What Cross-Border Employers Need to Know About Applicant/Employee Background Checks

by Dickinson Wright
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When it comes to being a cross-border employer, there are plenty of Canadian and United States laws to consider, and some of those laws regards how to conduct proper applicant/employee background checks. This piece reviews a number of background check nuisances as they exist in the United States versus Canada including: (1) How the Law Applies; (2) Pre-Check Requirements; (3) Industry-Specific Requirements; (4) Information Available; (5) Rolling Background Checks; and (6) Adverse Employment Requirements.

How the Law Applies

United States

Unless there is some industry-specific background check requirements, e.g., people working with children, banking, federal contractors, etc., the employee’s location/residence is the state law that will control the background check requirements. If the overarching federal law regarding background checks comes into play because the employer used a consumer reporting agency to conduct the background check, the Fair Credit Reporting Act (“FCRA”) then the FCRA would be applicable. See more below.

Canada

The Canada Labour Code applies to employees working in federally regulated industries, such as banking, airlines and maritime, irrespective of in which province the employee resides. However the vast majority of employees are governed by the labour and employment laws of the province in which they reside.

Pre-Check Requirements

United States

In the United States, there are a number of laws that apply to employee background checks. The primary law under the federal law is the FCRA. The FCRA applies to “consumer reporting agencies”, which essentially means that, if an employer is paying a third party to conduct a background check, the FCRA applies. If, however, the employer performs a background check internally by looking at publically-available documents via court websites, google searches, etc., the employer is not a “consumer reporting agency” in that instance and the FCRA does not apply.

When the FCRA applies, there are a number of pre-background check actions that must be performed by the employer before the consumer reporting agency is authorized to perform the background check. Before an employer can authorize a consumer reporting agency to conduct a background check, it must:

1. Disclose to the applicant/employee that the employer might use the information obtained in the background report for employment-related decisions; and

2. Must obtained the applicant/employee’s written authorization to conduct the background check.

These requirements, like all of the FCRA requirements, are extremely technical, and it is typically these technical requirements that lead to class action lawsuits against employers and consumer reporting agencies. For example, with respect to the disclosure requirement, the pre-check FCRA disclosure has to be via a stand-alone document; it cannot be part of another document, including the employment application or employee handbook.

Canada

Using Ontario as an example, an employer can request an applicant or employee to consent to a credit check or a police record check. The consent must be obtained in writing and kept on file.

Police record checks in Ontario will be governed by the Police Records Reform Act effective November 1, 2018. This Act establishes three types of police record checks: criminal record check; criminal record and judicial matters check; and vulnerable sector check. A criminal record check alone will not result in disclosure of conditional or absolute discharges from a criminal conviction. Non-conviction information is disclosed only in exceptional circumstances, usually relating to offences against vulnerable persons. The individual being checked receives a copy of the results prior to the entity requesting the check so that the individual has an opportunity to correct inaccurate information. Only then with the individual’s written consent will the results of the check be provided to the entity requesting the check.

Credit checks in Ontario are governed by the Consumer Reporting Act. A consumer reporting agency can provide a credit report to an employer only with the prior consent of the applicant or employee.

Industry-Specific Requirements

United States

While the FCRA is the primary federal background check statute, there are other specific industry-related statutes that require that employers meet certain background check standards prior to employment. In the federal context, some of those requirements apply to federal contractors, employees in the banking industry, and employees  in transportation, national security, and government/public employees, just to name a few.

There are also state industry or job specific statutes that govern requirements with respect to  employees in certain job functions, such as employees working with children or the elderly, employees working with financial transactions, and employees working in safety-specific or emergency jobs, etc.

There are also state laws that impose similar, though, many times, different notice and disclosure requirements, from those imposed by the FCRA. It is important that employers understand the federal and state difference and ensure dual compliance.

Canada

In Canada, there may be checks required by statutory or regulatory authorities as a condition of being employed in a particular industry or receiving a license to be engaged in an activity, but those will normally be subject to the previously described general rules concerning checks.

Information Available

United States

Under the FCRA, only certain information is allowed to be disclosed by a consumer reporting agency about an applicant/candidate. Felony convictions, regardless of when they occurred, are always subject to disclosure. Other information, however, such as liens, bankruptcy, and arrest and misdemeanor information is far more limited, and bankruptcy information is only reportable for seven years after discharge.

Canada

Generally a credit report will confirm name, age, address, employment, debts and paying habits but will not disclose bankruptcies over seven years old unless there has been more than one, or payment details for fines more than seven years old.

