From the smallest family business to the largest multinational corporation, every entity has some form of pre-employment screening process. Inquiring with a mutual acquaintance about the applicant’s reliability is a form of a “background check,” after all. And any pre-employment screening, no matter how ad hoc, carries risk.

Of course, the results of a pre-employment screening can bar applicants from hire. With the current economic situation, state and federal agencies are invested more than before in helping individuals win gainful employment. Accordingly, we are seeing increased scrutiny in the impact of pre-employment screening processes.

First, any company making pre-employment inquiries must be conscious of the federal Fair Credit Reporting Act (FCRA). The FCRA covers credit and background checks conducted for the purposes of “hiring, promotion, retention, or reassignment.” However, FCRA applies only when an employment background check is prepared by an outside screening company. When a third party compiles a report, the FCRA requires:

  1. The employer must provide notice that an investigation may be performed,
  2. The employee must be given the opportunity to consent in advance, and
  3. The employee must be notified if information in the report is used to make an “adverse” decision.The FCRA disclosures must be in writing, and they are very specific.  

For example, an employer must obtain specific permission if medical information is requested, and must give specific notice if any individuals will be interviewed about the applicant’s “character, general reputation, personal characteristics, or mode of living.” If an adverse decision is in the offing, the employee or applicant must be afforded the opportunity to comment on (or refute) the findings before the adverse decision is finalized. Many companies fail to comply with the detailed and specific FCRA disclosure and notice provisions.

Some states have their own FCRA-like provisions. In California, an employment background check is called an “investigative consumer report.” Under the federal FCRA, an “investigative consumer report” is limited to personal interviews with your friends, neighbors or business associates. In California, an investigative consumer report covers your “character, general reputation, personal characteristics, or mode of living” obtained through “any means.”  California’s laws require similar written disclosures to FCRA, but apply in a broader context. Moreover, though FCRA disclosures are not required if the employer compiles the investigative report itself (versus hiring a third party), California law does require some notice and access if the employer conducts its own report. As this example shows, it’s important to do your local research.

Credit Check

Credit reports are governed by different disclosure and usage guidelines. The use of credit reports in the context of pre-employment screening has become a hot button of late. In 2010, the federal Department of Labor obtained a judgment against Bank of America prohibiting the bank’s use of credit ratings in screening applicants for entry-level positions. This screening factor resulted in disqualifying African-American applicants at a rate nearly twice that of Caucasian applicants. The Bank was not able to offer a legitimate business reason for using credit ratings to screen applicants, so the usage of credit ratings in the pre-employment screening process was found improper.

State governments are beginning to pass specific laws addressing the use of credit checks as a screening tool. Effective this year, for example, an employer in California can only request a credit report for applicants in certain positions, and the employer must specifically cite which relevant exception it believes allows consideration of credit ratings in the employment context. Bankruptcies are a matter of public record and may appear on an individual’s credit report. The Federal Bankruptcy Act bars employers from discriminating against applicants who have filed for bankruptcy.

Crime Search

Criminal record searches are another fairly typical category of pre-employment inquiry. However, an employer’s ability to use criminal record information in making a hiring decision varies from state to state. You need to ensure that your criminal record search is not overreaching either as to time or scope.

For example, California allows you to ask only about convictions, and limits the inquiry to seven years, unless a job-specific exception applies allowing for a broader search. In contrast, federal law says that criminal convictions can be reported indefinitely. And, while the FBI maintains a national criminal records database, it is not accessible in all scenarios. Typically, a company retains a third party to do the records search, and the employer must define the geographic scope of the search—by state or county. (Typically employers use the applicant’s job and residence history as guidelines in defining the geographic scope of the search.) This leaves the accuracy of your results at the mercy of whether you chose the proper scope.

Most employers are aware that they can ask about an applicant’s ability to perform all the necessary functions of the job at issue. However, the Americans with Disabilities Act prohibits discrimination based on a physical or mental impairment, and forbids requesting an employee’s medical records. However, workers’ compensation appeal board files are a matter of public record, and may be used in a hiring decision if the employer can show the applicant’s condition might negatively impact his ability to perform required duties.

Educated Matters

What about an applicant’s educational history? Under the Family Educational Rights and Privacy Act and similar state laws, educational records such as transcripts, recommendations and financial information are confidential and will not be released by the school without a student’s consent. So, if you are interested in an applicant’s transcript—ask the applicant directly for this information.

And, finally, the old fashioned “reference check.” Most companies have a strict policy of only verifying employment dates and position(s) held. Companies fear defamation suits in the event they provide further comment. California allows a company to respond affirmatively or negatively to the question, “Would you hire this individual back?” in an attempt to make reference checks more useful. In reality, however, few companies offer any substantive information about former employees.

In this world of full-access, where information about applicants is only a click away, risks are certainly higher than before that an employer will be accused of improperly accessing or using information in the context of an employment decision. Companies need to carefully consider whether they can demonstrate a legitimate tie between the information obtained and the job at issue. The more closely the information ties to the legitimate business needs and job duties, the more likely its use in the context of an employment decision will be permitted.