. The report did find limited evidence that credit scores create a disparate impact based on age. Usefully, it identified the variable that caused the credit scores to create a disparate impact. That variable was the average age of the person’s credit accounts on file. Inclusion of this variable lowered credit scores with age, causing younger people, foreign nationals, and recent immigrants to have lower credit scores and older people and native-born citizens to have higher scores. This means that the average age of credit account is potentially misleading and might cause a disparate impact if used in employment decisions. For users of employment-purpose credit reports, a reasonable precaution would be to avoid placing any weight on any available information about the age of accounts. (The age of the oldest account appears on sample reports we reviewed; average age did not.)

We strongly urge that our clients have their equal employment opportunity lawyers review this paper (available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1726601) and the criteria they use for making decisions based on credit history.

The situation

A few years ago, had you asked the average businessman his personal philosophy on background screening, his response would’ve likely been something to the effect of “better safe than sorry.”  Better to screen every applicant, to eliminate any applicant with a blemish on their record, than to face a due diligence lawsuit.

Now that opinion is changing.  By taking “better safe than sorry” truly to heart, businesses have started to run afoul of the Equal Employment Opportunity Commission (EEOC).  According to the EEOC, making employment decisions (specifically hiring or retention decisions) based on arrest and convictions or on credit reports has a disparate impact on minorities.

The EEOC has also determined that they would generally analyze the following items to determine if a hiring/retention decision was a business necessity or if it was discriminatory:

1. The nature and gravity of the offense(s);
   
2. How much time has passed since the conviction and/or completion of the sentence, and
   
3. The nature of the job held or sought.

The forecast

These two differing opinions have put many businesses between a rock and a hard place. Businesses can’t stop doing background checks completely without opening themselves to due diligence lawsuits but to continue in the vein of running all checks on everyone opens the business to discrimination lawsuits.

Ideally, in order to avoid the potential lawsuits, each company would do the following:

• Look at the risks that a hypothetical criminal in a given job poses to the organization, its customers and its other employees. This can include access to people who are easily victimized (e.g. children), access to easily stolen information or things, and even access to other employees.
• Consider mitigation of those risks from the job itself. There are two major types of on-the-job risk mitigation: supervision and availability to the public. By these standards, a night watchman who would typically work alone should be subjected to a different set of checks than a cashier who would typically work with a manager nearby. Similarly, a school guidance counselor is much more private than even a teacher and should be subjected to different searches.
• Look for evidence in your applicants of the kind of criminal behavior that leads to those risks. This is where you should determine what types of checks are necessary for each applicant. Is there a financial risk with a CFO? Absolutely and that may warrant a credit check. Is there a financial risk with the mail room clerk? Unlikely and running a credit check would probably just be a waste of resources.
• Consider attenuation of that evidence due to the passage of time and any evidence of rehabilitation. The key here would be to consider your grading criteria. Can a single misdemeanor be ignored for a job class? How old is the record? Is there any evidence of rehabilitation?

What it comes down to is that each job class has a different risk profile and because of that, not each job class can be treated the same. The possible risks need to be carefully weighed for each class and policies need to be updated to reflect these risks.