As we’ve blogged about before, the EEOC has become more aggressive over the past few years in scrutinizing employer use of criminal background and credit checks.  While federal anti-discrimination laws do not expressly prohibit employers from performing background checks or similar screening methods on employees or applicants, their use can be unlawful where the practice has a “disparate impact” on protected classes of employees under Title VII.  Recently, the EEOC has issued Guidance documents focusing on disparate impact cases involving criminal history and credit checks, all as part of its interest in “systemic” forms of discrimination.  In addition to issuing guidance limiting when and how employers can use criminal and credit history background checks in employment, the EEOC has been actively investigating specific employers, as some readers of this blog are undoubtedly all too aware.  In some cases, the EEOC has even initiated lawsuits challenging employers’ use of background checks.  For example, the EEOC has filed suit just a few weeks ago against Dollar General (EEOC v. Dollar General, No. 1:13-cv-04307, Illinois) and BMW (EEOC v. BMW Manufacturing Co., LLC, No. 7:13-cv-01583-HMH-JDA, South Carolina).

Many employers and employment attorneys who have argued that appropriate use of background checks can be important and necessary believe the EEOC is going too far.  Those employers have complained that the EEOC’s aggressive position presumes the use of criminal or credit background checks is per se unlawful and amounts to a de facto ban on their use under any circumstances, regardless of whether or not they result in an unlawful disparate impact.  If you are one of those raising such concerns, federal judges may be listening.  A few weeks ago, a federal  judge in the U.S. District Court in Maryland issued an opinion granting summary judgment dismissal in another of the EEOC’s enforcement lawsuits, EEOC v. Freeman (No. 1:10-cv-2882, Maryland).  The scathing opinion by U. S. District Court Judge Roger Titus held that the EEOC’s evidence was unreliable and failed to raise a question of fact or show Freeman’s background check policies created a disparate impact in violation of Title VII.

Court Holds Background Checks Can Be “Important” and “Essential” Tools for Employers

The court also went out of its way to note as a general matter that employer use of criminal and credit background checks, absent an actual unlawful disparate impact, was not only lawful but an “important” tool for employers.  In so doing, the court cast doubt on the EEOC’s Guidance on this subject, which many believe presumes background checks are inherently discriminatory.  Speaking specifically about the use of criminal background checks, the court noted:

“Because of the higher rate of incarceration of African-Americans than Caucasians, indiscriminate use of criminal history information might have the predictable result of excluding African-Americans at a higher rate than Caucasians.  Indeed, the higher incarceration rate might cause one to fear that any use of criminal history information would be in violation of Title VII.  However, this is simply not the case.  Careful and appropriate use of criminal history information is an important, and in many cases essential, part of the employment process of employers throughout the United States * * *.  Thus, it is not the mere use of any criminal history or credit information generally that is a matter of concern under Title VII, but rather what specific information is used and how it is used.  Because of this, it is simply not enough to demonstrate that criminal history or credit information has been used.  Rather, a disparate impact case must be carefully focused on a specific practice with an evidentiary foundation showing that it has a disparate impact because of a prohibited factor.”

The court went on to describe the important goals that properly applied background checks serve, such as reducing employee theft and protecting the company from negligent hiring lawsuits that could result if a known violent individual injured coworkers or customers.  Indeed, Freeman was able to score easy points by showing that the EEOC itself requires passing criminal background checks as a condition of employment for over 90% of its positions!  (Interesting side note: the tables were also turned on the EEOC in the Kaplan case, where a federal judge required the EEOC to disclose information about its policies in discovery. See EEOC v. Kaplan Higher Education Corp., No. 1:10-cv-2882, 2012 U.S. Dist. LEXIS 54949 (N.D. Ohio Apr. 18, 2012) (granting employers’ motion to compel discovery into EEOC’s background check policies, in part because the information was relevant to company’s defense that EEOC should be estopped from suing employers over practices that it condones itself).)

“Winning” a Pattern and Practice Case Against the EEOC Can Be a Pyrrhic Victory

Freeman is undoubtedly a stinging rebuke of the EEOC’s (over?)zealous enforcement of its Guidance regarding background checks.  The opinion will certainly be cited liberally by employers involved in lawsuits alleging their use of background checks is discriminatory under Title VII.  But employers should be cautioned about reading too much into Freeman.  For example, the court did not hold that the EEOC could never succeed in such a case.  And despite the court’s general approval of background checks, it did not even find that the EEOC’s Guidance was overbroad or otherwise invalid.  The bulk of the court’s analysis focused instead on the inadequacies of the EEOC’s evidence and expert reports, which the court held were statistically unreliable and failed to show statistical evidence of disparate impact in that case.  It is certainly possible that the EEOC could prevail in another case, with either different evidence or better expert testimony.

