Employers increasingly are relying on credit and background checks in the hiring process. Employers want assurances that their employees are honest and trustworthy. Internal investigations of certain misconduct allegations are now required by anti-discrimination laws and others, such as Sarbanes-Oxley. At the same time, surveys show resume fraud is rampant. Job references often won’t provide information about former employees other than “name, rank and serial number.” With a bad economy, huge student loan liabilities, and the mortgage crisis, potential employees may appear to be untrustworthy with credit.

Specific federal and state laws govern how employers may use credit and background reports prepared by third-party vendors. The California Legislature has sent to the Governor’s desk Assembly Bill 2918, a new law further limiting employers’ ability to use such information. It is unknown whether the governor will sign AB 2918, which would prohibit employers from relying on background checks performed by third parties, except in limited circumstances.

Employers may wish to conduct their own research into employee backgrounds. Public records are more “public” than they were even 20 years ago. The internet has made it easy to obtain information that used to be available only in dusty courthouse basements. Additionally, employees provide a great deal of information about themselves to perfect strangers on social networking sites. When employers do their own research on employees’ backgrounds, they are subject to other laws, some of which may not be obvious.

What’s on the Horizon?

Most employers are not required to perform credit or background checks on their applicants or employees. The law generally allows employers to choose to perform checks for evaluating applicants, selecting employees for promotion, and deciding whether to retain an employee.

In certain circumstances, federal, state, and local governments require criminal and other background checks as part of the application or licensing process. The 1993 National Child Protection Act authorizes states to create regulations to access the FBI’s National Crime Information Center (NCIC) for background checks for employees and volunteers who work with children, the elderly, and persons with disabilities. The California Attorney General manages access for law enforcement agencies, public and private schools, non-profit organizations, and in-home supportive care agencies. Authorized “applicant agencies” can access NCIC criminal background checks, but must not disclose criminal record history information. Release of information to unauthorized individuals can result in civil fines and a misdemeanor conviction.

Some employers, such as schools, must conduct background checks of all employees. Other organizations may choose whether to use NCIC background checks. Proposed Assembly Bill 2888 would require all organizations with employees, independent contractors, or volunteers who work directly and unaccompanied with minor children to conduct criminal background checks. Also, hiring a registered sex offender to work unaccompanied with minors would carry a civil penalty of $10,000. Critics of the proposed law complain that it is not specific enough and unnecessary as long as the California Department of Justice provides NCIC information to employers whose employees work with children.

At the same time as the Legislature expands the obligation to conduct background checks, it is working to curtail permissible purposes for doing so. If signed, AB 2918 would prohibit employers from obtaining “credit” reports regarding employees unless it is “substantially job related,” required by another law, or obtained by an employer subject to “oversight” under the Fair Credit Reporting Act (such as certain banks). “Substantially job related” would be limited to credit checks obtained about applicants for “highly compensated,” managerial, or certain local government jobs. If the Governor approves the bill, it will prohibit employers from obtaining credit checks for employees handling cash or inventory.

Background Checks by Third Parties

The federal Fair Credit Reporting Act applies to most credit and background checks conducted by third parties for employment purposes. California has similar laws, maintained in the Civil Code at sections 1785.1-36 for credit reports, and 1786-1786.60 for investigative consumer reports.

The laws cover “consumer reports,” which include not only credit checks but also criminal record history, verification of education, and personal interviews of friends and neighbors. These laws also control the use and procurement of “investigative consumer reports,” which are based on an “interview” that goes beyond simply verifying facts and dates. The Federal Trade Commission (FTC), which enforces the FCRA, considers investigative consumer reports “particularly invasive of a consumer’s privacy.”

Under existing law, employers generally are free to conduct background checks for covered purposes so long as they disclose their intent to do so, provide sufficient information under the law, obtain written consent, and provide sufficient information to applicants denied employment based on the results of the report.

A California employer that uses a third-party background investigator must explain the scope of the report requested, provide contact information for the investigator, explain the rights to see and copy any report, and allow the subject to receive a copy of any report. An applicant who requests a report must receive a copy within three days of receipt by the employer.

Under the FCRA, before any adverse action is taken based upon information in the report, the employer must provide the applicant or employee a copy of the report and the summary of consumer rights prescribed by the FTC. After an adverse action is actually taken, the employer also must provide an adverse action notice and a summary of rights under the FCRA. Complying with these requirements is a function that responsible investigative consumer reporting agencies can do for the employer.

Background Checks Conducted by Employers

Employers that choose to conduct their own background checks are not subject to many of the requirements contained in the FCRA and the Civil Code. In California, for example, “investigative consumer reporting agencies” may not provide information about arrests, indictments, convictions, civil judgments, or tax liens that are more than seven years old unless state or federal law specifically requires the employer to check records for a longer period of time. However, employers are not limited from obtaining the same information in their own investigations. As a practical matter, of course, few employers are prepared to conduct that kind of thorough search without the assistance of an agency. Employers also cannot obtain a credit report without using a third party.

An employer that conducts its own investigation must notify the applicant or employee and, generally, must provide copies of any public records it receives within seven days of receipt. “Public records” include criminal files available to the public. However, if the investigation is ongoing, the employer may wait until its conclusion.

Internet Research

At present, there are few restrictions on employers that merely search the internet for posted information about an applicant or employee. However, one potential information source available to any member of the public äóñ the Megan’s Law website äóñ is completely off-limits to employers. Megan’s Law created a database and public websites for members of the public to check on the whereabouts of registered sex offenders. The law and website are administered by the Attorney General. There is an express warning that the information on the site may not be used by employers to determine an employee’s fitness for duty. Ironically, employers are free to deny employment based on the conviction of the crimes themselves. Megan’s Law simply prohibits employers from relying on the website to obtain the information about the convictions.

Employers also may be tempted to search social networking databases such as “MySpace,” “Facebook,” and the like. Information available to the public is fair game to view. But employers nevertheless should not make decisions based on illegal criteria revealed on public websites, such as political beliefs, sexual orientation, or religion. Moreover, employers should not use trickery to obtain passwords to private web pages. Doing so could result in an applicant or employee successfully claiming an intrusion into privacy.

Conclusion

Employers and the public have legitimate reasons to require the investigation of applicants’ and employees’ backgrounds. In some cases, the law requires careful vetting of applicants and employees exposed to children, confidential information, and other valuable or sensitive information or property. Other employers choose to implement background checks even though they are not required to do so. These employers must carefully follow the detailed procedures imposed upon them, and ensure the information obtained during the process is not misused.