Background checks

This blog is an excerpt from our book Hiring, Firing and Discipline for Employers by Frank L. Day, Jr., Robbin Hutton and Jessica Asbridge at Ford Harrison LLP. For more information, go to the Products tab above and click on "Federal" to subscribe, or subscribe to the resources written specifically for your state.

Types of background checks

Most employers understand that it is very important to hire the right employees. To make good hiring decisions, many employers consider information about the applicant that comes from various sources. This pre-employment due diligence helps companies make informed choices, and it also helps them limit their possible exposure for negligent hiring claims.  Liability can arise in this context where an employer hires an applicant without conducting a reasonable background investigation. Many services are available that can help employers conduct background investigations, but employers must account for laws such as the federal Fair Credit Reporting Act (FCRA), which regulates certain types of investigations and/or requires employers to make disclosures about such investigations.

• Credit checks - Only nine states prohibit employers from reviewing an applicant’s credit history as part of a pre-employment background check, but any such inquiry must also comply with the requirements of the FCRA.
• Criminal history checks - Inquiries about an applicant’s criminal history may be justified when the individual will be working with weapons, will have access to people’s homes or private lives, or will hold a position requiring trust and responsibility. For restrictions on obtaining and/or using information regarding criminal history, see the prior discussion regarding arrest and conviction records.
• Educational verification - An employer should consider verifying all of the schools or institutions listed by an applicant.
• Department of Motor Vehicles search - When an employee will be driving in the course and scope of his/her employment, an employer may want to review the employee’s driving record. If the employer secures information about the applicant’s driving record from public records, the requirements of the FCRA do not apply.  On the other hand, if the employer secures this same information from a consumer-reporting agency, the employer must ensure compliance with the FCRA.

Reference checks

An employer should contact all previous employers to check the applicant’s job titles and duties, work performance, and reason for leaving.  Former employers should be asked whether they would hire the applicant again. Former employers may also be asked whether there is anything else in the applicant’s background that would otherwise affect the applicant’s suitability for employment, including whether the applicant is honest, reliable, or has ever engaged in any improper conduct.

Many employers are reluctant to provide detailed information about former employees because of privacy concerns and the potential costs associated with defending a defamation lawsuit. Employers should ensure that they only provide accurate information and for the proper reasons. An employer should not ask an applicant’s references any questions that the employer would not directly ask of the applicant; of course, every question asked should seek information about the applicant’s ability to perform the job duties associated with the position. The most common questions to ask are as follows:

• Verify the employment dates. Employed from __________________ to ____________________.
• Verify the earnings. Starting $____________________ Ending $____________________
• Verify the positions held. Beginning: ____________________ Ending: ____________________
• How was his/her attendance record? Absences per month:____________________ Tardies per month:____________________
• Why did he/she leave your company? Voluntary: ____________________ Involuntary: _____________________ Reason: ________________________________________ Eligible for rehire? Yes: ____________________ No: ____________________
• Information furnished by: _______________________________________ Title: ____________________ Date: ___________________

The Americans with Disabilities Act

If a reference or a background check is a necessary part of an employer’s application process, the employer should ensure that it conducts these inquiries in compliance with the Americans with Disabilities Act (ADA), which makes it unlawful to use qualification standards, employment tests, or other selection criteria that screen out or tend to screen out disabled individuals, unless the standards, tests, or other selection criteria are shown to be job-related for the position in question and consistent with business necessity.

Fair Credit Reporting Act compliance

The federal Fair Credit Reporting Act (FCRA) governs an employer’s request for or use of a “consumer report” or “investigative consumer report” prepared or collected by a “consumer reporting agency.” The FCRA’s requirements do not apply if the employer uses its own employees to search any state records depository for background information, such as sending an employee to the county courthouse to check the public records for any lawsuits filed by or against an applicant or employee (compilations of publicly available background information by a third party may still constitute a “consumer report” subject to the FCRA).

Definitions

A consumer report includes a written or oral summary of a person’s credit-worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living. 

An investigative consumer report is a consumer report containing information about a person’s character, general reputation, personal characteristics, or mode of living that was obtained through personal interviews with neighbors, friends, associates, or others who have knowledge of such information about the consumer. 

A consumer reporting agency includes any person who, for money or on a non-profit basis, regularly compiles or evaluates consumer credit information or other information on consumers for the purpose of providing consumer reports to third parties.  If a consumer reporting agency verifies an applicant’s job references by merely checking the facts on the application, such as dates worked, job title, and final rate of pay and provides this information to the employer, the consumer reporting agency has provided a consumer report.  On the other hand, if the consumer-reporting agency essentially conducts an interview by asking about job performance or whether the former employee was discharged for cause, a report to the prospective employer about this information constitutes an investigative consumer report. 

