HR Magazine, March 2001: Outsourcing Background Checks

Third-party background checks can shield you from lawsuits, but they don't offer complete protection. Here are tips that can further limit your exposure.

You’ve heard the horror stories: A company rushes headlong to fill a position without conducting a background check. Later, calamity strikes and the company learns it hired a dangerous individual into a sensitive position.

To avoid workplace disasters involving theft, violence and fraud—and the legal repercussions they can bring—many HR professionals hire outside screening companies to help them discover any skeletons in the closets of potential employees.

While using a third party for such checks can provide practical and legal advantages, the legal protection afforded employers is far from complete. It is akin to having a shield that protects your head and torso, but leaves your legs exposed. As long as you recognize this—and act accordingly—the shield provides a benefit. But the moment you assume you are better protected than you actually are, you open yourself to the possibility of being lanced by a lawsuit.

The Benefits of Using Outsiders

Hiring a third-party investigator buys your company more legal protection than if you perform your own investigation, according to Mike Coffey, a Texas-based former HR manager turned background investigator. The Fair Credit Reporting Act (FCRA), the primary federal statute governing third-party background checks, provides limited legal immunity to employers who hire third-party investigators.

(The act also protects investigators themselves and anyone who provides them information.)

This legal immunity applies to suits alleging defamation, invasion of privacy or negligence in connection with the investigation. There is no comparable immunity for employers who conduct their own investigations, says Coffey.

In addition to FCRA liability protections, there are other advantages to farming out pre-employment checks. "Companies today don’t really have the facilities to do their own background checks," says Barry Nadell, president of InfoLink Screening Services Inc., Chatsworth, Calif. And "references are just not enough," he says. "You need to dig deeper into a person’s background."

Doing some checks in-house can save employers money, but "finding the expertise is always the trick," says Coffey—particularly when searching for legal information that may be hidden in dusty record books stacked in county courthouses.

For applicants who have lived in multiple counties or states, investigators may need to conduct numerous courthouse checks, so "it becomes a cost trade-off issue," says Coffey, president of Coffey Consulting in Fort Worth, Texas.

In addition, using a third party may give applicants a greater sense of privacy and dispel the impression that possible future co-workers are prying, says Les Rosen, president of Employment Screening Resources, Novato, Calif. Rosen says many large companies outsource checks on professional credentials and educational background as a way of demonstrating that all applicants are handled objectively.

Notification and Consent

The legal protection gained by using a third party is not absolute. HR still must take certain steps to minimize legal liability.

For example, under the FCRA, employers are obligated to notify applicants and employees before requesting background information on an individual’s "credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics or mode of living." This is the case whether the background check is conducted internally or externally.

In general, applicants must be notified in writing that a background check will be conducted, and they must sign a form consenting to it. "The golden rule is, ‘Nothing gets done without consent,’" Rosen says.

Some third-party vendors provide clients with disclosure and authorization forms. FCRA interpretations from the Federal Trade Commission (FTC), which administers the law, suggest that disclosure documents can include requests for such additional information as birth date, Social Security number, driver’s license number and current and former addresses, says Coffey. Having such information can ensure the accuracy of the background check and can reduce the time and expense of this process.

​​Dealing with Negative Information

HR professionals also have legal hurdles to overcome when background checks turn up negative information on job applicants. In such cases, HR managers should make sure they comply with the law to minimize their legal risks when acting on this information, experts say.

First, employers should review the information and be sure it is FCRA-compliant. For example, the FCRA requires that all data based on public records—such as criminal dispositions and motor vehicle records—be accurate and up to date. Moreover, information involving civil suits and judgments that is more than seven years old must not be included in a report. This requirement potentially excludes data gathered periodically through Internet-based database services.

Mindy Farber, a Rockville, Md., employment law attorney, also suggests that employers try to verify reports that an applicant has a criminal conviction. While it’s not unheard of for applicants to have criminal records, "the average person does not have that kind of problem," she says, so it should jump out as a red flag.

The FCRA lays out specific procedures to be followed if the information leads an employer to decide against hiring an applicant.

Before taking action, employers must provide applicants with a copy of the negative report and a Statement of Consumer Rights developed by the FTC. At this point, Coffey says, some employers also give applicants a cover letter explaining that adverse action (meaning a decision not to hire) is imminent, based on the report.

Employers should give applicants a reasonable period of time to contest the information. While the FCRA does not specifically state what constitutes a reasonable period of time, most experts recommend giving job applicants three to five days to straighten out the situation.

This period provides employers with "a powerful protection against being sued" by applicants, Rosen says. He recommends that employers tell applicants that if they do not get back to the employer within the specified timeframe, the employer will presume the information is not being contested. "Don’t do anything on the spot, because it’s illegal [a violation of the FCRA] and it’s not good practice," he says.

Instead, Rosen suggests scheduling a meeting with the applicant to discuss the situation. If the candidate has something to tell you, it is probably in your best interest to listen—especially since many screens are conducted late in the interviewing process, after you already have invested heavily in the applicant.

As a practical matter, Rosen says, most applicants "pull up their tents and go home" because the negative information turns out to be true. The percentage of times information is successfully contested is "so small it’s almost meaningless."

Once the potential employee has had a reasonable opportunity to respond, the employer is free to take adverse action. The law then requires the employer to send the applicant a "notice of adverse action," informing the applicant of the negative decision. The employer also must send another copy of FTC’s summary of consumer rights under FCRA and provide the name, address and telephone number of the consumer reporting agency that furnished the report.

As part of that notice, the FCRA requires employers to clearly state that the reporting agency did not make the adverse hiring decision and is unable to provide the applicant with specific reasons why the action was taken. Many experts suggest the information be delivered in writing, although the law allows the information to be conveyed electronically or orally.

Other Potential Liabilities

While complying with FCRA requirements can save employers a lot of misery, they still can be sued under other federal and state statutes, notes Allan Weitzman, an employment lawyer with Proskauer Rose LLP in Boca Raton, Fla. For example, the information from a background check must be used in a non-discriminatory fashion—or it could come back to haunt the employer in the form of a suit alleging discriminatory refusal to hire, he says.

Consider this scenario: An HR manager discovers that an otherwise excellent applicant lies about having a college degree. Weitzman says the manager should be consistent in his or her decision-making. If the company hires the person despite the lie, the next applicant to walk in the door with a similar discrepancy could allege discriminatory treatment if he or she is rejected because of it.

"What you do with the information can open up a whole new kettle of fish," Weitzman says.

Charlotte Garvey is a freelance writer, based in the Washington, D.C., area, who reports on business and environmental issues.