Federal Appellate Court Says Private Employers May Reject Applicants Based on Bankruptcy History, EEOC Says Maybe Not

Despite recent court decisions that hold that private employers may refuse to hire someone based on past bankruptcies, hiring managers and Human Resource departments across the country should give pause to consider whether such a policy is related to the job being sought.  The reason being is that the recent court decisions may give hiring managers a false sense of security which could cause their actions to be at odds with the EEOC’s long-held stance on the legality of considering certain data in making hiring decisions.

The Federal  Courts

In Rea v. Federated Investors, No. 10-1440, 2010 WL 5094250 (3d Cir. December 15, 2010), the Federal Third Circuit Court ruled that a private employer  may discriminatorily refuse to hire an applicant based on his/her past Bankruptcy.  This is the first federal appellate court decision on the issue, and follows on from at least nine (9) federal district court decisions that have held the same way[i].   The Third Circuit covers New Jersey, Pennsylvania, and Delaware.   New York’s Federal Southern District Court is home to the only decision to hold that private employers may not refuse to hire based on the applicant’s past Bankruptcy.  See Leary v Warnaco, Inc., 251 BR 656 (2000).  Though he is alone in his holding, Judge Brieant seems to make the most sense when he reasoned that allowing private employers to discriminate against people that have bankruptcy in their history would frustrate the “fresh start” policy which is behind personal bankruptcies.  How on earth does one get a fresh start if he cannot get hired?  I won’t bore you with the statutory construction analysis the courts were grappling with, but suffice it to say, with the Third Circuit having weighed in, New Jersey, Pennsylvania, and Delaware private employers would now seem to have the green light to commence using bankruptcy history in hiring decisions, while for New York private employers it is still somewhat unsettled.

The EEOC & State Law

So, what’s a hiring manager or HR department at a private company to do?  Well regardless of whether you’re in New York, New Jersey, or any other State, the EEOC has long said that you should be very careful when using past financial history (including bankruptcies) in making hiring decisions.  Why? Because they say application of such a policy may have a disparate impact on protected classifications, such as minority groups that are statistically experiencing more bankruptcies and negative credit reports.   As the EEOC puts it:

Inquiry into an applicant’s current or past assets, liabilities, or credit rating, including bankruptcy or garnishment, refusal or cancellation of bonding, car ownership, rental or ownership of a house, length of residence at an address, charge accounts, furniture ownership, or bank accounts generally should be avoided because they tend to impact more adversely on minorities and females. Exceptions exist if the employer can show that such information is essential to the particular job in question.

See Pre-Employment Inquiries and Credit Rating or Economic Status http://eeoc.gov/laws/practices/inquiries_credit.cfm   (last visited February 2, 2011) (emphasis added).   The EEOC is not alone in this analysis.  The States of Hawaii, Illinois, Oregon, and Washington have statutes that make it unlawful to use credit history in hiring decisions unless it can be shown to be job-related.

On December 21, 2010, coincidentally a mere six days after the Rea v Federated Investors decision, the EEOC filed suit against Kaplan Higher Education Corp. alleging that Kaplan violated Title VII of the Civil Rights Act of 1964 by rejecting black applicants nationwide based on their credit histories, without showing that the practice was job-related and justified by business necessity.  See EEOC Files Nationwide Hiring Discrimination Lawsuit Against Kaplan Higher Education Corp. , http://www.eeoc.gov/eeoc/newsroom/release/12-21-10a.cfm (last visited February 2, 2011).

This should be an interesting case to watch as pertains to defining “job-relatedness” in the context of considering the financial history of applicants in the hiring process.  In testimony before the EEOC on October 20, 2010, the issue of job-relatedness was raised by Michael Eastman, Executive Director of Labor Law Policy at the US. Chamber of Commerce.   In his testimony he pointed out that among the private companies that consider the financial history of individuals applying for jobs, they do so for positions in which the applicant would have access to certain sensitive information or company/client funds, such as HR, and presumably jobs like accounting, and security. See Employer Use of Credit History as a Screening Tool, Statement of Michael Eastman, http://www.eeoc.gov/eeoc/meetings/10-20-10/eastman.cfm (last visited February 3, 2011).  He also pointed out that various Federal agencies also consider applicants’ financial history for certain positions.  I find it telling that the EEOC has not gone after some of the large financial firms that are using credit histories in hiring decisions.  My guess is that the EEOC’s focus in the Kaplan case is on the specific types of jobs Kaplan is hiring for and applying the credit history checks to.  Assuming Kaplan raises job-relatedness as a defense in at least some of the rejections, maybe we can get some useful guidance out of this case in terms of which jobs the EEOC deems the use of credit history job-related enough to permit financial history discrimination.  Of course, the case could also settle, in which event we’ll have to wait until the next case comes along.

What Now?

In the meantime, what should hiring managers do?   If you are going to use credit histories: (1) make sure you comply with the federal Fair Credit Reporting Act (“FCRA”); (2) limit it to jobs that include access to sensitive information or money; (3) in considering the debt, distinguish between how the debts were incurred.  Gambling debts should probably not be seen in the same light as housing, medical, education, or certain other types of debt; (4) let it be one of several factors considered; and (5) seek the counsel of an experienced labor & employment attorney.

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[i] See In re Burnett, No. 06-34312-H4-13, 2008 WL 4609983 (Bankr.S.D.Tex. Oct.14, 2008); In re Martin, No. 06-41010, 2007 WL 2893431 (Bankr.D.Kan. Sept. 28, 2007); In re Stinson, 285 B.R. 239 (Bankr.W.D.Va. 2002); Fiorani v. CACI, 192 B.R. 401 (Bankr.E.D.Va.1996); In re Hardy, 209 B.R. 371 (Bankr.E.D.Va.1997); Pastore v. Medford Savings Bank, 186 B.R. 553 (D.Mass.1995); In re Briggs, 143 B.R. 438 (Bankr.E.D.Mich.1992); In re Madison Intern. of Illinois, 77 B.R. 678 (Bankr.E.D.Wis.1987). See also Cord v. Skinner Nurseries, Inc., No. 01-20256, 2004 WL 2923845 at * 2 (Bankr.M.D.Fla. Oct.14, 2004).

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