Employment background checks help employers hire individuals with integrity whom they can trust, and who do not present a risk to the business, other employees, or the customers and clients that the business serves. Buyers in transactions may view target businesses that run background checks as lower risk for employee performance and retention issues. Background checks also constitute an important area for employment diligence in transactions because an employer or background check vendor’s failure to follow the hypertechnical disclosure and authorization requirements of the Fair Credit Reporting Act (FCRA) and other applicable state and local laws risks potentially material class action exposure and $1,000 penalties per violation. This article explores mitigation strategies that buyers may use in due diligence to identify and valuate potential FCRA exposure.
Class action litigation brought under the Fair Credit Reporting Act (FCRA) is on the rise—particularly in California—after the US Court of Appeals for the Ninth Circuit issued a 2017 decision applying a hypertechnical approach to the FCRA’s disclosure requirements. Background checks are an integral part of the hiring process, but they open employers up to lawsuits for noncompliance with disclosure or adverse action requirements. Plaintiffs’ firms are turning their attention to these cases because of the potential for statutory and actual damages, punitive damages, costs and attorneys’ fees. In our recent webinars, we discussed strategies to help employers avoid and defend these claims.
Last month, the Federal Trade Commission (FTC) and the Equal Employment Opportunity Commission (EEOC) issued joint guidance addressing the use of background checks in employment decisions. The guidance does not offer new requirements related to background checks, but rather serves as a reminder to employers of their obligations under federal law when they use background checks, and creates a user-friendly guide to applicants and employees regarding their rights with respect to background checks.
The guidance consists of two documents – one for employers, “Background Checks: What Employers Need to Know,” and one for applicants and employees, “Background Checks: What Job Applicants and Employees Should Know.” The first document, “What Employers Need to Know,” offers guidance to employers on their existing legal obligations under the Fair Credit Reporting Act (FRCA), a federal law enforced by the FTC, and federal non-discrimination laws enforced by the EEOC. The document reminds employers that under FCRA employers must obtain written permission from job applicants and employees before conducting a background check, and must notify applicants and employees that background reports may be used to make decisions about employment. In addition, the agencies reaffirm that employers must not discriminate based on a person’s race, color, national origin, sex, religion, age (40 or older) or disability when requesting or using background information for employment. Finally, the guidance discusses the requirements related to the retention, preservation and disposal of personnel or employment records.
The second document, “What Job Applicants and Employees Should Know,” describes applicants’ and employees’ rights under federal law when an employer conducts background checks. The agencies remind applicants and employees that it is lawful for potential employers to ask about applicants’ or employees’ backgrounds or require a background check, as long as the employer does not unlawfully discriminate. The guidance also states that employers must not ask for medical information until they offer an applicant a job, and can only ask for genetic information under limited circumstances (for example, when an employer offers health or genetic services as part of a voluntary wellness program, or if the information is required to comply with the Family and Medical Leave Act). Finally, the guidance explains that when applicants have been turned down for a job or denied a promotion based on information in their background reports, they have the right to review the report for accuracy.
This marks the first time the two agencies have jointly issued guidance, which seems to indicate that both agencies have a vested interest in enforcing the laws related to employer use of background checks, and perhaps serves as a signal to employers that both agencies consider this topic a priority. Employers should consider reviewing the new guidance, and ensure that their policies and practices with respect to background checks comply with federal law, as well as applicable state and local law.
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