June 12th, 2018 by Frank L. Day, Jr., Robbin Hutton and Jessica Asbridge at FordHarrison
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.
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:
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).
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
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.
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
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:
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 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.
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.
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.
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.
No Credit Card Required
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