Further, defending against pattern and practice cases like this can be very expensive, even where, like Freeman, the employer “wins” by getting the case dismissed at summary judgment.  The EEOC filed its lawsuit against Freeman in September 2009, and the company only just won summary judgment in August 2013.  The trial court’s opinion detailed the “period of contentious discovery” and “flurry of motions activity” that occurred during the nearly four years of litigation that preceded this month’s dismissal of the case—code for what was undoubtedly time-consuming, costly, and stressful litigation. Indeed, pattern and practice cases by their nature entail extensive expert and class action-type discovery into many company policies and hiring practices.  For example, the court in Freeman noted that the company had disclosed information related to nearly 59,000 applicants during the course of discovery!

Background Checks Still Need to Be Individualized and Narrowly Tailored

So obviously, despite the employer’s resounding victory in Freeman, most employers would still be best served by trying to avoid costly EEOC scrutiny over background check policies altogether, if possible.  With that in mind, therefore, perhaps the most useful take-away from the Freeman case is the court’s detailed discussion of the specifics of Freeman’s policy.  The court described that policy approvingly, stating that “[o]n its face, Defendant’s policy appears reasonable and suitably tailored to its purpose of ensuring an honest work force.”  (See Freeman fn 3.) 

Specifically, Freeman’s policy included the following:

  • The application included an express disclaimer stating a conviction was not an automatic bar to employment, and that all the relevant circumstances would be considered, including the nature of the offense, the employee’s explanation, and how long ago the offense occurred.
  • The only absolute bar to employment was if the applicant was untruthful or failed to disclose.
  • Background checks were only performed once the employee received an offer of employment.
  • Any decision to deny employment based on background check results had to be reviewed and approved by senior Human Resources officials.
  • Criminal background checks were limited to convictions in the past seven years.
  • Credit checks were limited only to specific “credit sensitive” positions where employees had access to company credit cards or the authority to enter into contracts with vendors. Of course, watch out for other potential restrictions on use of credit checks, such as under state law (see below). 

Indeed, the Freeman criminal check policy seems to largely comply with the EEOC’s 2012 Guidance on that topic, which states that criminal checks should be job-related, consistent with business necessity, and involve an “individualized assessment” of each employee’s circumstances. The details of Freeman’s policy, which has the stamp of approval of at least one federal judge, should therefore be of particular interest to other employers wishing to craft their own background check policies. (Of course, the fact that Freeman’s policy closely tracked the EEOC Guidance was not enough for that employer to avoid a lawsuit, although presumably after the court’s dismissal, the EEOC may think twice before challenging similar policies in the future.) 

Regarding credit checks, even though the EEOC’s Guidance simply says they should be avoided altogether, Freeman suggests they too can be valid, particularly where they are limited only to “credit sensitive” positions.  Note, however, that employer use of credit checks may be limited by means other than Title VII, such as by state law.  For example, an Oregon statute enacted in 2010, ORS 659A.320, prohibits the use of employee credit checks in all but the most narrow circumstances where employee credit history is “substantially job-related.” (emphasis added)

The debate regarding the appropriate use of employee criminal or credit background information in hiring decisions is far from over.  While Freeman may give the EEOC pause, its other enforcement activities continue, including the ongoing litigation in the BMW  and Dollar General cases.  (The employer in the Kaplan case won summary judgment in early 2013 on the grounds, similar to Freeman, namely that the EEOC’s expert evidence failed to show a disparate impact See EEOC v. Kaplan Higher Learning Education Corp., No. 1:10 CV 2882, 2013 U.S. Dist. LEXIS 11722 (N.D. Ohio Jan. 28, 2013).  Interestingly, the Kaplan case involved the same expert relied on by the EEOC in Freeman.)

As the law continues to develop in this area, employers should continue to review hiring practices to ensure they comply with applicable law, including applicable EEOC Guidance. And even when the policy is facially compliant, employers should nevertheless consider conducting regular audits of hiring data to ensure there are no statistical indicators of a disparate impact affecting a protected class under Title VII.  As Freeman and other cases show, you want to be on solid ground and make sure the numbers back up your policy if the EEOC ever comes knocking.