CONDUCTING BACKGROUND INVESTIGATIONS OF EMPLOYEES AND APPLICANTS: EMPLOYER’S MUST PROCEED WITH CAUTION

Robin Foret
December 18, 2007 — 2,175 views  
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Employers increasingly rely on the results of background investigations to evaluate the suitability of an employee, or applicant for employment, before making employment decisions. This trend is certainly not surprising in light of post-9/11 concerns about national security, as well as public demand for increased honesty and integrity of corporate executives, officers and directors following the Enron scandal. Background investigations are often conducted in the employment context to verify a variety of information such as previous employment, educational history, credit history, to identify criminal activity and to otherwise evaluate the truthfulness of an employee or applicant for employment. In certain industries, federal or state law may require background checks of individuals who will work in sensitive positions. Some examples are the banking industry, certain government jobs and positions involving work with children, the elderly or the disabled. In some instances, background checks qualify as consumer reports under the Fair Credit Reporting Act (“FCRA” or “the Act”), mandating adherence to numerous statutory requirements designed to protect the privacy of individuals and to encourage the accuracy of reports prepared by “consumer reporting agencies.” 15 U.S.C.A. §1681, et seq. In the employment setting, this means protecting individuals from inaccurate reports that may be used as a factor in determining eligibility of employment. Below is a discussion of when and how the FCRA applies to background investigations conducted by an employer. Background Checks as Consumer Reports The FCRA defines the term “consumer report” as “any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer’s credit worthiness…general reputation, personal characteristics or mode of living” that is used or expected to be used as a factor in determining the consumer’s eligibility for “employment purposes.” 15 U.S.C.A. §1681a(d). A “consumer reporting agency” is a person or entity that “regularly engages” in the practice of “assembling or evaluating consumer credit information or other information on consumers for the purpose of furnishing consumer reports” to third parties. §1681a(f). The FCRA exempts from coverage any report based on a reporter’s first hand experience of a subject, as opposed to information obtained from an outside source. §1681a(d)(2). This means that an employer may, using its own internal resources, conduct a background check, including calling former employers to verify prior employment and contacting universities to verify degrees earned, without implicating the FCRA. When an employer conducts background checks or obtains credit information on an employee or applicant for employment using the services of a consumer reporting agency, the background check is considered a consumer report and FCRA guidelines must be followed. The term “consumer report” is broader than one might think. It includes tools routinely utilized by employers to evaluate employees and/or applicants for employment such as lie detector tests and drug tests. These tests may be considered “consumer reports” under certain circumstances; for example, when the information is released to an employer by a company that did not acquire the information first hand. See Hodge v. Texaco, Inc., 975 F.2d 1093, 1095-96 (5th Cir. 1992) (drug test reports not categorically excluded from FCRA coverage because statute targets broad range of conduct). When testing is conducted first hand by a credible facility such as a laboratory that provides testing results directly to an employer rather than relying on another facility’s results, the FCRA does not apply because of the first hand experience exception and because the testing facility is not a “consumer reporting agency” under the Act. See id. at 1096 (urinalysis test performed directly did not implicate FCRA); Martinets v. Corning Cable Systems, L.L.C., 237 F. Supp.2d 717, 720 (N.D. Tex. 2002) (breathalyzer test conducted by local clinic was not considered consumer report). Although drug testing and lie detection are commonly performed directly by service providers hired by the employer, and thus, exempt from the FCRA under the first hand experience exception, care should be taken to confirm the procedures utilized by the facility chosen. FCRA Requirements Before Conducting Background Check The FCRA requires the employee or prospective employee’s written authorization before an employer can obtain consumer report information, and requires the employer to notify the employee in writing that the report will be used for employment purposes. §1681a(h) (Note that special procedures apply to the trucking industry). The employer must have a legitimate employment purpose for obtaining the type of information sought, based on the employee or applicant’s job duties, financial responsibility in the company, access to confidential customer information, etc. Liability may be imposed against employers who seek credit reports for improper purposes. See e.g., Blanks v. Ford Motor Credit, 2005 WL 43981 *3-4 (N. D. Tex. Jan. 7, 2005) (Not Reported in F. Supp.2d) (employer failed to articulate legitimate purpose for obtaining employee’s credit report after employee was late in paying for vehicle financed through Ford Motor Credit). FCRA Requirements Following Background Check Before information gathered in a consumer report may be used, in whole or in part, to justify the failure to hire an applicant or to take an adverse action against an employee, the individual must be provided with a pre-adverse action disclosure notice. The notice must include a copy of the consumer report and a copy of a summary of the individual’s rights under the FCRA (a documents prescribed by the Federal Trade Commission). §1681b(b)(3). The purpose of the pre-adverse action notice is to provide the individual an opportunity to correct inaccurate information before a final decision is made. The employer should state that it will allow the employee or applicant a brief period of time (7-10 days for example) to take action to correct inaccurate information, before a final decision will be rendered. Once the employer rejects the applicant or makes an adverse employment decision that affects an employee, the employer must inform the individual if the consumer information in any way influenced the employment determination made. This post-employment decision notice must include: an explanation of the adverse employment action taken; the name, address and telephone number of the consumer reporting agency; a statement that the consumer reporting agency did not make the decision to take the adverse employment action; and, an explanation of the individual’s rights as a consumer. §1681m(a). Tips for Compliance The FCRA imposes civil liability on individuals and companies for negligent, as well as willful, noncompliance with the Act. Employers should establish internal procedures for how and when background checks will be used. Simple background information on employees and applicants such as confirming educational institutions attended and prior employment histories should be conducted directly by the employer’s personnel whenever possible. When outside services that accumulate consumer data are engaged to perform more detailed investigations, care should be taken to make sure the requirements of the FCRA are met. The general information contained in this article is not designed to address specific situations, and does not include rules and/or regulations that may be specific to various states. If you have questions concerning this topic, you should consult with legal counsel to obtain advice on fact specific matters. Robin Foret heads the Labor and Employment practice at Curran Tomko Tarski, LLP in Dallas, Texas. Ms. Foret is Board Certified in Labor & Employment Law by the Texas Board of Legal Specialization.

Robin Foret

The Foret Law Firm

Robin Foret practices in the areas of employment law, commercial litigation and specialty insurance defense claims. She handles a variety of employment matters such as theft of trade secrets, breach of employment agreements, non-competition agreements, wage and hour issues under the Fair Labor Standards Act (FLSA), discrimination and harassment issues under Title VII of the Civil Rights Act of 1964 (Title VII) and the Texas Commission on Human Rights Act (TCHRA), the Americans with Disabilities Act (ADA), Family Medical Leave Act (FMLA) issues, and the Sarbanes-Oxley Act (SOX). Robin has handled a wide variety of employment law matters for employers, as well as for executive-level employees, before agencies, and state and federal courts.