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Employment Background Checks and the Fair Credit Reporting Act

Posted on January 23, 2018

If your company performs pre-hire background checks, you should be aware of all of your responsibilities. While background checks can help employers avoid legal claims, such as those for negligent hiring, the gathering and using this information can carry legal risk if not done properly.

Federal Fair Credit Reporting Act (FCRA)

Employee background checks are considered “consumer reports” under the federal Fair Credit Reporting Act (FCRA), and there are civil and statutory penalties for failing to comply with the FCRA’s procedural requirements. The FCRA regulates the accuracy, fairness and privacy of information in consumer reports, which are defined as “any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer’s creditworthiness, 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 consumer’s eligibility” for credit, insurance or employment purposes. Thus, the FCRA is not limited to credit reporting—it extends to criminal and civil records, civil lawsuits, reference checks and other information obtained by a consumer reporting agency.

The FCRA allows job applicants to sue employers who fail to comply with any requirement imposed by the law. For companies that solicit large numbers of applicants, failure to abide by the FCRA’s requirements can result in class-action liability with millions of dollars in exposure.

Employers must follow certain procedures under the FCRA if they intend to take adverse action such as revoking a job offer or firing an employee, based in whole or in part on the contents of a consumer report. Failure to properly execute one of these steps could result in liability under the FCRA.

The FCRA’s required process steps include:

  1. Disclosure and pre-authorization. Before obtaining a report, the employer must provide a “clear and conspicuous” written disclosure to the consumer that a consumer report may be obtained. The employer must also obtain the applicant or employee’s written authorization.
  2. Pre-adverse action letter/copy of report/rights under FCRA. Before making a final employment decision based in whole or even in part on the results of a consumer report, the employer must provide a pre-adverse action notice to the individual, which includes a copy of the applicant’s consumer report and a document summarizing their rights under the FCRA.
  3. Waiting period. While not explicitly prescribed by the FCRA, courts and Federal Trade Commission guidance suggest five days is a reasonable period to wait after the pre-adverse action notice and before taking adverse action.
  4. Adverse action letter. After the waiting period, the employer is required to provide a post-adverse action notice to the individual, which includes the name and contact information of the consumer reporting agency that provided the background check on which the adverse employment decision was based; a statement advising the individual that the consumer reporting agency did not make the adverse employment decision and therefore cannot provide any reasons why the adverse action was taken; and notification that the applicant or employee is entitled to receive a free copy of the background check or consumer report on which the adverse action was based within a 60-day period.

In addition to the FCRA requirements, California does not allow employers to consider or seek information about certain types of criminal records, including an arrest or a detention that did not result in a conviction and certain marijuana infractions and misdemeanor convictions older than two years.

Also, in cities like Los Angeles, there are ordinances that require additional interactive steps if an adverse action is sought as a result of a finding on a criminal background check.

Most background check companies can help employers ensure they are providing the appropriate disclosures and obtaining the appropriate authorizations. However, employers should never become complacent and should understand all the requirements to protect themselves from a costly legal action.

Lauren Sims is the article’s author and eqHR Solutions’ Director of Human Resources.

Whenever you require professional Human Resources or Payroll guidance to navigate the ever-changing landscape of California and Federal Employment Laws & Regulations, contact us for a no-obligation consultation.

eqHR Solutions offers professional, tactical and strategic human resources support; ADP payroll product implementation/training and payroll processing services for businesses throughout Southern California.