1. Financial Risks of Using Criminal & Credit History in Employment Decisions Blake A. Bailey 817.488.3134 blake.bailey@phelps.com

2. Louisiana │ Mississippi │ Texas │ Florida │ Alabama │ North Carolina | London OVERVIEW Majority of employers run pre-employment background checks for criminal and/or credit history Purpose and use of background checks Credit Reporting Agencies claim that credit reports: Reveal applicant’s character Identify applicant’s propensity to steal Protect against workplace violence Avoid negligent hiring However: No empirical evidence to support correlation exists Many credit reports contain errors (FTC Study - 20%)

3. Louisiana │ Mississippi │ Texas │ Florida │ Alabama │ North Carolina | London OVERVIEW Although federal law permits employers to run background checks (with some restrictions), there is a financial risk EEOC has opposed background checks for years and has issued new guidelines which are gaining traction: Background checks may result in discrimination Risk: possible discrimination lawsuit by applicants or EEOC Many states have tougher restrictions on how background checks are performed and used Risk: liability for misuse of information/improper procedures

4. Louisiana │ Mississippi │ Texas │ Florida │ Alabama │ North Carolina | London CURRENT LAW Federal Law and Texas Law do not CURRENTLY Prohibit Employers From Refusing to Hire Persons with Poor Credit or Past Criminal Convictions They do not authorize it in all instances either There are restrictions in place EEOC Guidelines presume it is a discriminatory practice 10 States CURRENTLY DO Restrict Use 3 other states have laws pending

5. Louisiana │ Mississippi │ Texas │ Florida │ Alabama │ North Carolina | London If You Check Histories, There are Limitations Obtain the Information Properly Use the Information Properly Adopt and Follow Appropriate Policies

6. Louisiana │ Mississippi │ Texas │ Florida │ Alabama │ North Carolina | London Compliance with Current Federal Law Fair Credit Reporting Act Applies to reports prepared by third parties Obtain Written Consent Notice to Employee – separate from job application Certify FCRA Compliance to Reporting Agency If you make an adverse decision: Notify Employee of Intent to Make Adverse Decision Provide Employee Opportunity to Make Corrections Risks for Violating FCRA Damages – actual, attorneys’ fees, punitive damages (willful)

7. Louisiana │ Mississippi │ Texas │ Florida │ Alabama │ North Carolina | London EEOC’s Position on Background Checks EEOC Policy Guidance issued in 1987 and 1990 Presumed disparate impact Civil Rights Act of 1991 amended Title VII to codify disparate impact 42 USC §2000e-2(k) Presumption of disparate impact not allowed; plaintiff bears burden of proof to show impact 2007 3d Circuit case—El v. SEPTA Refused to consider EEOC guidance in analyzing use of criminal records in disparate impact case Convict advocacy groups pushed for individual consideration of applicants’ circumstances

8. Louisiana │ Mississippi │ Texas │ Florida │ Alabama │ North Carolina | London EEOC Issued New Guidance in 2012 “Eliminate policies or practices that exclude people from employment based on any criminal record” Addresses disparate impact of considering criminal and credit history in hiring and other employment decisions: Rate of arrests and convictions for African American and Hispanic males is higher than for others in population Women and minorities are more likely to have credit problems Concludes that policies which exclude individuals based on credit or criminal histories can create illegal disparate impact on women and racial minorities if not Job related Consistent with business necessity

9. Louisiana │ Mississippi │ Texas │ Florida │ Alabama │ North Carolina | London What is Standard for Disparate Impact? Title VII standard: Plaintiff/EEOC must show that (1) a “particular employment practice” (2) causes disparate impact based on race, etc. If shown, employer must show that policy is job related for position in question and consistent with business necessity Plaintiff can still win if shows less discriminatory alternative, but employer refused to use it. 42 U.S.C. § 2000e-2(k)

10. Louisiana │ Mississippi │ Texas │ Florida │ Alabama │ North Carolina | London What Constitutes Disparate Impact? Identify specific policy (or practice) Significant disparity affecting a group based on the policy or practice EEOC presumes disparate impact for criminal history in criminal history investigations: “National data... supports a finding that criminal record exclusions have a disparate impact on race and national origin.” EEOC has been less aggressive on credit history Credit inquiry “generally should be avoided because they tend to impact more adversely on minorities and females.”

11. Louisiana │ Mississippi │ Texas │ Florida │ Alabama │ North Carolina | London What is Business Necessity? Business Necessity is not defined in Title VII Supreme Court has been unclear EEOC adopts strictest potential formulation: “necessary to safe and efficient job performance.” Dothard v. Rawlinson, 433 US 321 (1977) Another formulation: “significantly serve... employer’s legitimate business interests.” Watson v. Ft. Worth Bank & Trust, 487 U.S. 977 (1988) Generally, a policy or practice is not a “business necessity” unless it is related to the nature of the work

12. Louisiana │ Mississippi │ Texas │ Florida │ Alabama │ North Carolina | London Business Necessity in Criminal Records Context Arrests EEOC says arrest records are irrelevant An arrest does not show that criminal conduct occurred Presumption of innocence “Exclusion based on arrest, in itself, is not job related and consistent with business necessity.” Convictions Can presume conduct occurred because of conviction Broad based exclusions based on any conviction are improper Traditionally, looked at Green factors to determine whether exclusion based on a particular offense is a business necessity Now, EEOC wants you to use Green factors, PLUS individual inquiry