In December 2003, President Bush signed legislation reauthorizing the FCRA, which included a provision to exempt third party investigations of employee wrongdoing from the reporting and disclosure provisions of the FCRA.  The provision amended the act’s definition of “consumer report” to exclude communications made by a third party to an employer in connection with the investigation of suspected misconduct relating to employment or compliance with federal, state, or local laws and regulations, the rules of a self-regulatory organization, or any pre-existing written policies of the employer.  To be excluded, the communication must not be made for the purpose of investigating a consumer’s credit worthiness, credit standing, or credit capacity.  Additionally, to be excluded, the communication can only be made to certain entities including the employer, federal, state, or local officers or agencies, or a self-regulatory organization with authority over the employer or employee. 

After taking an adverse action based on such a communication, the employer must disclose to the consumer a summary containing the nature and substance of the communication; the employer is not required to disclose the sources of the communication.  The provision was included to counteract a Federal Trade Commission (FTC) interpretation of the FCRA that impedes the use of third party investigations of harassment and other workplace misconduct (known as the “Vail Letter”).

Acceptable and prohibited uses of consumer reports by an employer

A credit-reporting agency may furnish a consumer report to an employer for employment purposes.  The term “employment purposes” includes an employer using the consumer report to evaluate the consumer for employment, promotion, reassignment, or retention.  A consumer-reporting agency may not include any medical information in a report unless it has the consent of the consumer. A consumer-reporting agency also may not report obsolete information regarding bankruptcies, civil suits or judgments, criminal arrests, or any other adverse information.  This prohibition regarding obsolete information is not applicable to a consumer report “to be used in connection with…the employment of any individual” that is reasonably expected to make an annual salary of $75,000 or more. 

Employer requirements prior to seeking a consumer report

• Employer's required disclosure to consumer/job applicant/current employee. Before an employer (other than in the trucking industry) obtains a consumer report, the employer must:
  • provide the consumer with "clear and conspicuous disclosure" that the consumer report may be obtained for employment purposes
  • ensure that the disclosure is written in a document that consists only of the disclosure
  • if it takes any adverse action against a consumer based ni whole or part on the credit report, it will provide the consumer with a copy of the report and a summary of the consumer's rights in accordance with the FCRA's requirements. The FTC has also issued a revised "Summary or Your Rights Under the Fair Credit Reporting Act," effective January 1, 2013, which is available on the agency's website:
    • http://www.consumer.ftc.gov/articles/pdf-0096-fair-credit-reporting-act.pdf
• Employer's required disclosure to consumer reporting agency - Additionally, prior to receiving a consumer report from a consumer reporting agency, an employer must certify to the reporting agency that:
  • it has made the required disclosures to the consumer in the proper form
  • it will not use the information in the consumer report in violation of any federal or state equal employment opportunity law or regulation
  • if it takes any adverse action against a consumer based in whole or part on the credit report, it will provide the consumer with a copy of the report and a summary of the consumer's rights in accordance with the FCRA's requirements.

Taking adverse action based on a consumer report

An employer can base an adverse decision regarding a consumer report in whole or part upon information included in a consumer report.  An “adverse action” by an employer broadly includes denying employment or “any other decision for employment purposes that adversely affects any current or prospective employee.”  As described herein, the FCRA requires employers that make adverse decisions based on said information to make certain disclosures to the applicant or employee both before and after the action.  The disclosure requirements for job applicants vary slightly from the requirements for employees.

• Required disclosure prior to taking adverse action -  Before engaging in an adverse employment action based on a consumer report, the employer must provide the consumer with both:
  • a copy of the consumer report
  • written summary of the consumer's rights as prescribed by the FTC (the employer should receive this summary from the consumer reporting agency). A revised Summary or Your Rights under the Fair Credit Reporting Act is available on the FTC's website at: http://www.consumer.ftc.gov/articles/pdf-0096-fair-credit-reporting-act.pdf

See also the FTC's advice for business regarding the use of background checks that is published on its website at: http://www.ftc.gov/tips-advice/business-center/guidance/background-checks-what-employers-need-know

