Disclosure and Consent in Employee Background Investigations

Many employers use background investigations when making hiring, promotional, and similar decisions. The data made available by these investigations help the employer evaluate applicants in greater depth than an application and typical job interviews will allow.  

Employers frequently rely on third party vendors, called consumer reporting agencies, to conduct the investigations.  These agencies typically compile historical data, such as criminal history, credit, residence, education, and employment history. 

The federal Fair Credit Reporting Act (the “FCRA”) and the state analog, the California Investigative Consumer Reporting Agencies Act (the “ICRAA”) regulate consumer reporting agencies and, consequently, employers’ use of background investigations.  Both of these laws require employers to follow certain procedures to obtain and use background information from consumer reporting agencies.

Disclosure and Consent Requirements

A background check or investigation must begin with providing a written disclosure and obtaining consent. Both the FCRA and the ICRAA provide specific guidance about what information employers must include in a disclosure.

Disclosures must be “clear” and “conspicuous.” The disclosures also must be “standalone,” meaning they cannot contain other information.  This “standalone” requirement prevents employers from burying the disclosure in a job application or other document that an applicant or employee may not carefully read or understand.

Challenges to Disclosure and Consent Forms

Applicants and employees recently have claimed in lawsuits that employers’ background investigation forms do not meet the FCRA and/or ICRAA disclosure requirements.  One reoccurring basis for these claims is that forms include more information than the law allows.  For example, in Syed v. M-I, the Ninth Circuit Court of Appeals ruled that an employer willfully violated the FCRA when its disclosure included a liability waiver that ostensibly prevented the signor from suing the employer for violating the FCRA. 

The Ninth Circuit recently extended Syed in Gilberg v. Cal. Check Cashing Stores, LLC. There, the plaintiffs claimed their employer violated both the FCRA and the ICRAA when it combined disclosures to include the FCRA and various state law requirements.

The court held that the employer violated the “standalone” requirements of both laws.  It also ruled that the notice was not “clear” because it purported to be an “all-encompassing” authorization, without explaining what that meant or how it would affect the applicant’s rights. 

So, “a reasonable person would not understand” what the language meant. 

Again, the document also was not “clear” because it included both federal and state disclosures in one form.  And to make matters worse, the disclosures included provisions required not only by California, but also states not relevant to a California applicant.

Using Third-Party Background Investigation Firms

Larger consumer reporting agencies naturally provide services in multiple states. Presumably to make administration easier, these agencies often provide “standard” forms that may combine federal and various state disclosures into one document, include irrelevant or extraneous information, or otherwise be difficult to decipher.

Unless these agencies now change their forms to comply with recent case developments, employers who use them may be in violation of FCRA and/or state law. Naturally, consumer reporting agencies may be unwilling to assume legal liability for the noncompliant forms.  That fact can result in litigation between employers and third party vendors, and may leave employers legally responsible for liability to the applicants, even if they relied on the agency’s forms.  These cases often proceed as expensive class actions, because employers use the same forms for many applicants and employees.  Violations may result in fines, as well as damages and attorney’s fees, depending on the law and violation involved.

What an Employer Should Do

To comply with these complex legal restrictions, an employer should take these important steps:

• Insist on customizing a consumer reporting agency’s documents and processes to ensure legal compliance.
• Ensure the agency uses separate forms to comply with the FCRA and the ICRAA, and that neither stand-alone disclosure includes extraneous information, such as compliance information for other states.
• If the third party agency will not permit an employer to alter the agency’s forms, then the employer should draft and use its own legally compliant forms. Negotiate the right to use these forms with the consumer reporting agency vendors.
• Carefully review the service agreement with the consumer reporting agency to understand what liability it will assume, if any, for not complying with the FCRA and ICRAA requirements. If a third party agency will not permit the employer to customize its standard forms and will not agree to indemnify for related liability, the employer may reduce risk by working with another agency that will allow it to take these steps.
• Understand other legal restrictions and conditions on background investigations. In addition to the consent and disclosure requirements, many other important legal restrictions affect what information an employer can obtain and use in a background investigation.  For example, in California, employers may not generally obtain credit history or arrest information, if the arrest did not result in a conviction. The timing of conducting the background investigation also is important.  The FCRA and ICRAA also require certain steps when an employer uses information obtained in a background investigation to reject an applicant or make an adverse employment decision.

Background investigations are an important part of many employers’ hiring and related processes. In some cases, they are legally required. They also provide an opportunity for unintentional mistakes and consequential legal liability.  Employers seeking to avoid these mistakes should work with legal experts who can help them navigate these complex issues—starting with proper disclosures.