Rolling-Background Checks

United States

In the United States, rolling background checks that permits an employer to run a background check on an employee at any time during the employee’s employment, are allowed for the most part. The “for the most part” caveat is two-fold. First, employers who want to be able to run a background report on an employee at any time during the employee’s employment must obtain specific authorization to do so in the initial notice provided to the employer. The Federal Trade Commission (FTC), which is the federal agency that enforces the FCRA, issued “40 Years with the Fair Credit Reporting Act An FTC Staff Report with Summary of Interpretations” that provides:

An employer may use a one-time blanket disclosure, and obtain permission from applicants or current employees to procure consumer reports, at any time during the application process or during the employee’s tenure. The disclosure must state “clearly and conspicuously” that the employer intends for the disclosure and authorization to cover both the application for employment and, if the consumer is hired, any additional consumer reports obtained while the individual is an employee. A valid disclosure and consent remain effective throughout the duration of employment.

The second caveat is that there are a number of states that prohibit rolling background checks, regardless of what the initial notice says.

Canada

Rolling background checks are only available if the written authorization of the individual extends to such checks. Even then the individual will receive the results of a police record check for review prior to authorizing their release to the entity requesting the updated check and an older authorization may be questioned by a credit reporting agency.

Adverse Employment Requirements

United States

For employers, if there is information in an FCRA-covered background report that the employer intends to use, in full or part, to exclude the applicant from employment/employee from promotion/opportunity, then the employer has to provide a pre-adverse notice that informs the applicant/employee that negative action may be taken against the individual due, in full or in part, because of information contained in the background check. While this notice can be given orally or in writing, for employer tracking purposes, giving the notice in writing is preferable. In addition to this notice, the employer must identify, give the contact information of the consumer reporting agency that performed the background check. The employer must also send the applicant a copy of the background report and a copy of “A Summary of Your Rights Under the Fair Credit Reporting Act”.

Notably, on May 24, 2018, Section 301 of the federal Economic Growth, Regulatory Relief and Consumer Protection Act, was signed into law. This Act amends the FCRA effective September 21, 2018 and requires consumer reporting agencies to include new language on the Summary of Rights form that explains a consumer’s right to obtain a security freeze to protect against identity theft.

Additionally, when the Bureau of Consumer Financial Protection issued its interim final rule on Sept. 12, 2018, it indicated that employers would have to provide a notice of the right to obtain a security freeze as part of the Summary of Rights. This new legal requirements adds new fodder for potential lawsuits against non-complying employers, including class actions, so employers beware.

The notice must also give the applicant/employee “reasonable” time to challenge the information in the report. Interestingly, this time is not for the applicant to challenge the information with the employer, but rather with the consumer reporting agency that provided the information. As for how long an employer must wait between the pre-adverse notice and actually taking adverse action against the individual, i.e., excluding the individual from employment, “reasonable” is not defined by the FCRA. It has been interpreted by some courts to be 5 days in certain circumstances, and it is essentially an employer-need-driven analysis. Some courts have indicated 10 days is reasonable.

The final step is to provide adverse notice to the individual that they are being excluded from employment/promotion, in full or in part, on information in a background report. Again, notice may be given orally or in writing, but it is recommended that the notice be in writing to prove that the FCRA compliance. The adverse notice must include:

(1)          A statement that the adverse action is based either in whole or part on information contained in the background report provided by the CRA;

                (2)          Notice of the individual’s right to dispute the accuracy or completeness of the provided information;

(3)          Name, address, and toll free telephone number of the CRA you used;

(4)          Statement that the CRA supplying the background report had no hand in the decision to take adverse action

and cannot give specific reasons for it; and

(5)          Notice of applicant’s right to another free consumer report, which must be made available within 60 days.

Canada

Federal and provincial Human Rights Codes prohibit discrimination in employment, which includes hiring, on the basis of “record of offences”, which means an individual’s police record. The exception is where the police record discloses conduct that would preclude hiring, promotion or continued employment due to a bona fide occupational requirement that could not be met because of the police record.

Take Aways

There are a number of issues that employers need to be aware of when they are conducting applicant/employee background checks. These issues only multiply as employers expand and become multi-state and multi-national. Whether the issues be international, federal, or state/provincial, ensure you are compliant before conducting applicant/employee background checks. Compliance is tricky and technical and while employers oftentimes, trust their consumer reporting agencies to ensure their forms are complaint, it is important to remember that CRA’s forms are drafted with their legal obligations in mind, which do not always mirror the legal obligations of the employer.

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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