Credit History Pitfalls

In a recent decision, the 3rd U.S. Circuit Court of Appeals held that the Bankruptcy Code's anti-discrimination provisions applicable to private employers do not apply to hiring decisions. See Rea v. Federated Investors, No. 10-1440, 2010 WL 5094250 (3d Cir. Dec. 15, 2010). Finding that the language of the statute is plain and that Congress chose to prohibit discrimination in hiring in the anti-discrimination section of the Bankruptcy Code applicable to public employers but not in the section applicable to private employers, the court held that Federated Investors did not violate 11 U.S.C. §525(b) when it refused to hire the plaintiff because he had previously declared bankruptcy. While this decision indicates that private employers may avoid liability under the Bankruptcy Code when making hiring decisions on the basis of an applicant's bankruptcy filing, such employers will face liability under the Bankruptcy Code's anti-discrimination provisions if they terminate an employee or otherwise discriminate against an employee on the basis of his bankruptcy filing.

However, employers may run afoul of various state and federal statutes when making employment decisions, including hiring decisions, based on employees' and applicants' credit histories. The Equal Employment Opportunity Commission contends that an employer violates Title VII of the Civil Rights Act of 1964 if it makes employment decisions on the basis of individuals' credit histories, as doing so has an adverse impact on various minority groups according to the EEOC.  See EEOC v. Freeman, No. 8:09-cv-02573-RWT (S.D. Md., complaint filed Sept. 30, 2009).

Employers may also run afoul of the federal Fair Credit Reporting Act if they use a third-party consumer reporting agency to conduct background checks, which typically include credit history information, and an adverse employment decision is made based on such information, unless the employer complies with the FCRA's strict notice, authorization and disclosure requirements prior to taking adverse employment action based on such information. See 15 U.S.C. §1681 et. seq. Some states have laws which contain similar or more stringent protections.