This article provides an expanded view of one of the subjects—background checks—covered in “The Perils of Multistate Employment” in the May 2012 issue of HR Magazine. It also contains a checklist to help multistate employers ensure compliance on a range of topics.
Despite the complexities of lawfully conducting background checks, employers continue to rely on them as an effective screening tool. In a 2010 Society for Human Resource Management survey, 92 percent of responding HR professionals indicated that their companies conduct criminal background checks, and 87 percent indicated that their companies conduct credit background checks on applicants for some or all positions.
The federal Fair Credit Reporting Act (FCRA) and state mini-FCRAs govern most background checks conducted by employers today. They apply to all types of background checks, such as criminal, credit, motor vehicle, employment or professional references—if they are conducted through a fee-paid third party known as a consumer reporting agency.
Penalties and damages. The federal and state laws create a complex set of requirements, with possible costly penalties of $100 to $1,000 for each instance of noncompliance. Multiply those numbers by each applicant, and then add attorneys’ fees and punitive damages, and the dollars add up quickly. For instance, assuming a federal Fair Credit Reporting Act statute of limitations of either two years from the plaintiff’s date of discovery or five years from the date the violation occurred, whichever is earlier, a large, national employer that conducts 5,000 background checks a year could potentially face $10 million in damages alone for the statutory period. A small employer that conducts 500 background checks a year could face $1 million in damages during the same statutory period.
Applicable state law. Don’t think you need to comply with these laws only in the states where you have facilities. The state laws where applicants reside when they apply to the company or when the background checks are run are also in play. For example, if a New Jersey applicant applied to an employer for its New York facility, the employer should have to comply with both states’ background check laws. Compliance with state background check laws is becoming increasingly difficult. Nine states currently prohibit or substantially limit employers’ reliance on credit background checks. At least 36 bills are pending in 19 states to limit employers’ use of credit background checks.
Rise of class actions. Not surprisingly, given the prevalence of background checks and the potential damages available, background check and FCRA class actions have recently been filed against companies like Kmart and Dillard’s department stores, alleging technical violations such as not separating the background check consent form from other consent forms, including an extra sentence in the consent form, and not waiting enough time between the required pre-adverse action letter and the required post-adverse action letter. In March 2011, a national employer settled for $5.9 million after the employer allegedly failed to wait a reasonable amount of time after receiving background check results before taking adverse action. In April 2011, another national employer settled for $2.6 million after it allegedly obtained background checks without first securing applicants’ consent.
EEOC’s position and activities. The U.S. Equal Employment Opportunity Commission (EEOC) issued updated enforcement guidance on the consideration of arrest and conviction records in employment decisions under Title VII on April 25, 2012, which went into effect immediately. The guidance is a summary of the EEOC’s long-held position that employers’ reliance on arrest and conviction records may have a disparate impact on individuals because of their race or national origin, with some significant changes in certain areas near and dear to the hearts of most employers.
The EEOC’s guidance focused on “disparate impact” claims under Title VII, when an employer’s neutral background check policy or practice disproportionately impacts protected individuals, unless the policy is job-related and consistent with business necessity. The EEOC identified two circumstances that will allow employers to establish this business necessity defense. However, only one will likely be useful to most private-sector employees—a targeted screening process, which takes into account: (1) the nature and gravity of the offense; (2) the time that has passed since the offense; and (3) the nature of the job held or sought.
For individuals “screened out” by this targeted screening process, the employer’s process should provide for an opportunity for an individualized assessment, where the employer provides notice to the applicant that it may take adverse action based on the applicant’s criminal record. While the guidelines stopped just short of requiring these individualized assessments, the between-the-lines message is that individualized assessments are now expected. This means that employer or background check service “red-light/green-light” policies of rejecting applicants based solely on a matrix (e.g., any violent felony bars the applicant from employment) must be reexamined. In what is sure to be a controversial one-sentence “best practice,” the commission recommends that employers not ask about convictions on employment applications. Equally controversial is the EEOC’s position that employers’ compliance with state law background check requirements (e.g., that healthcare providers must pass a background check) does not provide a defense to a Title VII discrimination claim. Given the EEOC’s stance on this issue, it will likely be the EEOC’s position that customer/client requirements (e.g., a client requirement that prohibits access to a worksite for anyone with a felony conviction) do not provide a defense to a Title VII discrimination claim. While courts are not required to defer to the EEOC’s guidance, they likely will look to the EEOC’s interpretation for guidance.
In January, Pepsi settled a race discrimination claim with the EEOC for $3.13 million. According to the EEOC, Pepsi’s criminal background check policy—which allegedly denied employment to applicants with arrest records, even if such arrests did not result in convictions, and certain conviction records—was racially discriminatory. In the updated guidance, the EEOC maintains its long-held position that arrest records should not be the sole basis for employment decisions. The guidance does not distinguish between currently pending arrest records and arrest records that did not result in convictions.
