Credit Checks as an Unlawful Practice

A friend of mine who is getting an MBA asked me the other day if he should be worried about credit checks from prospective employers once he graduates.  My friend has terrible credit, a result of a failed business he had in which he invested his own funds.  I'd like to tell him not to worry, but in this day and age of limited privacy, most employers insist on reviewing your credit prior to hire.

Under the Fair Credit Reporting Act, an employer is entitled to run background checks and credit checks if you sign an authorization.  Given the fact that an applicant isn't going to get the job unless she signs, most everyone signs the authorization. 

The argument in favor of credit checks is that someone with a bad credit history, or with lots of debt, may be tempted to steal or embezzle.  Assuming this is true -- and it seems dubious to me -- there are very few jobs these days that give employees unfettered access to cash.

Because of the tenuous link to employment, the Equal Employment Opportunity Commission is holding public hearings to discuss whether the use of credit history has a disparate impact on minorities and women.  Employment practices that have a disparate impact on protected groups are illegal unless they can be shown to be consistent with business necessity.  So, for example, requiring applicants at McDonalds to hold a college degree would be illegal because it would have a disparate impact on some minority groups, and there is no business reason for such a test.

Since some minority groups have lower credit scores than the general population, disqualifying applicants from employment based on a credit check has a disparate impact.  The question then becomes whether the tests are predictive of performance, or trustworthiness, and therefore are consistent with business necessity.  Proponents of checks say yes, while opponents say there is no correlation. 

Using credit checks as a blunt tool can't really be justified in my opinion, though it might be useful in certain contexts.  Dr. Michael Aamodt, an industrial psychologist, testified at the EEOC hearing that there is not much  research validating credit checks in the employment context.  Aamodt concluded that an applicant’s credit history should be considered only within the context of a thorough background check.

When my friend asked about background checks, I told him that he shouldn't worry, because in the corporate context he would be able to explain how his credit history turned south.  I'd like to think that a prospective employer would listen and take his explanation into account.  In this economy, however, I'm not so sure.