The Dos and Don’ts of Background Checks

July 16, 2013
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.

2. DO Have the Right Forms – Regardless of whether your company uses its own forms or standardized forms from a consumer reporting agency, they need to be properly formatted and contain all the required information under the FCRA. Unlike most documents used during the application process, the disclosure/authorization form required by the FCRA must be a standalone document. In California, it must contain certain specific information about the consumer reporting agency that will be used to collect the background (or consumer) information. By not having the proper forms, a company exposes itself to class action liability.

3. DO Select a Knowledgeable and Reputable Consumer Reporting Agency – The consumer reporting agency that is responsible for running the background check can be a key partner in a company’s process for obtaining background or credit information. Make sure you discuss the agency’s process to ensure you are getting reports in a timely fashion, and, if applicable, ensure that the forms they use comply with federal and state law by speaking with your employment counsel.

4. DON’T Rely On A Consumer Reporting Agency’s Word Alone – Just because a Consumer Reporting Agency has a well known name or says that it has been in the business for a long time, do not simply rely on their word alone. Shop around. Using the knowledge you learned from talking to your employment counsel, grill each potential consumer reporting agency. Do not be afraid to take the forms to your employment counsel to be reviewed for compliance with federal and state law.

5. DO Make an Informed Decision About When to Seek a Background Check – One of the easiest ways to reduce potential exposure when using background checks is to limit the number of applicants sent to the consumer reporting agency in the first place. As such, you should make an informed decision about when in the application process to submit applicants to the consumer reporting agency for background checks. Some companies may want or need to submit all applicants to a consumer reporting agency for background checks; others may want to submit a smaller pool of applicants after a round or two of interviews have been conducted. Finally, some may choose to submit a single applicant to the consumer reporting agency after making an offer contingent on passing the background screening process. If you are unsure of when in the application process to submit applicants for background checks, call your employment counsel and work through the issue.

6. DO Keep All Background Check Records – For every background check that is run, a company should have a standalone disclosure, must have an authorization signed by the applicant and additionally create a formal report. There may be additional documents such as Summaries of Rights under the FCRA or corresponding state law, as well as pre- and/or post-action notices depending on the particular circumstances and jurisdiction. It is important to maintain all of these documents, not just the authorization signed by the applicant. These documents will be very important for a company’s defense in the event of litigation. Incomplete documentation of the process can make it difficult or impossible to establish that applicants received all of the statutorily required paperwork.

7. DON’T Assume That You Can Search Public Records and Avoid Liability – An employer may want to try and avoid the burdens imposed by the FCRA when using a consumer reporting agency by doing its own search of public records. This strategy does not always steer clear of potential liability. Various states, such as California, have specific laws in place (and penalties for non-compliance) that impose obligations on these types of public records searches. If your company is running searches on its own using public records, ensure that you are complying with the particular statutory requirements in your jurisdiction related to this type of search.

8. Do Review Each Report Carefully to Determine if There is a Job-Related Basis to Disqualify an Applicant – Employers should not use background checks, and the resultant report, as a means of automatic disqualification for an applicant. There should be a legitimate job-related basis for using information from a background check to disqualify an applicant.

9. DON’T Rush Through the Process or Cut Corners – The process of having all of the correct forms, getting authorization for the background check, sending out pre-adverse action information or letters (if required in the specific jurisdiction) and/or post-adverse action information or letters can be confusing, tedious and time consuming. Take the time to work through the steps, with employment counsel if necessary, so that you understand and have a sound process in place that can easily be followed with every applicant/employee. This will help ensure that the company can use background checks or consumer reports, to help bring in the best employees, while minimizing potential liability.

James Dye is an associate in the Irvine, Calif., office of Fisher & Phillips LLP. He represents employers in various aspects of labor and employment law. He can be reached at [email protected] Additional information is available at

About the Author

James Dye

James Dye is an associate in the Irvine, Calif., office of Fisher & Phillips LLP. He represents employers in various aspects of labor and employment law. He can be reached at [email protected] Additional information is available at