Insights

Employee Background Checks: Avoiding FCRA Liability When Conducting Due Diligence

By Joseph P. Hoag, Betsy Carroll, and Tracy Thompson

04.26.18

Employers, understandably, want to know as much as possible about job candidates, and many look to background checks as a source of relevant information. Unfortunately, the laws governing employer use of background checks, including in particular the federal Fair Credit Reporting Act (“FCRA”), are technical, complex, and in many cases pose challenges for even the most well-intentioned of employers. By taking steps to understand what these laws require and by developing compliant policies, procedures, and paperwork, employers can perform the due diligence they feel necessary without exposing themselves to unanticipated liability.

Employee misconduct can cause significant reputational harm and liability to employers. In seeking to protect their businesses from possible liability through background checks, unwary employers can find themselves incurring actual liability by failing to comply with technical notice and disclosure requirements. The consequences can be significant, as evidenced by the seven-figure settlements and awards resulting from class actions against employers under the FCRA and similar state laws. For example, federal judges have recently approved a $4.4 million settlement against a trucking company, a $3 million settlement against a home improvement company, a $2.5 million settlement against a delivery company, a $6.8 million settlement against a grocery store chain, and another $3 million settlement against a separate grocery store chain, all for failing to comply with the various requirements imposed by applicable background check laws.

What is the FCRA?

The FCRA imposes multiple notice and authorization requirements on employers who intend to obtain, or do obtain, information from a “Consumer Reporting Agency” about an individual for use in making an employment decision about that individual, such as hiring, promotion, or termination. In general, a Consumer Reporting Agency is a person or company that, on a commercial basis, assembles or evaluates information on individuals for the purpose of providing “Consumer Reports” to unrelated persons or companies. A Consumer Report, in turn, is defined to include, with certain limited exceptions, any communication of substantive information about an individual if the information was collected, is expected to be used, or is actually used, to make decisions about the individual’s eligibility for employment or similar purposes. Any information about an individual that is more than contact information is likely to be considered substantive for purposes of this definition. Relevant, limited exceptions include information developed in connection with employment-related investigations. Unlike “Ban the Box” laws, which generally restrict employers from inquiring about or considering applicant or employee criminal history information in certain contexts, the FCRA applies if an employer engages a Consumer Reporting Agency to provide any regulated information concerning a job applicant or employee, including criminal history.

Why Should Employers Care?

Because the FCRA’s technical requirements are easily violated, claims under the FCRA are frequent subjects of class action litigation, and FCRA violations carry significant financial risk in the form of actual or statutory damages of up to $1,000 per discrete violation, plus punitive damages and attorneys’ fees. Notably, the FCRA does not include a liability cap.

What Does the FCRA Require?

Employers who wish to use background information in making employment decisions must follow specific notice and authorization requirements:

Before you obtain a Consumer Report: You must give notice to a job applicant or employee that you intend to get a Consumer Report, and that you might use the Consumer Report information for employment decisions. You must also get the applicant or employee’s written approval to obtain the Consumer Report. The notice and authorization may be on the same page, and the notice may provide very limited, relevant ancillary information, such as what type of information is in a Consumer Report. The notice must be in stand-alone format and not part of the job application or other document, and it may not include any other authorizations, commitments, or waivers. And the 9th Circuit has made clear that the notice may not contain a waiver of any kind of liability, including for FCRA violations, and may not purport to define the employment relationship (e.g. defining the employment status as “at will”). If you wish to obtain an Investigative Consumer Report (which includes information gained from personal interviews regarding the employee or applicant), additional notice requirements apply.
Before you take adverse action based on a Consumer Report: If you decide, based on information in a Consumer Report, to take adverse action against an applicant or employee (such as deciding not to hire, or to terminate or demote), you must provide the applicant or employee with a packet of information before you take the adverse action. This packet must contain:
- A notice that the employer is contemplating adverse action;
- A copy of the Consumer Report; and
- A copy of the publication, “A Summary of your Rights Under the Fair Credit Reporting Act.
  
  In addition, you must give the applicant or employee a reasonable period of time to respond to the notice of contemplated adverse action. Typically, five business days is the minimum period that is recommended. During this time, you should not fill the open job position or take other action that would constitute an adverse employment action against the applicant or employee. If the applicant or employee provides additional information, you must consider it, but you are not required to change your mind regarding the contemplated adverse action.
After you take adverse action based on a Consumer Report: You must give the applicant or employee notice of the actual adverse employment action. This notice should be in writing and must include:
- The name, address, and telephone number of the Consumer Reporting Agency that provided the Consumer Report;
- A statement that the Consumer Reporting Agency did not make the adverse employment decision and cannot give specific reasons for it; and
- Notice of the applicant or employee’s right to dispute the accuracy or completeness of the information the Consumer Reporting Agency provided, and the applicant or employee’s right to get a free copy of the report from the Consumer Reporting Agency if the applicant or employee asks for it within 60 days.

