Background Checks: Beware!


Hiring mistakes can be expensive; so can giving sensitive responsibilities to existing employees. As a result, many companies have begun to conduct, or expand, the background searches (e.g., criminal records searches) they do on applicants and existing employees. Your company may use credit or other background checks when making decisions about hiring, promoting or firing employees. Background checks done by your own staff as part of their regular responsibilities are not covered by the Fair Credit Reporting Act ("FCRA").

However, employers must comply with FCRA when using "consumer reporting agencies" to perform these credit and background checks. Because the requirements of FCRA are significant and the consequences of failing to comply are serious, employers must be careful when using outside agencies/persons to do these searches.

Consumer Credit Reporting Reform Act

The Consumer Credit Reporting Reform Act, which became effective on October 1, 1997, was the most comprehensive reform of the FCRA since its enactment in 1968. Congress enacted these amendments in response to consumer complaints about denial of credit or employment due to inaccurate information in their credit reports. The amendments are intended to remedy consumers' difficulty with contacting personnel at credit bureaus, the length of time taken for investigations of disputed information and the reappearance of disputed information on credit reports even after consumers had successfully disputed the problem with credit bureaus.

The 1997 amendments impose the following responsibilities and duties on employers who use reports supplied by consumer reporting agencies.

Prior To Obtaining A Consumer Report

Before requesting a consumer report (such as credit reports and background checks), employers now must: (1) make a clear and conspicuous disclosure in a separate document to the applicant or employee that a report may be requested; and (2) obtain written permission from the applicant or employee.

A statement in the employment application that consumer reports may be obtained is no longer sufficient. Employers must make the disclosure in a separate document.

To comply with these disclosure requirements, the Federal Trade Commission ("FTC") has provided the following options to employers.

  1. Make the disclosure in a separate document and obtain written authorization on the disclosure document.
  2. If you include the disclosure and authorization in the employment application, you must also provide the disclosure on a separate document.
  3. You may split the procedure into two parts by obtaining authorization in the application and by providing the disclosure in a separate document.

If you choose to combine the disclosure notice and authorization, identifying information (such as date of birth, social security number, driver's license number and current and former addresses) may be included in the combined form. However, the FTC has advised that the form should not contain any extraneous information.

Employers should also be aware that the FTC has also advised that inclusion of a waiver provision of any of the consumer's rights under the FCRA violates the requirement that the disclosure consist "solely" of the disclosure that a consumer report may be obtained for employment purposes.

Using The Report For Adverse Employment Decisions

Prior to the 1997 amendments, an employer who relied on consumer reports in taking an adverse employment action did not have to provide the applicant or employee with the report. Rather, the employer only had to notify the individual of its reliance on the report. Now, if a consumer report influences an employer's decision to take an adverse employment action, before taking any action the employer must provide the applicant/employee with a copy of the report and a written summary of consumer rights as prescribed by the FTC.

The summary of consumer rights is available from the FTC, but should be provided by the consumer reporting agency supplying the report. The statute does not specify how long an employer must wait after providing the required disclosures before taking the adverse action. The FTC recommends that employers consult with their counsel to develop appropriate procedures, considering the nature of the job involved, the way the employer does business and a reasonable opportunity for the employee to discuss the report with the employer. The FTC has issued an advisory opinion which states that a five-day waiting period appears reasonable.

Once the employer takes the adverse action, it must provide certain information to the individual. This notice may be provided orally, in a written form, or electronically and must include the following information.

  • The name, address and telephone number of the agency that provided the report.
  • A statement that the reporting agency did not make the decision to take the adverse employment action and is unable to provide the specific reasons for the decision.
  • A statement of the applicant or employee's right to obtain a free copy of the consumer report from the consumer reporting agency by making a request within 60 days.
  • Notice of the applicant or employee's right to dispute the content of the credit report.

