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Should employers go “old school” in criminal background checks to avoid the unforgiving FCRA?

November 6th, 2014  |  Lorene Park

By Lorene D. Park, J.D.

Even absent unlawful intent, some employers are facing high defense costs and others are paying multi-million dollar settlements because they allegedly failed to send the right notice at the right time when using criminal background checks performed by other companies. The Fair Credit Reporting Act (FCRA) is hyper-technical in its requirements and unforgiving of noncompliance — so much so, that it begs the question of whether employers should go “old school,” performing their own background checks to avoid potential liability under the FCRA, which only applies when they run background checks through a company in the business of compiling background information. Here are some recent examples:

A typical case. In one recent case, three individuals who applied to work at Lowe’s but were denied employment based on background checks filed a collective and putative class action against Lowe’s and LexisNexis, which provided the background report. One plaintiff was denied an assistant manager position after his report wrongly stated that he had a criminal history that actually belonged to another person of the same name. He did not receive a copy of the report until three days after he was informed of the rejection. A second plaintiff was rejected for a sales position based on a felony conviction that the background check failed to note had been overturned on appeal; he was not provided with a copy of the report nor given notice that the report was given to the employer. The third applicant’s report was not inaccurate but she alleged that the employer failed to provide her a copy until “several days after” she was rejected. A federal court in North Carolina refused to dismiss their class action under the FCRA, which alleged that Lowe’s routinely used consumer reports, but failed to provide copies or notice of the reports before taking an adverse employment action (Brown v Lowe’s Companies, Inc).

Data entry clerk with old conviction. A data entry clerk for Canon Business Solutions was fired soon after she was hired because her background check revealed a felony conviction that was over ten years old. A federal court in New Jersey denied Canon’s motion for summary judgment on her class action claim that it had a nationwide practice of taking adverse employment actions without complying with the FCRA and that it willfully violated the Act by never providing her a copy of the report, describing her rights under the Act, or giving her a chance to explain the conviction before firing her (McPherson v Canon Business Solutions, Inc).

Multi-million dollar settlements. A federal court in Virginia granted preliminary approval of a settlement ending a class action against Dollar General under the FCRA. Dollar General agreed to pay over $4 million to resolve claims that it violated the Act by denying the plaintiffs employment either before they received a copy of their consumer report and a summary of rights, or by failing to provide the documents at a meaningful and reasonable time before making the adverse decisions. The summary of rights eventually sent to applicants was also purportedly outdated (Marcum v Dolgencorp, Inc dba Dollar General).

Dollar General is not the only large company to agree to big payouts when faced with FCRA class actions. Earlier this year, Swift Transportation Company agreed to pay $4.4 million to resolve a class complaint alleging that it violated the FCRA by failing to obtain the authorization of online applicants before having criminal background checks run and then relied on the results to take adverse actions without notifying the applicants of their rights (Ellis, III v Swift Transportation Co of Arizona).

Strict requirements. As these examples show, the FCRA has specific requirements that apply before an employer has a background check run, before taking an adverse action based on the results, and after taking the adverse action. Failure to comply can result in civil penalties, punitive damages, attorneys’ fees, and even criminal penalties. Briefly, the requirements include:

  • Before obtaining background information, such as a credit or criminal background report, from a company in the business of compiling background information:
    • In writing and in a stand-alone format, tell the applicant or employee that the employer might use the information for decisions about his or her employment. The notice cannot be in an employment application. Avoid adding extraneous information in disclosure forms; some employers, including Whole Foods and AT&T Corp. have been hit with FCRA suits on this basis.
    • If seeking an “investigative report” (based on personal interviews about a person’s character, reputation, lifestyle, etc.) tell the applicant or employee of his or her right to a description of the nature and scope of the investigation.
    • Get the applicant’s or employee’s written permission to do the background check.
    • Certify to the company providing the report that the employer notified the subject and got permission; complied with FCRA requirements; and will not discriminate or otherwise misuse the information in violation of federal or state laws.
  • Before taking an adverse employment action based on the background check, give the person advance notice and a meaningful opportunity (usually five days) to review the report and explain negative information. Make sure the notice given to the employee includes a copy of the consumer report relied upon to make the decision and a copy of “A Summary of Your Rights Under the Fair Credit Reporting Act,” available from the FTC.
  • After taking the adverse employment action, the employer must tell the applicant or employee (orally, in writing, or electronically):
    • that he or she was rejected because of information in the report;
    • the name, address, and phone number of the company that sold the report;
    • that the company selling the report did not make the hiring decision, and cannot provide specific reasons for it; and
    • that he or she has a right to dispute the accuracy or completeness of the report, and to get an additional free report from the reporting company within 60 days.

