New Wal-Mart case highlights risks in use of credit reports to screen applicants
Responding to Michael’s last post on Wal-Mart, I have a few thoughts.
First, it is not entirely clear from the news report that the EEOC is actually litigating this case. It found cause, which it does in a relatively small fraction of charges filed. But only in a relatively small fraction of these cause cases does the EEOC actually join as a plaintiff, using its staff attorneys to litigate the case. The agency uses its resources carefully, and typically only joins litigation when it wants to make new law or send an important message to employers.
Once the EEOC is a party, forget about a confidential settlement. They’ll settle all right, but will typically insist on, and follow through on, the right to publicize the settlement.)
Second, Michael is absolutely correct that this sounds like a “disparate treatment” theory, not “disparate impact.”
However, this may be a function of poor journalism or poor lawyering (suggesting the EEOC is not involved).
Wal-Mart may indeed have problems if challenged on a class action basis using a disparate impact theory for using credit reports to screen truck driver applicants.
I do not have a good sense of how common this practice has become. But I would anticipate that it may be quite easy to establish a disparate impact racially. And quite hard to establish legitimate business justification for using credit reports for this purpose.
The following discussion is from a lawyer’s perspective (what did you expect?) I am coming to a better understanding of the differences between such a perspective and that of the HR community. We will disagree about a practice if the lawyers are queasy about the legal risk, but the HR people are convinced the practice is functionally extremely valuable. HR may well feel this way about using credit reports. But let me tell you about my queasiness:
What exactly does it tell Wal-Mart if a truck driver applicant has been late paying bills or even has been through bankruptcy? That the applicant is financially irresponsible and therefore would be unreliable and irresponsible as a truck driver?
Too many unjustified inferences required to reach that conclusion. What if the applicant worked like a dog for years, working two poverty-wage jobs with near-perfect attendance and exemplary performance records, but did not receive health insurance through either job and then experienced a health crisis that ran up an enormous debt?
I suppose if you ask questions about a credit report and don’t simply jump to conclusions from its contents you may be justified. But even there, in drawing conclusions about work habits from personal financial habits where the job does not involve handling or accounting for money or making financial decisions, job-relatedness is questionable.
Additionally, past financial behavior is not always a good predictor of future financial behavior, especially with young people.
An anecdote: My wife and I own one rental property. We started using credit reports to screen potential renters, mainly because the city residential housing service offered such reports for a reasonable fee. One time two very pleasant young ladies applied for an apartment. College students by day and waitresses by night, they seemed perfect.
Then we got the credit reports. One had just been through a personal bankruptcy — at age 19 or whatever.
She successfully pleaded her case: she got a credit card at 16 and got in over her head; she had learned her lesson; she really needed to rebuild her credit record and wanted a good record with a landlord as part of that effort. Seeing that they were both raking in very nice tips, income you can’t beat for rapidity of cash flow, we let them move in. We made the right decision; they were ideal tenants and always on time with the rent.
I have other legal concerns about using credit reports. Compliance with the Fair Credit Reporting Act is one. Among other things, this means applicants screened out due to their credit record must be given a pre-adverse action disclosure and an adverse action notice. See this summary by the FTC: “Using Consumer Reports: What Employers Need to Know”
There is also a prohibition on discrimination based on bankruptcy.
