When conducting background checks, many employers try to verify the prior salaries reported by applicants. This is particularly true for positions where salary is tied to performance (e.g., sales positions). Historically, salary could be readily verified by contacting former employers; however, companies these days are less willing to share such information due to legal concerns. In response, employers conducting background checks have turned to asking for a job candidate’s W-2 or tax return. There are several legal issues that should be considered before adopting this approach, however.
Asking applicants for a tax return or W-2 (which contains tax return information) is not illegal under federal law, but state law must also be considered. For example, it is unlawful in Rhode Island for an employer to require an applicant to provide a federal or state income tax return or related tax documents as a condition of being considered for employment (RI Gen Laws Sec. 28-6.9-1). According to Joy Waltemath, Portfolio Managing Editor at Wolters Kluwer Law & Business, employers should also be aware that the completed forms contain information that could cause legal problems depending on how it is used. For example, the forms include the individual’s Social Security number and it is unlawful under 42 U.S.C. Sec. 408 for a person to disclose, use, or compel the disclosure of the Social Security number of any person. It is also unlawful to offer an item of material value in exchange for a tax return or tax return information, and for a person to whom tax return information is disclosed without authorization to willfully print or publish the information (26 U.S.C. Sec. 7213).
This makes it clear that employers must be cautious in requesting a tax return or W-2 and should at least ask the applicant to redact the Social Security number on requested forms. Waltemath identified other issues for employers to consider, including the following:
- Tax forms include other information which might disclose that an applicant is in a class protected by federal or state discrimination laws such as nontaxable sick pay, adoption benefits, and dependent care credits.
- Requesting tax information inconsistently and from only certain groups could run afoul of discrimination laws if the group is a protected class.
- Tax forms may reveal that a person is unemployed and in several states, it is unlawful for an employer to refuse to consider applicants based on employment status. There is currently no federal law prohibiting discrimination against the unemployed. However, as discussed in an EEOC panel meeting in February 2011, the practice arguably has a disparate impact on minorities, older women, and individuals with disabilities, who have higher unemployment rates.
- Applicants may feel that a request for a prior employer’s W-2 is overly intrusive and some stronger candidates may be unwilling to continue the application process.
In addition to these issues, identity theft has become a major problem and employers seeking personally identifiable tax information should take measures to maintain its security. If, despite the risks, employers decide to request tax returns or W-2s from applicants, they should consider taking these actions:
- Try other less intrusive means to get the salary information (e.g., contacting a former employer) before resorting to a request for tax documents.
- Request the information uniformly (i.e., not only from certain individuals) and instruct applicants to redact Social Security numbers from the tax documents. It should go without saying that Social Security numbers should only be used for legitimate purposes such as verifying eligibility to work under immigration laws.
- Enforce written procedures for handling the information requested, including the proper disposal of records.
- Limit access to sensitive information to employees with a legitimate need to see it.
- To the extent tax information is provided in electronic form, take special protective measures to reduce identity theft, such as keeping computer terminals locked, requiring login procedures and passwords, and prohibiting employees from leaving computers with sensitive data in areas vulnerable to theft, such as in vehicles. Comply with all security breach notification laws.
By following these measures, employers can alleviate some of the legal concerns raised above.