The Dos and Don’ts of Background Checks

Tips to avoid liability once you have narrowed the applicant pool

One of a company’s most valuable assets is the employees it entrusts to carry out the day-to-day operations of the business. Just as most executives understand the value of their employees, they also understand that those employees can be a source of tremendous liability.

Thus, implementing the best hiring practices is an essential element to running a successful enterprise. Selecting dedicated, productive and creative employees begins with the application and interview process. These checks can provide important information about potential employees; however, given privacy concerns, conducting these checks can expose a company to potential liability if the correct steps are not followed.

By falling afoul of the various statutory obligations (under both federal and state law), a company exposes itself to a potential class-action lawsuit. These suits could potentially include all applicants from a five-year period. In addition to potential class actions, the Equal Employment Opportunity Commission (“EEOC”) is closely scrutinizing the use of background checks by employers. Specifically, the EEOC has filed several complaints for discrimination against employers alleging that their use of background checks disproportionately screened out minority applicants.

This article will discuss the implications of using this background information in light of the Fair Credit Reporting Act, or FCRA. Under the FCRA in the employment context, a “background check” — also known as a “consumer report” — means any written, oral, or other communication of any information by a consumer reporting agency bearing on an applicant or employee’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used, or collected in whole or in part, for the purpose of serving as a factor in establishing the applicant or employee’s eligibility for employment purposes.

The general framework for using these types of background checks is set by the FCRA, however, the specific requirements a company must follow can vary depending on where their employees are located. Several states, including California, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon and Washington impose obligations on top of the FCRA that employers must be aware of when using these background checks in those jurisdictions. For example, in California, in addition to the FCRA, criminal background checks are governed by the Investigative Consumer Reporting Agencies Act, or ICRAA. Credit Reports in California are governed by a separate statute — the California Consumer Credit Reporting Agencies Act (or CCRAA), as well as certain provisions of the California Labor Code.

Here’s a list of dos and don’ts to avoid legal liability:


1. DO Contact Legal Counsel. Contact your employment counsel to get an overview of the FCRA and any state law requirements that apply to your operation and talk through whether or not your company wants to handle the required forms (disclosures, authorization, and any pre- or post-adverse action notices) in-house or have a consumer reporting agency provide those forms for you. Having a general understanding of the statutory requirements (disclosure, notice, authorization, pre-adverse action issues, etc.) will help when dealing with the next point as well as make you aware of the specific requirements in your state under FCRA and state law. Most importantly, if at any point during the background check process questions arise, contact your employment counsel to discuss the issue in order to have a clear understanding of the process.


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