• Required disclosure after taking adverse action -  If the employer engages in an adverse action against the consumer, the employer must notify the consumer. The notification may be done in writing, verbally, or by electronic means. It must include the following: 
  • a notice of the adverse action
  • the name, address, and phone number of the consumer reporting agency that provided the report to the employer
  • a statement that the consumer reporting agency did not make the decision to take the adverse action and thus cannot tell the consumer the specific reasons for the adverse action
  • a statement setting forth the consumer's right to obtain a free disclosure of the consumer's file from the CRA if the consumer makes a request within 60 days
  • a statement of the consumer's right to dispute directly with the consumer reporting agency the accuracy or completeness of any information provided by the agency.
• Employment in the trucking industry - The trucking industry is exempt from the requirement that both the disclosure and authorization to secure the report be in writing. The law allows the required disclosure and authorization to be provided orally or by electronic means for positions “over which the secretary of transportation has the power to establish qualifications and maximum hours of service pursuant to the provisions of section 31502 of title 49, or a position subject to safety regulation by a state transportation agency,” but this exemption only applies if the driver does not apply for the job in person.
• Adverse action based on information obtained from affiliates -  If a person takes an adverse action involving insurance, employment, or a credit transaction initiated by the consumer, based on information of the type covered by the FCRA, and this information was obtained from an entity affiliated with the user of the information by common ownership or control, the FCRA requires the user to notify the consumer of the adverse action.  The notice must inform the consumer that he/she may obtain a disclosure of the nature of the information relied upon by making a written request within 60 days of receiving the adverse action notice.  If the consumer makes such a request, the user must disclose the nature of the information not later than 30 days after receiving the request.  If consumer report information is shared among affiliates and then used for an adverse action, the user must make an adverse action disclosure as set forth previously.

Use of investigative consumer reports

If an employer wants to obtain an investigative consumer report about an applicant or employee, it must comply with the following requirements:

• The user must disclose the consumer that an investigative consumer report may be obtained. - This must be done in a written disclosure that is mailed, or otherwise delivered, to the consumer at some time before or no later than three days after the date on which the report was first requested. The disclosure must include a statement informing the consumer of his/her right to request additional disclosures of the nature and scope of the investigation as described herein, and the summary of consumer rights required by the FCRA.  (The summary of consumer rights will be provided by the credit-reporting agency that conducts the investigation.)  The user must certify to the credit-reporting agency that the disclosures set forth herein have been made and that the user will make the disclosure described as follows.
• Upon the written request of a consumer made within a reasonable period of time after the disclosures required previously, the user must make a complete disclosure of the nature and scope of the investigation. -  This must be made in a written statement that is mailed, or otherwise delivered, to the consumer no later than five days after the date on which the request was received from the consumer or the report was first requested, whichever is later in time.

Penalties

An employee or applicant may receive actual damages, punitive damages, and attorneys’ fees in a civil suit against an employer or prospective employer for non-compliance with the FCRA. An employer may also be liable for monetary damages to a consumer-reporting agency for obtaining a consumer report under false pretenses or knowingly securing the report without a permissible purpose.  Moreover, any person who obtains information from a consumer-reporting agency under false pretenses may be fined and/or imprisoned for up to two years.

Drug tests

Drug test reports may be covered by the FCRA. In a recent case, the Fifth Circuit Court of Appeals ruled that drug test results may be covered by the FCRA because the “results of these drug tests are communications bearing on…personal characteristics that were used to determine…eligibility for employment.” The FCRA does not apply to any report prepared by a drug-testing lab, which the lab submits directly to the employer after performing a drug test pursuant to the employer’s policies. The FRCA applies when a report includes information about the results from prior drug tests.

Document destruction requirements

The FTC’s document disposal rule requires employers to properly dispose of consumer information derived from “consumer reports” by taking reasonable measures to protect against unauthorized access to or use of the information in connection with its disposal.  The “disposal rule” was issued pursuant to the requirements of the federal Fair and Accurate Credit Transactions Act (FACT), which amended the FCRA.  The rule is designed to reduce the risk of consumer fraud, including identity theft created by improper disposal of consumer information.

The disposal rule applies to any person or entity over which the FTC has jurisdiction and who, for a business purpose, maintains or otherwise possesses consumer information.  Employers who obtain consumer reports for any of the permissible purposes listed in the FCRA are covered by the disposal rule.  While the disposal rule does not specify how employers should dispose of consumer information, it does state in the preamble that the FTC expects covered entities to consider the sensitivity of the information, the nature and size of the entity’s operations, the costs and benefits of different disposal methods and relevant technological changes.  The preamble also explains that the “reasonable measures” requirement likely requires employers to adopt policies and procedures to ensure that the policy behind these rules is achieved. 

State laws

Many states have enacted prohibitions on access and use of consumer reports that are more restrictive on employers than the FCRA.  Be sure to consult state and local law before conducting any background check.

Adverse impact considerations

Poor credit ratings and other information found through consumer reporting agencies may have a disparate impact on a protected group.  The employer must then show that this information is job-related and consistent with business necessity.

Workers' compensation

The EEOC Technical Assistance Manual issued under the Americans with Disabilities Act (ADA) states that an employer may not make an inquiry of a third party that the employer could not make of the applicant.  An employer should not check an applicant’s workers’ compensation history from any source until after making the applicant a conditional offer of employment.

Privacy concerns

Background checks also raise privacy concerns and possibly defamation claims. The employer should always give the applicant notice and obtain a release for all information to be obtained.