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by Jennifer Brown Shaw and Becki D. Graham | SHRM Legal Report | Apr 1, 2009

Hiring employees can be costly. Between the expenses of advertising, employment agencies and lost productivity associated with recruiting, it pays to select employees as efficiently as possible.

Yet, brief interviews, applications and resumes provide scant information. Reference checks rarely yield substantive insight. And, once employees are hired, California’s employment laws make it risky for employers to change their minds. No wonder employers seek additional information about prospective hires through credit and background checks.

There are different ways to obtain background information about prospective and current employees. Some methods are not currently regulated by any federal or California laws.

Other methods, particularly when an employer uses a third-party reporting agency, are subject to specific and complicated legal requirements.

What Laws Apply?

Background checks in California are regulated by federal and state law.

The federal Fair Credit Reporting Act (FCRA) regulates “consumer reports” and “investigative consumer reports.” Under the FCRA, “consumer reports” include:

  • Credit checks.
  • Criminal record history.
  • Verification of education.
  • Other related information.

“Investigative consumer reports,” as defined by the FCRA, are based on personal interviews of friends and neighbors that go beyond simply verifying facts and dates.

What Procedures Apply?

The procedures applicable to background checks depend on what type of report is sought and whether the report is gathered by the employer or a reporting agency.

Background investigations

Employers that use a reporting agency to conduct background investigations must follow rigorous notice and disclosure rules.

First, the employer must make appropriate disclosures to the applicant or the employee before procuring a report from the reporting agency. The disclosure must be in a clear and conspicuous writing consisting of the following information:

  • A statement that a background check may be obtained for employment purposes.
  • The purpose of the report.
  • A statement that the report may include information about the individual’s character, general reputation, personal characteristics, mode of living, creditworthiness and credit standing.
  • How to contact the reporting agency conducting the investigation.
  • The nature and scope of the investigation, including a summary of the individual’s rights under the ICRAA.

    If the background check will include personal interviews, the employer must provide the applicant or the employee with a summary of FCRA rights (a copy of which is available on the Federal Trade Commission’s web site at ). Employers must include this information in a stand-alone document and not as part of the employment application or other document.

    The employer must obtain written consent to conduct the background check and provide a “check box” on the disclosure form or elsewhere so the applicant or the employee may request a copy of the report. If requested, a copy of the report generally must be provided within three days of its receipt by the employer. However, if the employer is obtaining a consumer credit report, the applicant or employee must receive a copy of the report at the same time it is sent to the employer. The employer may contract with the reporting agency to provide the copy.

    Finally, the employer must certify to the reporting agency that it has complied with the notice and disclosure requirements and is obtaining the report for a permissible purpose.

    Under the FCRA, if the employer intends to take some form of adverse action against the applicant or employee based on the report, the employer must provide the applicant or employee with a copy of the report and a summary of rights. Then the applicant or employee may provide information to dispute the report.

    Under state and federal law, if the employer proceeds with the adverse action, the employer must provide the applicant or employee with:

  • An adverse action notice.
  • Information on how to contact the reporting agency.
  • A statement that the decision to take an adverse action was based on information in the report.
  • Information on how to obtain a free copy of the report.
  • A summary of rights under both state and federal law.

    Public records searches

    Employers may investigate an individual’s background through public records searches.

    If the employer obtains information by means of a credit report or an investigative background check conducted by a third party, the employer must follow the procedural requirements described above.

    California law restricts reporting agencies from providing certain information. For example, lawsuits and satisfied judgments, unlawful detainer actions where the individual being investigated was the prevailing party, paid tax liens, accounts placed for collection, and records of arrest, indictment, misdemeanor, or conviction of a crime that are more than seven years old may not be reported. (Interestingly, due to recent amendments to the FCRA, there is no seven-year limit on criminal convictions under that law.) Reporting agencies also may not report bankruptcies older than 10 years.

    Notably, these time period limitations do not apply when employers conduct their own background checks. However, those employers must comply with separate notice and disclosure requirements. An employer that accesses public records during a background investigation related to an arrest, indictment, conviction, civil judgment action or tax lien must provide a “check box” on the employment application that allows the applicant or employee to waive his or her right to receive a copy of any records obtained. If the individual does not waive his or her rights, the employer must provide copies of any public records it receives within seven days of receipt of the information, whether oral or written, unless the employer is conducting an investigation for suspicion of wrongdoing or misconduct. In that case, the employer may withhold the information until the completion of the investigation.

    Moreover, an employer that takes an adverse action (e.g., refusing to hire an applicant) based on the information uncovered by the reporting agency during a public records search must provide a copy of the public records to the applicant or employee, even if the individual initially waived his or her right to receive one.

    Do-it-yourself background checks

    In addition to public records searches, employers may utilize other methods to discover background information regarding applicants or employees.

    References. Employers often conduct reference checks to obtain background information regarding an applicant’s prior employment. Reference checks typically involve a telephone discussion with a former employer to verify an applicant’s prior employment. Reference checks generally are excluded from the FCRA and California law so long as the employer does not utilize the services of a third party for this purpose.

    Internet Searches. Employers also may obtain background information regarding an applicant or employee through the Internet. There are few restrictions on this practice if employers merely search the Internet for information. Social networking web sites such as MySpace, Facebook, and LinkedIn can provide employers with a potpourri of information—sometimes more than they want to know!

    While employers are not subject to background check rules when accessing Internet web sites directly (that is, without using a third party), employers may run into other problems if they make employment decisions based on the information contained on the sites. For example, employers that learn the political beliefs or religion of their employees from web sites obviously cannot make adverse employment decisions based on that knowledge. In addition, employers that inappropriately obtain passwords to web sites could be subject to claims they violated applicants’ or employees’ privacy rights.

    Employers should also be aware that certain public web sites prohibit employers from using the information listed on their sites for employment purposes. For example, in California, employers generally may not rely on information found on the Megan’s Law web site to determine whether an employee can perform the essential functions of his or her position. The Megan’s Law web site is a public database that lists registered sex offenders. Interestingly, while the California version of Megan’s Law prohibits employers from relying on its web site to obtain information about an applicant’s or employee’s convictions, an employer may obtain that information from another permissible source, such as a public criminal court record.

    Internal investigation

    Under California law, if an employer is using a third-party reporting agency to conduct a background investigation based on suspicion of wrongdoing, the employer generally is exempted from following the notice and disclosure requirements for background checks. Until recently, however, employers could not take advantage of this law because the FCRA did not contain a similar exception.

    In a positive development for California employers, the Fair and Accurate Credit Transaction Act of 2003 (FACT Act) resolved this issue. FACT Act, a law that amends the FCRA, specifically excludes background investigations for suspected misconduct from the FCRA’s consumer report requirements.

    Compliance Steps

    California’s legal requirements for conducting employment-related background checks are complicated. Many employers are unaware of these requirements and may make illegal decisions without realizing it.

    To protect themselves from potential liability, employers should confirm that the reporting agencies they retain are using forms that comply with both state and federal laws. In addition, the agencies should not provide prohibited information to the employer, such as misdemeanor marijuana convictions that are more than two years old.

    Employers also should be cautious of relying on impermissible information to make employment decisions. While the Internet can be a source of intriguing information, not all such information is fair game in the workplace.

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