More information on these requirements can be found in “Background Checks: What Employers Need to Know,” a joint publication from the EEOC and the FTC. In addition, the FTC, which enforces the FCRA, has published “Using Consumer Reports: What Employers Need to Know,” which has a detailed summary of the Act’s notice and other requirements, including extra requirements for “investigative reports” and links to further information. The EEOC has also cautioned that special care should be taken when basing employment decisions on criminal background information that may be more common among people of a certain race, national origin, or other protected characteristic so as to avoid potential liability under Title VII. The agency issued a detailed guidance and a Q&A discussing discrimination and criminal records.

Recordkeeping and disposal. Any employment records you make or keep (including application forms and other records related to hiring) must be preserved for one year. (The EEOC extends this requirement to two years for educational institutions and for state and local governments and the DOL extends it to two years for certain federal contractors.) If the applicant or employee files a discrimination charge, you must keep the records until the case is concluded. Once you’ve satisfied all applicable recordkeeping requirements, you may dispose of any background reports you received but must do so securely which, according to the FTC, can include burning, pulverizing, or shredding paper documents and disposing of electronic information so that it cannot be read or reconstructed. For more information, see the FTC’s online publication “Disposing of Consumer Report Information? Rule Tells How.”

Penalties. An employer that fails to comply with the FCRA can be liable for actual damages, costs, and attorneys’ fees. If the violation is willful, the employer also may be liable for statutory damages and punitive damages. The U.S. Supreme Court has ruled that violations committed either with knowledge or in reckless disregard of FCRA requirements could be considered “willful” (Safeco Insurance Co of America v Burr). The FCRA also imposes criminal sanctions for knowing and willful violations.

Continued uncertainty. In addition to the threat of significant liability, employers are plagued with a certain level of uncertainty given that this area of law is rapidly developing and new issues emerge as courts address new FCRA cases. Recent developments of note include:

  • According to a complaint filed in California this month, LinkedIn sells employment information from members without their knowledge and employers are using that information to make hiring and firing decisions without giving notice required by the FCRA. This raises interesting implications as to the scope of FCRA coverage.
  • Because punitive damages are not capped under FCRA, a federal district court in Virginia refused to find, as a matter of law, that an employer’s Rule 68 offer of judgment, which appeared favorable to the employee, satisfied his claim for relief (Milbourne v JRK Residential America, LLC).
  • A company’s outside counsel was acting as an attorney-agent when doing a background investigation and therefore did not qualify as a reporting agency under the FCRA, ruled a federal court in the District of Columbia (Mattiaccio v G, II v DHA Group, Inc).
  • A summary report of a background check obtained by Dish Network on a technician who worked for a third-party contractor that provided installation services to Dish customers was a consumer report under the FCRA. Granting summary judgment for the technician, the federal court in New York noted that the summary had information on his character and reputation and was used for employment purposes (Ernst v Dish Network, LLC).

Should HR take it old school? Considering the complex requirements of the FCRA, the uncertainty of emerging legal issues, penalties for even unintentional noncompliance, and potential Title VII concerns over the disparate impact of basing employment decisions on criminal background checks, employers should consider having HR or management personally perform background checks as needed. The FCRA does not apply when an employer does its own foot work; it only applies to background checks run through a company in the business of compiling background information (i.e., a credit reporting agency). One would think that simply verifying employment history, investigating gaps in periods of employment, and checking references would clue an employer in if an applicant had been incarcerated for any period of time.

Interestingly, a 2012 study by the Society for Human Resource Management (SHRM) indicates that fewer employers are conducting criminal (and credit) background checks on job candidates as compared to a 2010 study. SHRM found that most background checks are done to reduce theft and avoid legal liability (e.g., for negligent hiring). Employers might well be weighing these concerns against the potential for liability under the FCRA and deciding it’s simply not worth it. It will be interesting to see if the trend continues, particularly when industry commentators are noting a significant increase in FCRA class actions.

In the meantime, employers that continue to utilize background checks performed by credit reporting agencies should make sure to comply fully with the FCRA.