Employers Beware: You Cannot Always Trust Third-Party Provided Background Check Disclosure Forms

Snell & Wilmer

Does your company run background checks on its employees? Do you pay a third-party to run the reports and trust them to get it right? You may not be as safe as you think you are.

Just ask Whole Foods, Paramount Pictures and Michaels. Each of those companies has been hit with a huge national class action regarding background checks in the past few months. Here’s the issue: employee background checks are governed by the Fair Credit Reporting Act (FCRA). Its requirements are specific and rigorous. In addition, if the employer is located in California, state law imposes additional technical requirements for employee background check forms. If those forms do not comply with the FCRA or California law, it is nearly impossible to defend class action claims on the merits. The plaintiffs’ class action bar has figured out that these might be some of the easiest and most lucrative class action lawsuits around.

The best way employers can limit their liability, and avoid joining the ranks of employers facing FCRA class actions, is to invest on the front end and make sure their forms and procedures are compliant.

Both the FCRA and California law proscribe specific procedures for employers who run consumer reports and investigative consumer reports on applicants or employees. Under the FCRA, a consumer report is broadly defined and includes any report obtained from a consumer reporting agency that bears on a person’s credit, character, reputation or personal characteristics. Investigative consumer reports are similar but involve a more intensive investigation with personal interviews. Under California law, however, investigative consumer reports are defined as a consumer report containing information on a person’s character, general reputation, personal characteristics and mode of living (but not credit) obtained through any means.

Before obtaining what the FCRA defines as a “consumer report” and what California law defines as an “investigative consumer report,” the employer must notify the applicant or employee of its intent and obtain their written consent. This disclosure must be a separate and conspicuous writing. California law further requires that the disclosure inform the applicant or employee that a report will be made about the person’s character, general reputation, personal characteristics and/or mode of living. It must state the report’s permissible purpose and the nature and scope of the investigation. It must also provide the third-party agency’s name, address, telephone number and Internet address. Additionally, the disclosure must provide specific information about the person’s rights to obtain information regarding the investigative report, including that they can view the file maintained by the consumer reporting agency, obtain a copy of the file by mail or in person, or obtain a summary of the report over the telephone. Finally, under California law the disclosure form must contain a check box where the applicant or employee can request a copy of any report that is prepared on them.

All of these disclosures must be made to the applicant or employee before the employer requests a third-party agency run a background check. The employer must then certify to the third-party agency that it has made all the applicable disclosures. Afterwards, if an employer decides to take adverse action against the person as a result of the report, the FCRA and California law impose additional requirements, including providing additional disclosures and a copy of the report to the applicant or employee, before any adverse action is taken.

These hyper-technical disclosure requirements are easy to misinterpret and employers should not assume that third-party agencies hired to provide the forms will get them right. Moreover, other states have enacted their own fair credit reporting laws with separate and distinct disclosure requirements. Unless you have an indemnification from the third-party agency that you use, and hint, most companies do not, the employer is typically responsible for any violations, even if the violation is caused by the forms given to you by the agency. To avoid facing costly class action lawsuits alleging violations of either the FCRA or state law, employers should take it upon themselves now to ensure the forms they use are compliant.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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