The Difference Between "Investigative Consumer Reports" and Consumer Reports"

"Consumer reports" are typically credit reports. They may also include information about a consumer's "character, general reputation, personal characteristics, or mode of living." If this type of information is obtained through personal interviews of neighbors, friends, or associates of an employee or applicant, the report is then defined as an "investigative consumer report" and additional responsibilities are imposed.

FCRA identifies the responsibilities of an employer who intends to obtain or use an investigative consumer report. An employer must "clearly and accurately" disclose in writing that it may obtain information about the applicant or employee's character, general reputation, personal characteristics and mode of living. This notice must include a statement informing the individual of his/her right to request additional disclosures concerning the nature and scope of the inquiry. The employer must also provide the written summary of the consumer rights with the disclosure.

The FTC suggests that employers either include this disclosure as part of the "separate document" disclosure required for consumer reports or provide the applicant/employee with a separate disclosure that it may obtain an investigative consumer report. The 1997 amendments also require that the disclosure must be made within three days after the investigative consumer report is first requested. In contrast, the disclosure concerning consumer reports must be made before the consumer report is procured.

If the employer relies on an investigative consumer report to take an adverse employment action, the employer has the same duties imposed for use of consumer reports as described above.

Requesting Reports From Consumer Reporting Agencies

Before obtaining "consumer reports" or "investigative consumer reports" the employer must certify to the consumer reporting agency that the necessary disclosures have been made and the individual has authorized obtaining the report. The employer must also certify that it will follow the procedures regarding adverse employment actions if it relies on information reported by the consumer reporting agency.

Penalties Under the FCRA

Employers are liable to consumers for actual damages, punitive damages, costs and attorneys' fees for willful non-compliance with the FCRA. An employer that negligently fails to comply with the statute will be liable for actual damages, costs and reasonable attorneys' fees. Actual damages are limited to an amount not less than $100 and not more than $1,000. There is no set limit on punitive damages.

The FTC can sue violators for up to $2500 per violation and for injunctive relief. The 1997 amendments also authorize state officials to sue on behalf of consumers to halt illegal conduct.

Interpreting the 1997 Amendments

During the year since enactment of the amendments, employers have reached out to their attorneys and the FTC with some common questions about the practical application of FCRA.

What types of searches are covered by FCRA?

Background investigations done by private investigators retained under contract are covered by FCRA. The investigators would be considered consumer reporting agencies and any communication from the investigator to the employer would be considered a "consumer report" or an "investigative consumer report" subject to the rules and regulations of the FCRA.

If your company hires a private investigator to perform a criminal or civil record search and obtains copies of court documents, but does not generate a written report, the FCRA would still apply. "Consumer report" means any communication "bearing on a consumer's credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living." Forwarding these court documents to an employer constitutes a "communication" covered by the FCRA.

However, it is important to remember that the Act does not apply to "reference checks," criminal background or drug record checks performed by the employer's own staff as part of their regularly assigned job duties.

The FTC does recommend that employers who use this type of information voluntarily disclose to the applicant or employee the nature and substance of any public record information that they rely upon in taking an adverse action. Then, if the information is inaccurate or incomplete, the individual can take steps to correct the problem.

What information can be obtained by the Consumer Reporting Agency?

Employers should also be aware that there are restrictions on the type of information that can be supplied by consumer reporting agencies . For example, the FCRA specifies that no consumer reporting agency may make a consumer report containing information about "[r]ecords of arrest, indictment, or conviction of crime which, from the date of disposition, release, or parole, antedate the report by more than seven years." (emphasis added)

It also prohibits agencies from providing information about bankruptcies that are more than ten years old. While there is no time restriction on obtaining employment and educational histories, the FCRA generally prohibits the reporting of any "adverse item information" that antedates the report by more than seven years. Unfortunately, the statute does not define "adverse item of information." However the FTC has issued an advisory opinion broadly interpreting this prohibition to cover information that casts the employee/applicant in a negative or unfavorable light.

Because the FCRA does not apply to employers who conduct their own background checks, these limitations do not apply to information obtained directly by the employer. These limitations are not applicable to searches performed on individuals whose annual salary is expected to exceed $75,000.

