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Doing background checks correctly

Oklahoma Employment Law Letter - January 2011

By Michael Avery

The Fair Credit Reporting Act (FCRA) places several obligations on employers that use third-party providers to perform background checks on prospective and current employees. Compliance with FCRA requirements is important because employers can be subject to civil liability for merely negligent violations. And with the potential for increased hirings in 2011 and the prevalent use of background checks in the hiring process, it's necessary to understand how to perform an effective and lawful search for relevant hiring information at the beginning of the new year.


Authorization and disclosure

The FCRA states:

[A] person may not procure a consumer report, or cause a consumer report to be procured, for employment purposes with respect to any consumer, unless:

(i) a clear and conspicuous disclosure has been made in writing to the consumer at any time before the report is procured or caused to be procured, in a document that consists solely of the disclosure, that a consumer report may be obtained for employment purposes; and

(ii) the consumer has authorized in writing (which authorization may be made on the document referred to in clause (i)) the procurement of the report by that person.

The term "consumer report" is defined for these purposes as:

[A]ny 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 ...employment purposes. ... The term "employment purposes" when used in connection with a consumer report means a report used for the purpose of evaluating a consumer for employment, promotion, reassignment or retention as an employee.

Taken together, those provisions require employers that wish to perform background checks on applicants or employees via a third-party provider not only to disclose that intent to those individuals but also to receive their written authorization. You may obtain a one-time authorization and then use it at any point in the future. Also, despite the fact that the law seemingly indicates that the disclosure and authorization must be separate documents, courts have held that compliance may be achieved through a single document so long as the disclosure is sufficiently clear and conspicuous.

Oklahoma law defines the term "conspicuous" as "so written, displayed, or presented that a reasonable person against whom it is to operate ought to have noticed it." Moreover, the Oklahoma Legislature has elaborated on this point by explaining that "[c]onspicuous terms include ... language in the body of a record or display in larger type than the surrounding text of the same size, or set off from surrounding text of the same size by symbols or other marks that call attention to the language."

If a company willfully fails to comply with the statutory requirments, it may be liable to the applicant or employee in an amount equal to "any actual damages sustained ... or damages of not less than $100 and not more than $1,000," plus attorneys' fees and costs and punitive damages when appropriate.


Certification to credit reporting agencies

Under 15 U.S.C. § 1681b(b)(1), a consumer reporting agency may furnish a consumer report for employment purposes only if:

  1. the employer certifies to the agency (a) that it has complied with the notice and authorization requirements of the law, (b) that it will comply with the law's disclosure and timing requirements before taking any adverse action based on the consumer report, and (c) that the information from the report will not be used in violation of any applicable federal or state equal employment opportunity law or regulation; and
  2. the consumer reporting agency provides with the report or has previously provided a summary of the consumer's rights as prescribed by the Federal Trade Commission (FTC).


Process for taking adverse action

Any business that takes an adverse action against an applicant or employee based in whole or in part on information contained in a consumer report must first provide the individual with a copy of the consumer report and a written description of her rights. "Adverse action" is defined for these purposes as "a denial of employment or any other decision for employment purposes that adversely affects any current or prospective employee." As with the authorization and disclosure requirements, willful violations involving an adverse employment action can subject an employer to civil liability to the aggrieved applicant or employee in an amount equal to "any actual damages sustained ... or damages of not less than $100 and not more than $1,000," plus attorneys' fees and costs and punitive damages when appropriate. Negligent noncompliance can result in an award of actual damages, plus costs and attorneys' fees (no statutory or punitive damages are available).

With respect to the sequencing of events, courts have generally held an employer may lawfully decide to take an adverse action before providing the consumer to take an adverse action before providing the consumer with his consumer report and statement of rights so long as the action itself isn't implemented before the documents are provided. With respect to the content of the documents that must be provided, the requirement to provide a copy of the consumer report is pretty clear. The statement of rights is a somewhat more difficult document to create, however.

Under the FCRA, Congress instructed the FTC to create and promulgate "a model summary of the rights of consumers," which the agency has done. You should be aware, however, that on August 27, 2010, the FTC released a proposed rule and request for comment that includes a revised model form. The cutoff for public comment on the proposed changes was September 21, 2010, but as of press time, no official rule change had taken place.

If such a change were to take place, notice and a copy of the new model form will be posted on the FTC's website. Employers should use the new statement of rights form once it becomes effective and provide it to an applicant or employee before taking any adverse action against her based on consumer report.


Investigative reports

An important subset of "consumer reports" are so called "investigative consumer reports." This subgroup includes consumer reports or portions of such reports in which information on a consumer's character, general reputation, personal characteristics, or mode of living is obtained through personal interviews with neighbors, friends or associates. The most common form of investigative consumer report is a reference check. If an employer hires a third party to conduct reference checks, the FCRA provisions for investigative consumer reports are implicated.

An employer may not request an investigative consumer report unless the following conditions are met:

  • The employer must disclose in writing to the current or prospective employee that an investigative consumer report may be made and may include information about his character, general reputation, personal characteristics, and mode of living, whichever are applicable.
  • The employer must disclose in writing to the current or prospective employee that he may request additional disclosures, including the nature and scope of the investigation to be performed. If the individual makes such a request, the additional disclosures must be made to him within five days of receipt of the request.
  • The employer must provide a certification in writing to the consumer reporting agency that it will comply with the provisions in items (1) and (2) above.


Bottom line

The FCRA imposes strict compliance requirements on employers that use third-party consumer credit agencies for employment-related screening. If you have the resources to procure the information internally, without the use of a third party, you can eliminate any obligations imposed by the Act.