Brenda Matthews thought she had landed the job of her dreams. After interviewing for a paralegal position in Johnson & Johnson’s legal department, Matthews was offered the job. The 27-year-old single mother accepted it immediately. She even informed her current employer of her new position–providing the standard two-week notice.

A few hours later, however, her dream turned into a nightmare. Johnson & Johnson called Matthews to rescind the offer. The company said it had run a background check on Matthews and discovered information it considered unsatisfactory.

It wasn’t poor job performance or a criminal history the company had uncovered. It was an unsatisfactory credit report. Matthews was devastated.

But Johnson & Johnson isn’t the only company using credit histories when making hiring decisions. Many organizations across the country–such as banks, universities and retail stores–commonly use credit reports to screen potential employees. For the most part the practice isn’t illegal. But how these companies are going about using the information they obtain–and whom it’s affecting–is raising some eyebrows.

Meanwhile, Matthews is raising hell.

The Race Case

Matthews filed a complaint with the EEOC claiming discrimination under Title VII of the Civil Rights Act of 1964, which protects individuals against employment discrimination on the basis of race, among other things. Matthews, who is African-American, and her attorney, Adam Klein, believe the use of credit history or credit scores ultimately will adversely affect all African-Americans.

“Statistically speaking, blacks earn much less than whites, have far fewer accumulated savings and are more at risk in terms of health care,” says Klein, who is a partner at Outten Golden in New York. “Those are stressors that cause credit scores and credit histories to be less than perfect.”

Furthermore, Klein says there is no scientific evidence to indicate credit history reveals anything negative about an applicant’s suitability for employment.

“In fact the opposite may be true,” he says, adding it would make logical sense that people with financial difficulties may want to keep their jobs and do well, where those who are in better shape financially may not care as much.

Klein believes the number of otherwise qualified African-Americans who are being denied employment opportunities based on poor credit scores is rising.

“There are segments of the population where the problem is acute,” he says. “It is very serious.”

But historically, the courts haven’t necessarily seen it that way.

According to the federal Fair Credit Reporting Act (FCRA), a company has the right to obtain credit reports and use that information when considering a candidate for a position in which the information may be applicable, such as jobs that require an employee to handle a significant amount of money or deal with sensitive information.

“Companies need to make sure they are using devices such as credit reports in the hiring process only when there is a good job-related reason,” says Lawrence S. McGoldrick, of counsel at Fisher & Phillips in Atlanta, and head of the firm’s labor and employment practice. “That refers to jobs that require an employee to handle large sums of money or have access to various forms of sensitive information.”

In the 1979 case EEOC v. American National Bank, a group of African-American women applying for teller positions at American National Bank in Virginia claimed the bank discriminated against them when it denied them employment based on their credit history.

“In cases like these, the first step in litigation is for the plaintiffs to prove there is an adverse impact as a result of the credit reporting,” McGoldrick explains. “Once they’ve done that, the burden of proof shifts to the employer, who then has to prove there was a legitimate business reason to use the credit reports.”

Because the bank proved the tellers would handle a great deal of money as part of their daily job responsibilities, the court found for the bank, stating “the use of credit checks by the bank served legitimate, important and job-related purposes.”

Whether this case will say anything for the fate of Johnson & Johnson in Matthews’ complaint has yet to be decided. It’s still in the hands of the EEOC, which has about six months to decide whether or not it will file suit. The EEOC didn’t respond to requests for comment.

Johnson & Johnson said in a statement it uses credit reports to “identify the existence of negative credit-payment history,” which may impact the job offer if the history reveals issues significant to the position involved. Although Matthews’ position wouldn’t have required her to handle great sums of money, it would have provided her access to sensitive patent information.

Playing By The Rules

Experts say companies who use credit reports when making hiring decisions can sidestep these types of complaints by following some simple steps when obtaining credit reports.

First, if the credit report is job-related and a position puts a person in charge of a lot of a company’s money, the applicant’s credit history could say a lot about their ability to handle money, says Les Rosen, president of Employment Resource Screening, which conducts background checks on employees for hundreds of companies.

“If the person can’t handle their own money, a potential employer might ask, ‘How is he going to handle mine?’” says Rosen, a retired attorney.

Second, the company may want to know a person’s debt situation and compare that to the salary it is offering. “If you’re applying for a job that pays $3,500 a month, but you owe $4,500 a month in credit-card debt, an employer might say, ‘Is this the ideal candidate to place in charge of our money when they have these personal financial issues?’” Rosen says. “That creates temptation. Embezzlement is a crime of opportunity, motive and means.”

One thing companies must keep in mind when using credit reports in hiring decisions is the possibility those reports contain errors.

“There are a lot of things reported on credit histories that just aren’t factual,” Rosen points out. “Employers need to make sure the information they are getting is recent, relevant and fair.”

When a company does decide to use a credit report in any hiring decision, it should follow FCRA’s guidelines on how to properly and legally obtain the report, and if necessary, deny an offer based on the credit report’s results.

First, the company must inform the potential employee in writing that it is planning on conducting a credit check. Second, the applicant must sign an authorization form allowing the company to obtain the information. Third, if the company is planning on making an adverse decision based, even in part, on the report, it has to give the applicant a copy of the report before making that decision. Finally, the company has to send a written notice to the applicant explaining why it made the adverse decision and give him or her the opportunity to correct any errors with the credit-reporting firm.

Experts say obtaining credit reports for pre-employment screening seems to offend people more than any other information obtained in background checks.

“It becomes an issue of privacy rights for people,” McGoldrick says. “They want to know why a company needs to get into their private affairs. It creates a morale problem, and morale problems often turn into legal problems.”

Rosen agrees that privacy is top of mind for many Americans today. And post September 11, he says security concerns are as well.

“Background checks weed out the criminals and terrorist,” he explains. “While credit reports, a part of background checks, have the potential to invade privacy. Security and privacy are two core American values. We need to figure out a way to balance the two.”

Until then, Matthews plans to stand strong in her fight to get credit reports out of the pre-employment screening process.

“Unless someone can demonstrate that there is some connection between credit histories and suitability for employment, using credit information simply has no place in the hiring process,” Klein says.