In addition, an agency may not transmit a report containing medical information without prior consent of the individual.

Is it possible to conduct a confidential investigation without violating FCRA's disclosure requirements?

Some employers may have concerns about their ability to conduct a confidential investigation without alerting an employee until the employer is prepared to confront the employee with its findings. Although an employer is required to obtain written authorization from the applicant/employee before procuring the consumer report, FCRA only requires that the disclosure be given to the employee "at any time" before the report is procured or caused to be procured.

Therefore, an employer could provide a general disclosure to all current employees and maintain the employees' written authorizations in their personnel file if it should later become necessary to obtain a report on any individual employee. Then, the employee would not have to be told that a report had been procured until the employer had decided the action it intended to take based, in whole or in part, on information in the report.

Before adopting this procedure, employers should consider that if the disclosure covers "investigative consumer reports," the disclosure will advise employees that they have the right to request information about the nature and scope of the inquiry about their character, general reputation, personal characteristics and mode of living. Therefore, asking employees to sign the authorization may generate requests from employees for access to this information causing an administrative cost in responding to these requests. Your company may not want to incur this extra administrative burden if it is unlikely that it will need to conduct confidential investigations.

If the investigator does phone interviews should the company consider the report an "investigative consumer report?"

The FTC generally does not believe that using phone or personal interviews to verify factual information offered during the application process automatically converts a consumer report into a investigative consumer report. However and for example, if during the course of verifying a college degree, the consumer reporting agency asks whether the applicant was a good student or took drugs, this information would convert the report into an "investigative consumer report ."

Also, if a former or current employer goes beyond simple responses to fact-checking questions and offers opinions or other unsolicited information, such as statements that the individual was reprimanded for poor job performance, the conversation would become an interview for purposes of the FCRA.

As a rule of thumb, the distinction between the two types of investigations can be thought of as simply verifying the specific facts about education, employment or other information the applicant has provided to the employer ("consumer report") versus obtaining more general character or personal information through interviews ("investigative consumer report").

Interestingly, if the consumer reporting agency does not include the opinions or other unsolicited information in its consumer report, the consumer report would not be an investigative consumer report. Therefore, you should be proactive in identifying the types of information that you want your investigative agency to supply.

Are reports received from drug testing laboratories covered by FCRA?

Consultants used by employers to coordinate and forward drug testing reports may be considered consumer reporting agencies under FCRA. If the consultant or intermediary does nothing more than perform the test or arrange for a laboratory to conduct the drug test, collect samples, forward them to the laboratory and transmit the test results to the employer, it probably will not be considered a consumer reporting agency.

However, if the consultant does more, including gathering or verifying background information or conducting interviews, FCRA may apply. Employers should carefully review all functions of the drug testing consultant to be sure that it is not engaged in activities covered by the FCRA.

Are background searches on independent contractors covered by FCRA?

There is no clear answer. The FTC has taken a liberal approach in defining the term "employment" and apparently believes that many types of independent contractors qualify for protection under FCRA. The statutory language which refers to "employment" is not so clear, however, and it would not be surprising if litigation on this subject arises.

For example, the FTC determined that information furnished by a consumer reporting agency to the Texas Board of Medical Examiners which had requested the information to aid its assessment of a physician's application for a license to practice medicine was provided for "employment purposes."

The FTC also concluded that a trucking operation that uses consumer reports to evaluate whether to engage individuals as drivers must comply with the Act when obtaining consumer reports. The FTC determined that drivers who (1) own and operate their own equipment, and (2) may even subcontract with other drivers to operate their equipment, are considered employees for purposes of the Act even though they may be considered as independent contractors for other reasons.

The FTC has also issued an opinion that a homeowner who is considering hiring an individual to perform services for the homeowner is required to comply with the statute before obtaining a credit report or criminal background check on that individual.

Article courtesy of Riker Danzig, Employment UPDATE