Employee Background Checks: A look at the Fair Credit Reporting Act

Employee Background Checks: A look at the Fair Credit Reporting Act

One of C2’s government contracting clients recently called for some advice and “best practices” regarding employee background checks. Organizations often grapple with whether or not to use background checks as part of the hiring process. According to a recent survey from HireRight, 84% of employers found a lie or misrepresentation on a resume or job application – at all levels of the organization. Background checks can minimize guess work about applicants’ backgrounds and increase the efficiency, safety and accuracy surrounding applicants and employees in the workplace…but there is also a cost associated with conducting those checks. Whether the benefit outweighs the cost, is a decision each employer has to decide for itself. Let’s take a closer look at what employers need to know from an administrative perspective about background checks and the Fair Credit Reporting Act (FCRA).

      A. What Constitutes a Background Check?

 A background “investigation” or “check” is an inquiry in to an individual’s character, general reputation, personal characteristics, and/or mode of living. According to the Federal Trade Commission (FTC), a “consumer report” is any written, oral or other communication that contains any information by a Consumer Reporting Agency (CRA) bearing on a consumer’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics or mode of living. A CRA is defined as “… any person which, for monetary fees, dues, or on a cooperative nonprofit basis, regularly engages in whole or in part 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, and which uses any means or facility of interstate commerce for the purpose of preparing or furnishing consumer reports.”  Background checks conducted by a CRA require an individual’s consent and are regulated by the FCRA, as well as by some state and local laws.

Background checks are designed to gather background information from a variety of sources and may include:

  • Criminal and civil record checks at county courthouses, state repositories, federal courts and/or international courts;
  • Driving records checks;
  • Verification of employment, education, professional licensure;
  • Reference checks; Registry checks; such as sex offender and child and elder abuse lists;
  • Office of Foreign Assets Control (OFAC) Specially Designated Nationals List (SDNL);
  • Export Denial List Search; Patriot Act Searches (terrorist watch lists);
  • Office of Inspector General (OIG) Search and other healthcare sanction lists;
  • Financial Industry Checks, including SEC filings, FINRA and Federal Reserve Sanctions;
  • Credit History (note – one’s credit score is not included in a pre-employment screening report);
  • Accessing the FBI’s criminal database system when mandated by law; or
  • psychological evaluations or assessments.

       B. The Fair Credit Reporting Act 

Employers must comply with the federal FCRA (in addition to applicable state or local laws) when using a CRA to conduct a background check on an applicant or employee. The FCRA spells out the rights, obligations and responsibilities for consumers, employers and the CRA’s, which includes required notices to the applicant or employee regarding the background check and its results.

Prior to performing a background check on an applicant, the FCRA requires the following:

  • Let the applicant or employee know the information may be used in decisions about his or her employment. This notice must be in writing and separate from the employment application, handbook, offer letter, or other type of document.
  • If you are asking a company to provide an “investigative report” – i.e., a report based on personal interviews concerning a person’s character, general reputation, personal characteristics, and lifestyle – you must also tell the applicant or employee he or she has a right to receive a description of the nature and scope of the investigation.
  • The applicant’s or employee’s authorized written consent must be obtained prior to requesting a background check. This can be part of the document used to notify the person that you (as the employer) will get a copy of the report. If employers want the ability to get background reports throughout the person’s employment, the written authorization must say so clearly and conspicuously.
  • Certify to the company from which you are getting the report that you:
  • notified the applicant and got their permission to get a background report;
  • complied with all of the FCRA requirements; and
  • will not discriminate against the applicant or employee, or otherwise misuse the information in violation of federal or state equal opportunity laws or regulations.

       C. Adverse Action and FCRA Requirements

“Adverse action” is a personnel action that is taken because of negative results obtained from a background check, and frequently encompasses such employment decisions as rescinding an offer of employment or terminating an existing employee. However, before proceeding with any “adverse action” the FCRA imposes certain requirements on employers:

  • Before taking adverse employment action, give the applicant or employee:
  • a notice that includes a copy of the consumer report relied on to make the employment decision; and
  • a copy of “A Summary of Your Rights Under the Fair Credit Reporting Act,” which you should have received from the CRA that conducted the background check and provided the report.

By giving the person the notice in advance, the person has an opportunity to review the report and explain any negative information. After you take an adverse employment action, you must tell the applicant or employee (orally, in writing, or electronically):

  • that he or she was rejected because of information in the report;
  • the name, address, and phone number of CRA that produced the report;
  • that the CRA did not make the hiring decision, and cannot give specific reasons for the hiring decision; and
  • that he or she has a right to dispute the accuracy or completeness of the report, and to get an additional free report from the CRA within sixty (60) days.

      D. Revised FCRA Form

Stemming from a law passed in May 2018, the “Summary of Your Rights Under the Fair Credit Reporting Act” form was recently updated to include information about security freezes and fraud alerts, which was in response to high-profile data breaches. Previously, this form had last been revised in 2012.  The newly revised version can be used in combination with the 2012 form “so long as a separate page that contains the additional required information is provided in the same transmittal.”

      E. Background Checks Do Have Some Drawbacks

Employers certainly enjoy the additional information background checks often provide.  However, background checks come with a few inherent drawbacks.  First, reports from CRA’s are not always 100% accurate.  Employers therefore run the risk of making employment decisions on false information.  Second, if conducting checks on current employees, employers need to be prepared for the possibility that negative (and possibly termination worthy) information could be uncovered about even their best employees.  Lastly, CRA background reports can be expensive, and often make employees uncomfortable due concerns about their privacy. Employers thinking of implementing background checks in the employment process should first consider these potential drawbacks and whether proceeding makes sense for their organization as a whole.

      F. Conclusion

Background checks can often effectively weed out candidates and employees who are prone to violence, fraud, lying about their experience, embezzlement, and theft.  However, the information received from background reports cannot be used as a basis to unlawfully discriminate, and must be utilized in a fair and consistent fashion by employers. On the whole though, and when used appropriately, background screening is one tool that helps employers craft the best workforce possible. Due to the complex legal framework surrounding them, Employers wishing to incorporate background checks are well advised to review the requirements of the FCRA and enlist the services of a professional CRA to conduct the background checks to help ensure compliance.

For more information about the Fair Credit Reporting Act, including applicable forms and notices, go to www.consumerfinance.gov/learnmore.

C2 provides strategic HR outsourcing to clients who want to develop optimal workforce strategies and solutions to allow them to be more competitive and profitable. C2 blog posts are intended for educational and informational purposes only.

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After graduating with a degree in Philosophy from Emory & Henry College in Southern Virginia, Mr. McCoy earned his law degree from Valparaiso University School of Law. Mr. McCoy began his legal career as a judicial law clerk to judges on two different intermediate courts of appeal before settling in the D.C. region.


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