In challenging economic times, it is essential for employers to hire and retain strong, valuable employees. The costs associated with high workforce turnover can frustrate the operation of business and damage an employer's overall workplace culture. Additionally, many employers face floods of applications for very few open positions. Credit checks and criminal background checks can be effective tools when screening applicants for employment. While these reports may provide valuable insight into an applicant's history, employers should be cautious when using them. Employers should evaluate their hiring policies and procedures to ensure compliance with laws and standards from recent litigation.
Employers may obtain background checks on applicants; however, they must comply with requirements set forth by federal law. The Fair Credit Reporting Act (FCRA) provides detailed procedures for obtaining reports on applicants from outside sources. FCRA applies to both credit checks and criminal background checks, but does not apply to an employer's internal investigations. If a consumer reporting agency gathers outside information about an applicant by conducting personal interviews, additional notification requirements may apply under FCRA.
If an employer obtains a background report on an employee or applicant from an outside consumer reporting agency, they must follow the notification procedures outlined in FCRA. An employer must:
- Provide the applicant with a clear and conspicuous written disclosure that a report may be obtained in the future (provided separately from application materials) and inform applicants that a poor credit history or conviction on the report will not automatically result in disqualification for the position;
- Obtain written authorization from the applicant to obtain a background report;
- Warrant to the reporting agency that it will not use the information in the report in violation of any applicable federal or state equal opportunity law or regulation;
- Before taking any adverse action based on the background report, notify the applicant that it is considering taking adverse action in whole or in part because of what was contained in the report, provide to the applicant a copy of the report and a summary of legal rights (prescribed by the Federal Trade Commission), and allow the applicant the opportunity to rebut the information contained in the report; and
- After taking adverse action based on the background report, provide to the applicant or employee: (1) notice that the adverse action was taken in whole or in part because of what was contained in the report; (2) the name, address, and telephone number of the consumer reporting agency that furnished the report; (3) a statement that the consumer reporting agency did not make the decision to take adverse action and is unable to provide the applicant or employee the specific reasons why adverse action was taken; and (4) written notice that, even though the applicant or employee already has received a copy of the report, they have the right to obtain another free copy of the report from the consumer reporting agency within 60 days after the adverse action and to dispute the accuracy of that report with the consumer reporting agency. FCRA, 15 USC § 1681b.
Employers should examine state law to determine whether there are additional requirements for obtaining a background report on an applicant. For example, the Minnesota Consumer Protection Act requires an employer to include notice that a report may be obtained, either in or with a written employment application. Minn. Stat. §§ 13C.02. This means that when a Minnesota employer provides FCRA notice in connection with an application, it must be provided on a separate document along with the written application in order to comply with both Minnesota and federal law.
State Specific Issues
Some states explicitly prohibit the collection of certain information in the hiring process. Therefore, information obtained through background checks may lead to the collection of prohibited information under certain state laws.
Several state laws restrict an employer's ability to inquire about criminal history information. Hawaii prohibits employers from inquiring about an applicant's criminal history during the hiring process until after a conditional offer of employment has been made. Haw. Rev. Stat. § 378-2.5. In November 2010, a Massachusetts law will prevent employers from requesting criminal conviction information on an initial written application. 2010 Mass. Acts., ch. 256, § 101.
Additionally, many states prohibit employers from using credit history information in the hiring process. In August 2010, Illinois passed a law prohibiting employers' use of an employee's credit history for employment purposes with exceptions for positions in the banking, insurance, trade secrets, or state and national security industries. The Illinois law is effective as of January 1, 2011. Employee Credit Privacy Act, 820 Ill. Comp. Stat. 70. Oregon enacted a similar law in March 2010, as did Hawaii in 2009. Job Applicant Fairness Act, Or. Rev. Stat. § 659A.885; Haw Rev. Stat. § 378-2(8). Similar bills have been introduced in nearly 20 other states.
State laws may provide additional restrictions on the use of credit information. For example, the Minnesota Human Rights Act (MHRA) specifically prohibits an individual involved in the selection of employees from having any document that includes an applicant's date of birth, gender, or race information other than the person designated as the background investigator. Minn. Stat. § 363A.08, Subd. 4(a)(1). A background investigator may provide a background report, so long as it does not directly or indirectly reference prohibited information, but he may not be involved in the selection of an employee. Additionally, the MHRA prohibits an employer from seeking or obtaining information from any source on a person's race, color, creed, religion, national origin, sex, marital status, status with regard to public assistance, disability, sexual orientation, or age for the purposes of making job selection (subject to narrow exceptions). Minnesota employers (and employers in other states with similar laws) must be careful to ensure that individuals involved in the selection process do not use prohibited information gathered through background checks.