Additionally, the EEOC held a public meeting in October 2010 on the discriminatory impact of credit checks, citing studies that show that racial minorities, Hispanics, and women tend to have lower credit scores than non-Hispanic white males.
Instituting a System
There are several components to an effective, lawful background check system for applicants and employees:
- Assess and determine whether background checks may lawfully be performed. Do this for each job title and position, and consider federal and state law components. For example, employers may not conduct credit checks in Illinois unless the applicant’s or employee’s credit history is a bona fide occupational requirement. Under federal law, employers should not conduct any background check that is not job-related and consistent with business necessity--this analysis has become even more important in light of the EEOC's updated guidance. For instance, a credit background check is fine for a chief financial officer but not for a custodian.
- Request background checks and communicate results lawfully. The process must be legally compliant. This means using forms and letters that comply with the federal FCRA and state background check laws. The most common legally deficient form is the background check disclosure and authorization form. It must be on its own form, separate from all other subjects; must contain required state notices from 10 states, depending on the type of background check conducted; and must not include a “release from liability” statement. Be sure to separate the disclosure section from the authorization section, and comply with other technical requirements. New York, for instance, requires that employers provide a copy of New York Correction Law Article 23-A when requesting investigative consumer reports. Fourteen states require credit security freeze notices in the pre-adverse action packet.
- Use the information obtained from a background check lawfully. Based on the EEOC's updated guidance, a targeted screening process--which includes consideration of the criminal record based on the three factors set forth in the guidance and and opportunity for an individualized assessment--should be used before employers take adverse action based on criminal record information. State law may place additional requirements on employers' use of background check information. For example, employers in California may not rely on information about convictions for certain marijuana-related possession offenses if the convictions are more than two years old. In New York, a criminal conviction must have a direct relationship to an applicant’s or employee’s ability to perform the job duties, with six or seven specific factors or questions to be used in assessing the “direct relationship” requirement.
Checklist of Multistate Issues
In addition to the topics discussed in “The Perils of Multistate Employment,” employers operating in multiple states should review and examine the following employment-related elements under the laws of the states where they have facilities and, in some cases, the states from which they accept applicants or employ employees:
Employment applications. Many states require specific language to disclaim employment applications and prevent them from becoming implied contracts of employment. Some states require notices to accompany application questions about criminal convictions, while Philadelphia prohibits all questions about criminal history on the application. Additionally, the EEOC's updated guidance "recommends," but significantly does not require, that employers remove questions regarding criminal convictions from their employment applications. At least one state requires language about lie detector tests.
Electronic signatures. Electronic signatures on documents that employers must provide “in writing,” such as the background check authorization form under the federal FCRA, are governed by the federal Electronic Signatures in Global and National Commerce Act. At least one plaintiffs’ attorney has argued that this act does not apply in the employment context, leaving employers to use state electronic signature laws. State electronic signature laws may place additional requirements on employers’ use of electronic signatures. Given the recent focus in this area by the plaintiffs’ bar, employers should review their online process for compliance with both federal and state laws.
Drug testing requirements and policies. Drug testing statutes generally fall into three groups:
- Mandatory requirements to conduct drug tests, such as those for issuing pre-test notices, testing procedures, verification procedures and post-test notices.
- Optional steps to qualify for a workers’ compensation premium discount.
- Optional steps to deny unemployment compensation to an applicant or employee testing positive for drugs.
Although employers may choose not to take advantage of the financially beneficial optional drug testing provisions, the mandatory provisions in states as diverse as North Carolina and Minnesota are very technical and unforgiving for employer noncompliance.
Protective or restrictive covenants such as noncompetes or nondisclosure agreements. How long an employee may be bound not to disclose confidential information, what it takes for information to be considered confidential and what geographic territory is reasonable for a traditional noncompete all vary from state to state.
Protected characteristics. Some states prohibit discrimination on bases beyond those protected by federal law, including marital status, sexual orientation, gender identity and age younger than 40.
Paid-time-off and vacation restrictions. Some, but not all, states allow “use it or lose it” policies. For states that allow employers not to pay out to employees accrued but unused paid time off or vacation at termination, many require specific, advance and often written notices to employees.
Gun and weapon prohibitions. Some states expressly or implicitly allow employees to bring weapons into employers’ parking lots in their personal vehicles, some states prohibit such weapons, and other states are silent on the topic
The author is a shareholder with Ogletree Deakins in Greenville, S.C., and head of the firm’s Background Check Advice team. He may be reached at email@example.com.