Sixth Circuit Rejects EEOC's Challenge to Kaplan Higher Education Corp.'s Use of Credit Checks During Hiring

In EEOC V. Kaplan Higher Education Corp. , 13-2408 (2014), the Sixth Circuit rejected the Equal Employment Opportunity Commission's (EEOC) claim that Kaplan's use of credit reports discriminated against applicants because the credit reports had an adverse impact on African American applicants.

Kaplan offers graduate and undergraduate degrees. Some of Kaplan's students receive student aid through the Department of Education. Kaplan's employees have access to the student's financial information. After Kaplan discovered that some of its employees were stealing student checks and other irregularities involving the financial aid process, it instituted a pre-employment credit check for applicants to executive, accounting and financial aid positions.

Kaplan uses third party vendors to perform the credit checks. The credit report flags applicants who have filed for bankruptcy, child-support delinquency, garnishments of earnings, outstanding civil judgments over $2,000 and social security numbers that do not match the number the credit bureau has on file. If a credit report is flagged, Kaplan typically reviews the file and makes an individualized analysis on whether to move forward with the application. The vendor does not know the race of the applicants.

The EEOC brought an action against Kaplan claiming its use of credit reports excluded African American applicants at a higher rate than white applicants. To support this claim, the EEOC relied on a process it called "race rating." "Race rating" was a process developed by Kevin Murphy, who holds a doctorate in industrial and organizational psychology. He used five "race raters" who would look at the applicant's driver's license photo and guess the race of the applicant. When four out of the five "race raters" agreed on the race of the applicant, Murphy would use that person's acceptance or rejection in his study.

The lower court granted Kaplan's motion for summary judgment finding that the EEOC had failed to provide any evidence that Kaplan's use of the credit report adversely impacted African Americans. The EEOC appealed.

On appeal, the Sixth Circuit affirmed the lower court's dismissal of the action finding that the lower court did not abuse its discretion when it excluded Murphy's "race rating" study. The court concluded:

We need not belabor the issue further. 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. The district court did not abuse its discretion in excluding Murphy's testimony.

Scrutinizing the use of credit reports in the application process is one of the EEOC's Strategic Enforcement Plan priorities. Despite the ruling in Kaplan , employers can expect the EEOC to continue to challenge the use of credit reports. However, the Kaplan case illustrates procedures which may prevent the EEOC from prevailing on its challenges to the use of credit reports and criminal background checks. Employers who use credit reports and criminal background checks in the application process should:

• Identify the reason you need a credit report or criminal background check on applicants. Kaplan had a legitimate business reason for requiring the information, security of its students' financial and private information.

• Use a third party vendor to perform the credit and criminal background checks.

• Only ask for information that is relevant to the job duties of the position.

• Ensure that the procedure is blind to the applicants protected characteristics by not providing the credit reporting agency or the decision maker with information regarding the applicant's race, gender, age, disability or other protected characteristic.

• When a credit report or criminal background check reveals issues, do an individualized assessment by informing the applicant that he or she is being excluded because of an adverse credit report or criminal background check. Provide the applicant with a chance to explain the credit report or criminal background check.

• Each year review your application process to determine if it is having an adverse impact on minorities, older workers, women or applicants with a disability.

These steps may help you avoid EEOC litigation and provide you with a strong defense if your company is sued.

If you have any questions about credit reports or employment application procedures, please contact Thomas P. Brady at (313) 965-8291 or tbrady@clarkhill.com or another member of the Labor and Employment Practice Group.