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Appellate Court Affirms Dismissal of EEOC Challenge to Credit Checks

On April 10, 2014 by Schnader in Labor and Employment

By Scott J. Wenner

In an important opinion that turned on a technical rule of evidence, but which has broader implications, the Court of Appeals for the Sixth Circuit yesterday strongly rejected the EEOC’s methodology for asserting that an employer’s use of credit checks has an unlawful disparate impact on minority applicants.

As we have written previously, [EEOC Begins Enforcing 2012 Criminal Background Check Guidance] and [EEOC Position on Criminal Background Checks Rejected Again], as part of its effort to eradicate systemic discrimination, the Commission has published sweeping guidelines and has filed a number of lawsuits aimed at curtailing use of background checks in the hiring process.  Its theory is that these methods have a disproportionately adverse impact on black and Hispanic applicants, and therefore must be justified as job-related and required by business necessity. While the pushback from employers, and even by a collective group of state attorneys general, was predictable in view of an employer’s obligations to its stakeholders in the areas of personal and financial security and safety, the Commission was undeterred.

The fact that its first two lawsuits challenging background check practices – by Kaplan Higher Education Corp. and by event organizer Freeman – were dismissed by federal district judges who plainly were highly dubious of the EEOC’s theory, did not prompt the Commission to change course. The short shrift given the EEOC’s position by the Sixth Circuit panel in Kaplan, which staunchly supported the district court’s analysis, should give the Commission substantial doubt over the viability of its theory, which also is pending review by the Fourth Circuit in Freeman.

Technically at issue in Kaplan was the methodology used by the EEOC to prove the impact of Kaplan’s credit background checks on black applicants.  As Kaplan did not record the race of applicants, a fact obviously needed to establish the impact of its practice on African-American applicants, the Commission retained a purported expert “race rater” to divine the race of 900 applicants using subpoenaed drivers’ license photos. The “expert’s” only credentials appeared to be a doctorate in organizational and industrial psychology and some statistical expertise.  On multiple unassailable grounds the appellate panel found that the method used to prove the races of the applicants (i) failed to satisfy any of the factors used by the courts to test the reliability of expert evidence under the Federal Rules of Evidence and (ii) was based on a sample that was unrepresentative of Kaplan’s pool of applicants.  As devastatingly summarized at the end of the Court’s relatively brief opinion:

The EEOC brought this case on the basis of a homemade methodology, crafted by a witness with no particular expertise to craft it, administered by persons with no particular expertise to administer it, tested by no one, and accepted only by the witness himself.

What should be giving the Commission particular pause about the Sixth Circuit’s opinion reaches beyond its limited holding.  It is found in the opening paragraph of the opinion, which reads in its entirety:

In this case the EEOC sued the defendants for using the same type of background check that the EEOC itself uses. The EEOC’s personnel handbook recites that “[o]verdue just debts increase temptation to commit illegal or unethical acts as a means of gaining funds to meet financial obligations.” Because of that concern, the EEOC runs credit checks on applicants for 84 of the agency’s 97 positions. The defendants (collectively, “Kaplan”) have the same concern; and thus Kaplan runs credit checks on applicants for positions that provide access to students’ financial-loan information, among other positions. For that practice, the EEOC sued Kaplan.

Coupled with the fact that the court ruled a mere three weeks after it heard oral argument, this passage, which is consistent with views expressed by the district courts that dismissed both the Kaplan and Freeman cases, certainly suggests that the EEOC will have a tough road ahead in convincing the courts to embrace its effort to curb the use of background checks to screen applicants.


The Court of Appeals for the Fourth Circuit will be deciding the EEOC’s appeal from the dismissal of its Freeman action, probably in the near future.  Further, the EEOC has not commented yet on whether it plans to seek Supreme Court review of the Sixth Circuit Kaplan decision.  Given the focus of Kaplan’s holding on the evidentiary value of the expert’s opinion and the EEOC’s apparent judgment error in bringing that action based on what the appellate panel obviously considered to be a poor excuse for an expert opinion, the Commission could take the position that strictly speaking, Kaplan does not affect the EEOC’s position on the unlawfulness of overly broad use of background checks to screen applicants. For all of these reasons, it is premature to assume that the Commission will back off the rather extreme position it has asserted in its guidelines and has taken in the actions it has brought thus far.

Thus, employers should continue to exercise care in selecting positions for which they will use background checks to screen applicants, and understand the risk that the costly defense of a challenge could be the result of a decision to continue to use credit and/or criminal background checks broadly in screening applicants.