New rules for employee background checks

Changes to Fair Credit Reporting Act affect companies using third-party agencies


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Q. Alice, a vice president, wants to use an outside credit agency to help with background checks for applicants as the checking of references has become too time-consuming for the company. Before making this proposal to the president, Alice needs to know whether the law requires the company to follow any certain processes or procedures in order to take this action.

A. Companies routinely conduct background checks on applicants for employment or current employees being considered for promotion to assist them in selecting the best candidates. There are several types of background checks available. The type of check utilized should depend upon the requirements and nature of the job position. Some checks may also be required by federal or state law.

Employers are subject to the Fair Credit Reporting Act when they utilize third parties to perform background checks on job applicants or employees. The FCRA requires employers to notify applicants/employees before ordering a background check or taking an adverse employment action based on the results of a background check.

It also requires that prior to ordering a background check, an employer must obtain the applicant/employee's consent.

Failure to comply with these requirements can result in civil penalties, punitive damages, and even attorneys' fees.

Employers may use their own employees, such as a human resources professional, to conduct background checks by verifying references or credentials without implicating the FCRA. If a company decides, however, to use an outside consultant or agency -- other than a governmental law enforcement agency like the State Police -- to conduct a background investigation or any other background check of an applicant/employee, the requirements imposed by the FCRA are triggered.

As of Jan. 1, 2013, employers required to follow the FCRA must provide new and updated notices to applicants and employees. The recently created Consumer Financial Protection Bureau issued these new requirements and deadlines. The bureau is now the enforcement authority over the FCRA.

Under the FCRA, an employer must certify that it:

• Notified the applicant/employee and obtained that individual's permission to get a consumer report

• Complied with all of the FCRA requirements

• Will not discriminate against the applicant or employee or otherwise misuse the information, as provided by any applicable federal or state equal opportunity laws or regulations.

Before an employer may reject a job application, reassign or terminate an employee, deny a promotion, or take any other adverse employment action based on information in a consumer report, the employer must give the applicant or employee a notice that includes a copy of the consumer report relied upon in making the decision and a copy of a "Summary of Rights" under the Fair Credit Reporting Act.

The 2013 change includes modification to the mandatory rights summary. This form is a standard notice that must be provided to an applicant or employee subject to an investigative consumer report or when a "pre-adverse action" notice is sent to an applicant or employee. A copy of the new notices are available at www.consumerfinance.gov.

Not too long ago, amendments to the Dodd-Frank Act specifically added the disclosure requirements for any person taking an adverse action based on a credit score. The adverse action notice includes the numerical credit score, the range of possible credit scores, the factors adversely affecting the credit score (top four factors plus key factors), the date the credit score was created, and the name of the entity that provided the credit score.

The purpose of obtaining a background check is to determine if the applicant or employee is suitable for the job position. The check can be done either before making an offer of employment, right after making an offer of employment conditioned on a satisfactory background check, or when considering an existing employee for another position.

Now is a good time for businesses to review their procedures for conducting background checks and the forms they use to make sure that they are in compliance with federal and state laws. Specific state laws may be more restrictive. For example, Massachusetts has special timing requirements that differ from the FCRA.

As for Alice, if the company decides to take this action, she should conduct due diligence on potential outside agencies handling the background checks. When deciding on an outside agency, companies should ask about the agency's FCRA compliance program. Companies may also want counsel to review any disclosure or consent forms provided by the agencies.

Jennifer Parent, a director in the Litigation Department of McLane, Graf, Raulerson & Middleton, can be reached at 603-628-1360 or Jennifer.parent@mclane.com.

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