Articles - Health / Safety / Risk Mgmt

Despite recent federal appellate 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, and a business necessity.

The reason being is that the recent court decisions may give hiring managers a false sense of security which could cause their hiring decisions 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

On December 15, 2010, in Rea v. Federated Investors, No. 10-1440, 2010 WL 5094250 (3d Cir. December 15, 2010), the Federal Third Circuit Appellate Court ruled that a private employer may discriminatorily refuse to hire an applicant based on his/her past Bankruptcy.  Rea was the first federal appellate court decision on this issue, and followed on from at least nine (9) other lower federal district court decisions that had held the same way.   The Third Circuit covers New Jersey, Pennsylvania, and Delaware.

Similarly, on March 4, 2011, in Shani Burnett v. Stewart Title, Inc., 2011 U.S. App. LEXIS 4369 (5th Cir. 2011), the Federal Fifth Circuit Appellate Court became the second federal appellate court to hold that private employers may discriminate against job applicants based on their bankruptcy history.  The Fifth Circuit covers Texas, Louisiana, and Mississippi.   More recently, on May 17, 2011, In Myers v. Toojays, the Federal Eleventh Circuit Court of Appeals ruled that private employers may refuse to hire applicants based on their bankruptcy history.  The Eleventh Circuit covers Alabama, Florida, and Georgia.

To date, 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 alone in its holding, the New York decision seems to make the most sense in its reasoning 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 one cannot get hired?

Beyond the legal considerations, the more recent Eleventh Circuit Myers v. Toojays case raises some other issues for HR and senior executives to ponder.  The job at issue in the Myers case was a managerial position in a local gourmet deli.  There was no evidence that the applicant Mr. Myers had a criminal history, or was involved or somehow predisposed to stealing.

In fact, at the time he applied for the job he was already working as a supervisor for the national coffee chain Starbucks, and resumed working there after the deli rejected him.   He had completed the required two days of on-the-job training at the deli, and was scheduled to start in earnest a few weeks later.   It was only after the credit check revealed his past bankruptcy that the deli rescinded his job offer.

Considering how many Americans are burdened by large amounts of debt due to the recession, medical debt, student debt, and the housing crisis, it is no surprise that some have opted to exercise their legal right to file for bankruptcy in seeking a fresh start.  As noted above, that is the express purpose of the personal bankruptcy provision.

In light of this, and the fact that Mr. Meyers was otherwise qualified for the job, and his credit history does not appear to be job-related, did the deli’s policy unnecessarily deny it the services of a good employee?  Probably.  Did it deny an individual his legal right to a fresh start under US law?  Definitely.  He did nothing wrong, and was qualified for the job, yet he was denied the job because he had a past bankruptcy.  Any talk of getting the recession turned around is meaningless if qualified Americans are not able to rejoin the ranks of the employed.

With three federal appeals courts, and at least 9 district courts now ruling this way, the case for congressional action is clear.  Sadly, the current congress is not likely to answer the call.  It is up to HR and corporate executives to question the utility of such a lazy screening policy that in many instances has nothing to do with the requirements of the job, or qualifications of job applicants.  The fact that a national chain like Starbucks has figured it out offers some hope.

If you are wondering why the majority of courts have ruled that private employers may discriminate against applicants based on bankruptcy history, I won’t bore you with the statutory construction analysis the courts were grappling with.  For the record, I think the courts’ statutory construction analysis is correct.  However, the results of the analysis are absurd and conflict with the stated purpose behind the personal bankruptcy law.  As such, Congress must act to correct this contradiction.

Until then, it would seem that with the Third, Fifth, and now Eleventh Circuits having weighed in, New Jersey, Pennsylvania, Delaware, Texas, Louisiana, Mississippi, Alabama, Florida, and Georgia private employers now have the green light to commence using bankruptcy history against applicants in hiring decisions.  The same cannot be said for New York private employers since the Federal Second Circuit has not ruled on the issue yet.  The Second Circuit covers Connecticut, New York, and Vermont.

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.  It has been reported that 14 other states are considering similar legislation.

On December 21, 2010, coincidentally a mere six days after the Third Circuit’s Rea 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 U.S. 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 in light of the potential conflict between certain federal court decisions on one hand and the EEOC and certain state laws on the other?

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 (i.e., make it “job-related”); 
(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.

The green light signaled by federal court decisions allowing private employers to discriminate against applicants based on their bankruptcy history should not be viewed as an invitation to plunge head-first into applying such a screening policy.

Instead, with the EEOC and its concern for disparate impact discrimination lurking just below the surface when it comes to credit checks being used as a screening tool, the prudent employer should first question whether such a tool is job-related, and necessary for the business.  In other words, like any other so-called tool, ask “Do we really need it for this job?” or risk unwanted scrutiny from the EEOC.

DISCLAIMER: This site and any information contained herein, including this article, are intended for informational purposes only and should not be construed as legal advice. Seek competent counsel for advice on any legal matter.  The author is Principal of Reid Kelly, P.C. law firm, where his practice focuses on labor, employment, and immigration matters. Visit www.ReidKellyPC.com for more information.

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Biography

Shaun C. Reid, Esq. is a labor, employment, and immigration law attorney.  As the Principal of Reid Kelly, P.C. law firm, he advises clients on all aspects of employment law, immigration, and labor relations, and provides human resources counseling.  His practice includes employment discrimination litigation, unfair labor practice litigation, NLRB representation proceedings, collective bargaining, involvement with grievance arbitration procedures, drafting and implementation of personnel policies, and advising clients concerning compliance with applicable labor and employment laws, wage and hour standards, and other general workplace guidelines.

Prior to founding Reid Kelly, P.C., Mr. Reid served as the General Counsel and Director of Labor Relations of a retailer based in New York City.  Prior to that, he served as an Associate Attorney for a boutique management-side labor and employment law firm in New Jersey and New York.  He has also served twice as a legal intern at the U.S. Equal Employment Opportunity Commission’s New York District Office, and as a legal intern in the U.S. Bankruptcy Court, Southern District of New York.  He is a proud graduate of Fordham University School of Law, and is admitted to the Bars of New York and New Jersey, and the Federal Courts in the Southern and Eastern Districts of New York.  He is a member of the New York City Bar Association, The Brooklyn Bar Association (member, Labor & Employment Law Committee), The Brooklyn Chamber of Commerce, the MBBA (member, Labor & Employment Committee), and NAAAHR-GNY (member, Legal Committee).

Mr. Reid volunteers his time with several legal services organizations on matters related to immigration and consumer debt.

He can be reached at s.reid@reidkellypc.com, and more of his thoughts can be found here http://www.reidkellypc.com/blog/, and here http://hrlawyer.tumblr.com/.

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