13. Louisiana │ Mississippi │ Texas │ Florida │ Alabama │ North Carolina | London Business Necessity in Criminal Records Context Green factors: Green v. Mo. Pac. R.R., 549 F.2d 1290 (8th Cir. 1975): Nature and gravity of offense or conduct Criminal acts involved and harm caused Time passed since offense or release Likelihood of repeat occurrence lessens over time FCRA limits credit reports to 7 years Nature of job held or sought Essential job functions – written job description

14. Louisiana │ Mississippi │ Texas │ Florida │ Alabama │ North Carolina | London Business Necessity in Criminal Records Context Business necessity means employer must justify exclusion policies by “accurately distinguish[ing] between applicants that pose an unacceptable level of risk and those who do not.” Bad facts make bad law: El v. SEPTA, 479 F.3d 232 (3d Cir. 2007) Employer terminated 55-year old bus driver with 40-year old conviction for 2d degree murder from gang fight EEOC has relied on El to amplify what it says is required for business necessity: “[E]ffectively link specific criminal conduct, and its dangers, with the risks inherent in the duties of a particular position.”

15. Louisiana │ Mississippi │ Texas │ Florida │ Alabama │ North Carolina | London How Does Employer Show Business Necessity? One method: validate policy under Uniform Guidelines on Employee Selection Procedures (UGESP) for potentially disparate impact EEOC says such validation studies are “rare” Unintended consequence: Endorse Watson, 487 U.S. at 997 (O’Connor, J., concurring) (recognizing that validation studies are not always required, particularly in “subjective or discretionary employment decisions”)

16. Louisiana │ Mississippi │ Texas │ Florida │ Alabama │ North Carolina | London How Does Employer Show Business Necessity? Second method: Apply Green factors AND give the individual a chance to explain EEOC’s real goal is individualized inquiries EEOC will allow you to rely on just Green factors in a few narrow circumstances

17. Louisiana │ Mississippi │ Texas │ Florida │ Alabama │ North Carolina | London Green Factors Nature and gravity of offense or conduct Criminal acts involved and harm caused Time passed since offense or release Likelihood of repeat occurrence lessens over time FCRA and Texas law limit credit reports to the past 7 years Nature of job held or sought Essential job functions – written job description

18. Louisiana │ Mississippi │ Texas │ Florida │ Alabama │ North Carolina | London What are the Individual Factors? Criminal record is inaccurate or inapplicable Circumstances surrounding offense Number of convictions Age at time of conviction/release, whichever is later Evidence of working in same job after conviction or release without additional crimes Employment history before and after conviction Rehabilitation efforts (education or training) References Whether individual is bonded No need to consider if individual won’t provide info.

19. Louisiana │ Mississippi │ Texas │ Florida │ Alabama │ North Carolina | London EEOC v. Freeman – Best Practices Written policy designed to: Avoid negligent hiring suits Increase security of assets and employees Reduce inconsistent hiring practices Reduce risk of employee related loss Eliminate incidents which jeopardize customer confidence Multi-tiered pre-screening procedure depending on job General employees without credit sensitive job, screened for criminal and social security violations Credit sensitive positions also screened for credit background Officers further screened to verify education and certifications

20. Louisiana │ Mississippi │ Texas │ Florida │ Alabama │ North Carolina | London EEOC v. Freeman – Best Practices Pre-employment Asked if employee pled guilty or was convicted of crime Provided space to describe date and circumstances Included a statement that it would not automatically exclude applicant After Conditional Offer was Extended Run criminal background check Verify accuracy of representations in application Evaluate Green criteria: nature of crime, job, and timing Credit histories evaluated on similar criteria Applicant rejected if application inaccurate, certain automatically disqualifying crimes, or based on Green criteria Decision not to hire reviewed by senior VP of HR Please add a lawyer to this evaluation team

21. Louisiana │ Mississippi │ Texas │ Florida │ Alabama │ North Carolina | London Court Rejected EEOC’s Claim EEOC filed suit Claimed use of credit and criminal history created disparate impact on race and gender Sought injunction to prohibit any use of criminal/credit histories Court rejected EEOC claim: EEOC failed to isolate specific employment practice that caused disparate impact National statistics alone could not prove policy had disparate impact Required statistical proof of disparities in employer’s workforce If provided, burden shifts to employer to show business necessity

22. Louisiana │ Mississippi │ Texas │ Florida │ Alabama │ North Carolina | London EEOC v. Freeman – Best Practices Key take-aways from Freeman Decision: Multi-tiered inquiry based on the needs/responsibilities of types of positions Opportunity for employee to explain Exclusion for offenses/credit problems that were recent and related to the job duties of the particular position Additional compliance review

23. Louisiana │ Mississippi │ Texas │ Florida │ Alabama │ North Carolina | London “Ban the Box” Bandwagon has Wheels EEOC supports “ban the box” Similar to ADA no-medical inquiry rule Limits number of individuals excluded without chance to explain Removes “chilling” effect of individuals who do not apply because of inquiries at pre-hire stage Ban the Box Act (HR 6220) Equal Employment for All Act (HB645/SB 18737.IS) 8 states restrict use of criminal histories, 3 are pending 10 states restrict use of credit histories

24. Louisiana │ Mississippi │ Texas │ Florida │ Alabama │ North Carolina | London Best Practices Policies based on arrests, or Blanket Policies based on all convictions: sitting duck Adopt policy specific to job requirements Consider the crimes covered Consider the time period covered Consider the jobs covered (vulnerable customer population, customer service, loading dock, handling sensitive company assets) Provide opportunity to explain Provide higher level of review for negative decision Document Process

25. Louisiana │ Mississippi │ Texas │ Florida │ Alabama │ North Carolina | London Questions Blake A. Bailey Phelps Dunbar LLP Direct 817.305.0332 blake.bailey@phelps.com