Developments in the Use of Background Checks in Hiring
The issue of criminal history and credit history checks in the employment context has recently been in the spotlight. Recently-enacted state statutes, such as the Massachusetts law referenced above, have restricted the use of criminal history information in hiring. Particularly in light of the recent credit crunch, the use of credit information in the hiring process has also come under scrutiny. Legislation has been introduced at both the federal and state levels to prohibit the use of credit information in making employment decisions. At the federal level, the Equal Employment for All Act has been introduced in the House of Representatives. If enacted, it would prohibit employers from using credit checks unless the position related to national security or clearance for employment with the Federal Deposit Insurance Corporation (FDIC); supervisory, managerial, professional or executive positions with financial institutions; or positions where checks are mandated by federal, state, or local law.
The issues surrounding background checks are also playing a prominent role in recent EEOC activity. On October 20, 2010, the Equal Employment Opportunity Commission held a hearing to address the issues surrounding employers' use of credit checks, particularly in light of the Equal Employment for All Act. The EEOC has also considered updating its guidance on the use of credit history information in employment decisions, issuing an informal discussion letter in March 2010. Recognizing its inability to enact legislation prohibiting the use of credit checks, the EEOC advised that credit checks could have a discriminatory impact on certain protected classes.
The EEOC has also taken up the issues of both credit and criminal background checks in recent litigation. In October 2009, the EEOC filed a case in the District of Maryland against Freeman, a national event planning company, for ongoing practices of discriminatory hiring. The EEOC alleges in that case that Freeman's practice of using an applicant's credit history in hiring decisions has a disparate impact on black applicants and that using an applicant's criminal history in hiring decisions has a disparate impact on black, Hispanic, and male applicants. The EEOC is seeking injunctive relief, lost wages and benefits for applicants and deterred applicants, and reinstatement. The decision in this case will likely provide strong guidance for employers on how a court views background checks in the employment context.
Guidance on the Use of Background Checks
The current state of the law presents risks for employers in using credit and criminal background checks in hiring procedures. Employers should take precautions in using background checks to avoid any inference of discrimination. For example:
- Review or enact policies that dictate precisely how criminal convictions/arrest records and credit checks will be used in hiring or other employment decisions.
Employers should carefully review policies regarding the use of background checks in hiring decisions. Statistics show the disparate impacts of hiring practices that exclude applicants based on low credit scores or criminal arrests and convictions. Case law has long established that arrest and conviction records may not be used as a complete ban to employment. See Green v. Missouri Pacific Railroad Company, 523 F.2d 1290 (8th Cir. 1975). As such, the EEOC provides that an employer should consider several factors when using arrest and conviction records in hiring decisions: 1) the nature of the job, 2) the nature and seriousness of the offense, and 3) the length of time since the offense occurred.
The EEOC also advises against inquiring into an applicant's credit rating or economic status, because of the potential for adverse impacts on women and minorities, unless the employer can show that the information is essential to the job. Employers, therefore, should analyze which positions necessitate a background investigation. If an employer determines that a background investigation is warranted, the employer should carefully decide what type of information is needed for each distinct position. For example, a credit check may be necessary only for employees involved in handling financial information. An employer should also clearly establish any guidelines that it would like applied to all positions. For example, an employer may want exclude all applicants convicted of a felony or misdemeanor which involved violence or fraud in the last five years, but even this type of policy could be subject to challenge under certain state laws.
- Ensure that all policies are enforced consistently.
Employers can avoid the inference of discriminatory hiring by applying all policies regarding background checks consistently among all applicants. All applicants for each particular category of jobs should be screened consistently and under the specifications outlined in the developed policies regardless of their qualifications. Consistent application of policies will avoid the appearance of discriminatory hiring in any specific case.
- Review hiring processes and applications to comply with the laws of each state.
Employers must pay particular attention to the restrictions imposed by state laws on gathering criminal and credit history information about applicants, and the ability to use information gathered in connection with making hiring decisions. Employers should review the hiring processes used in each state in which they have employees and ensure that any application and background check process used complies with state law. Also, employers should ensure that relying upon background check information to make hiring decisions does not run afoul of any state law limitations. Recent changes in state laws make it difficult to have a one-size-fits-all hiring practice for all employment locations.
- Choose a screening service carefully.
Employers and screening agencies can both be held liable for violations of FCRA. In addition to prohibitions against the collection of certain information, state laws can also outline additional regulations for background check service providers, such as safeguards regarding the accuracy of information contained in background checks. Employers should ensure their service providers comply with both federal and state applicable laws. If state law prohibits you from collecting an applicant's date of birth, your service provider should make sure to exclude that information from any report they give you. An employer may violate an applicable law based solely on information obtained from a service provider.
- Stay updated on changing laws and regulations.
As cases related to credit and criminal background checks continue to appear in courts around the country, we will likely see new legislation and guidance limiting the use of these reports in employment decisions. Employers should monitor developments in the law and raise any concerns regarding their background-check policies and procedures with legal counsel.