Use Notice and Authorization Forms from Consumer Reporting Agencies with Caution

Consumer Reporting Agencies typically provide their clients with the notices described above. However, in our experience, those forms can contain defects that violate one or more of the FCRA’s technical requirements. Employers are liable for the content of the forms they use, even if the Consumer Reporting Agency provides the forms. Not surprisingly, many Consumer Reporting Agency agreements include liability exclusions for FCRA violations associated with the forms the Consumer Reporting Agency provides. Employers should have their notice and other forms reviewed by experienced employment counsel to ensure that all of the FCRA’s requirements have been met. As noted above, alleged violations of the FCRA are often subject to class treatment, and the financial exposure for employers resulting from a violation can be significant. For example, if a non-compliant form is used for 100 applicants for a particular position, the employer faces possible liability of $100,000. The FCRA further permits the imposition of punitive damages and an award of attorneys’ fees.

Be Aware of State Law Restrictions

Dozens of states have passed their own versions of the FCRA, and a number of these state laws provide greater protection for applicants and employees than the FCRA does. For example, employers in California must comply with the following requirements when obtaining Consumer Reports, all of which extend beyond those imposed by the FCRA:

Use caution in seeking credit checks. In most cases, employers in California may not obtain an applicant or employee’s credit report as part of a background check. In addition, as of January 1, 2018, employers in California are prohibited from inquiring about a candidate’s salary history. These rules do not restrict employers from verifying past employment, but any inquiry about credit history is prohibited. California Labor Code section 1024.5 sets forth specific exceptions to the rule prohibiting credit checks (but not the rule prohibiting salary inquiries). These exceptions include certain employees who qualify for the executive exemption to overtime under California law, law enforcement, certain jobs where employees have access to sensitive information, or where credit checks are required by law. Before obtaining a credit report in connection with any employment-related decision, employers should confirm that one of the specific exceptions applies and ensure that salary history information is not included. Where credit checks are permitted, they must be carried out in compliance with the FCRA requirements described above, as well as with the requirements of the California Investigative Consumer Reporting Agencies Act (“ICRAA”), described below.
Background checks in California must comply with additional timing requirements and restrictions on the types of information that may be obtained. Any background check in California is also subject to various state and local laws that restrict both the type of criminal background information that can be obtained and the timing for doing so. Under California’s "Ban the Box" law, employers may not ask about criminal history information until after a conditional offer of employment has been made. Even then, the information that can be obtained is limited; for example, under California Labor Code sections 432.7 and 432.8, certain criminal information, including information concerning arrests that did not lead to conviction, expunged and juvenile convictions, and certain misdemeanor offenses relating to marijuana, remains off-limits. Various cities and counties in California, including San Francisco and Los Angeles, have also passed local Ban the Box legislation. For example, employers in San Francisco may not obtain criminal background information that is more than seven years old. Finally, under both the California state and local Ban the Box laws and regulations issued by the California Fair Employment and Housing Council, employers must take certain steps, which include an “individualized assessment,” before taking adverse action based upon criminal history information. In light of these restrictions, employers should wait to conduct background checks until after a conditional offer is made, confirm that the information obtained will not violate any applicable restriction, and proceed with caution before disqualifying an applicant or employee based upon the information learned.
Additional disclosure requirements apply before California employers may obtain Consumer Reports. Under the ICRAA, and in addition to the FCRA requirements described above, California employers must disclose the following before obtaining a Consumer Report:
- The name and contact information of the Consumer Reporting Agency conducting the investigation;
- A description of the scope of the investigation to be conducted;
- Information advising applicants and employees that they may view their file at the Consumer Reporting Agency during business hours or obtain a copy from the agency; and
- The Internet address of the Consumer Reporting Agency (or its phone number if no website exists) where the applicant or employee may find information about the agency’s privacy practices, including whether information will be sent outside of the United States.
The employer must also provide applicants and employees with a written form containing a box they can check to obtain a copy of the Consumer Report. This check box can be included on the disclosure form or provided as a separate form. If an applicant or employee checks the box, a copy of the Consumer Report must be provided within three business days after the report is received by the employer.
California employers who conduct background investigations in-house (i.e., without using a Consumer Reporting Agency) are still subject to limited notice and disclosure requirements. A California employer that conducts its own background investigation without using the services of a Consumer Reporting Agency may still have disclosure obligations under the ICRAA. In particular, if an employer gathers information that is a matter of “public record,” the employer must provide a copy of that information to the applicant or employee within seven calendar days of receipt (except in cases where the information is being obtained for purpose of investigating suspected misconduct, in which case the information must be provided upon completion of the investigation). The ICRAA defines “public record” narrowly to include only records of “arrest, conviction, civil judicial action, tax lien, or outstanding judgment,” so this disclosure applies only in limited circumstances (though as described above, employers are in most cases prohibited from obtaining any information concerning arrests that did not lead to conviction under Labor Code section 432.7). Employers who obtain this information must also provide written notice that includes a check box by which an applicant or employee can waive the right to obtain a copy of the records. Even if this right is waived, however, the employer must provide a copy of the records to the applicant or employee if adverse action is taken based upon those records.