Employee Background Check Compliance: What You Need to Know About the FCRA and EEOC

Anyone who’s gone through the process of interviewing or hiring an employee, whether they’re the CEO, hiring manager or simply a supervisor weighing in on a hiring decision, has felt the pressure of responsibility to make the right decision.

Make the right decision and the new hire will immediately bring value and profit to the company. The wrong decision, however, will manifest in a number of ways:

  • Employee does not have the advertised skill set
  • Employee shows performance and attendance issues
  • Employee’s behavior or negligence exposes the company to legal action

But the chance of a negligent hire isn’t the only reason that bringing new blood into your organization exposes you to legal risks. The process itself of running background checks and using the information garnered in consumer reports to inform hiring decisions carries with it many procedural requirements on a federal level.

Use consumer information improperly and you can be slapped with serious fines under the regulations outlined in the Fair Credit Reporting Act (FCRA) and the Equal Employment Opportunity Commission (EEOC).

Here’s how to inform and protect yourself.

Understanding and Navigating the FCRA

The FCRA is a federal act regulating the accuracy, fairness, and privacy of sensitive and personal information disclosed in consumer reports. There are sometimes hefty and always serious civil and statutory penalties for non-compliance with the procedural requirements. We’ll cover those requirements here, but first let’s explore what falls under the category of “consumer reports.”

What qualifies as a consumer report?

Officially, a consumer report is defined as “any written, oral, or other communication of any information by a consumer reporting agency (CRA) bearing on a consumer’s

  • credit worthiness,
  • credit standing,
  • character,
  • general reputation,
  • personal characteristics,
  • or mode of living

which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumer’s eligibility” for lending, housing, insurance, or employment purposes.

As you can imagine, the need for a governing body to regulate the use and dissemination of such sensitive information is necessary for our individual security and privacy. The FCRA provides that oversight, but it’s likewise important to the vast majority of employers, hiring managers, lenders, and landlords to have access to the above information so that they can make prudent decisions for their organizations. Handling consumer reports appropriately is the key to protecting everyone involved.

How do employee background checks fit in?

One of the reasons it can be unclear just what the Fair Credit Reporting Act governs is the name. It’s easy to assume that the FCRA covers credit reporting exclusively, but the regulations extend to:

  • Criminal and civil records
  • Civil lawsuits
  • Reference checks
  • DMV records
  • Medical records
  • And, of course, employee background checks, which can include all of the above.

Focusing on employee background checks, the FCRA makes it possible for job applicants to sue anyone who mishandles their consumer reports or otherwise fails to comply with procedural requirements. For a small company, such litigation can be disastrous, and for large companies that process hundreds if not thousands of applicants’ information, FCRA non-compliance can result in a crippling class-action lawsuit.

In other words, no organization should consider itself immune to FCRA oversight.

Procedural Requirements of the FCRA

These days applicants are generally aware of their rights under the FCRA, but part of the procedural requirements for requesting and using consumer reports is to appropriately educate the individual, disclose the reasons for the background check, and to acquire written authorization from the individual prior to ordering the report from a CRA such as Victig.

Failing to receive written authorization from your applicants and employees before running a background check is a surefire way to land in hot water, but one of the most common ways an organization fumbles with compliance and exposes itself to litigation is while taking adverse action.

Adverse action is the decision not to extend an offer of employment or promotion, or to terminate employment based “in whole or in part” on information that is discovered on the applicants’ background check report. In other words, if an individual’s background check turns up something disqualifying, tread carefully before revoking a job offer or terminating an employee. Here’s what you need to keep in mind:

Steps for Acquiring Authorization and Taking Adverse Action

The breakdown of the FCRA’s procedural requirements are:

  • Disclosure and pre-authorization
  • Pre-adverse action letter, copy of report and rights
  • Waiting period
  • Adverse action letter

Disclosure & Pre-Authorization

  • Whether the individual in question is an existing employee or a job candidate, the employer must provide them with written disclosure that is “clear and conspicuous.” This means that it cannot be attached to a job application, liability waivers, or other extraneous materials.
  • The document must stand alone and clearly announce that a consumer report will be obtained and that their background information may be used to make employment decisions.
  • Minor additional information may be included, but only if it is brief and does not detract from the notice, such as a description of consumer reports.Candidate’s written pre-authorization signature may be written on the disclosure or elsewhere, but it must be obtained.
  • If you want to run background checks periodically through the individual’s employment (prior to promotions, for example), this must be made clear and conspicuous as well.

Pre-Adverse Action Letter, etc.

  • If you’ve discovered disqualifying information in the background report, you must provide the candidate with a pre-adverse action letter that includes:
    • A copy of the consumer report
    • A document that clearly outlines their rights under the FCRA. (See here for a Summary of Rights.)
  • The purpose of the pre-notice is to give the candidate the chance to discuss or dispute the report before the action is made final.

Waiting Period

  • There is not an explicit time period for the waiting period outlined in the FCRA, but precedence has been set by the Federal Trade Commission (FTC) and relevant court hearings to wait five days before sending the adverse action letter.

Adverse Action Letter

  • After the suggested five-day waiting period, it’s all right to send the final notice of adverse action, which must include:
    • Name and contact information of the CRA that was used to generate the report.
    • A statement explaining that the CRA did not make the adverse action decision and cannot provide additional information on the decision.
    • A reiteration of their rights to request a free copy of their report within 60 days.

A Close Up Look at the EEOC

A short and simple way of explaining the purpose of the Equal Employment Opportunity Commission (EEOC) is that it exists to lay down the ground rules on what can be considered “disqualifying information” in a comprehensive background check. The intention is to protect candidates and employees from discrimination in the workforce.

In other words, the EEOC prevents employers from using background checks however they choose even if they’re following the procedural requirements of the FCRA to the letter. Certain state legislatures also apply, interpret, or elaborate on EEOC guidelines differently so it’s important for employers to be fully informed on the laws of the state(s) in which they’re hiring.

For example, both California and Massachusetts have special restrictions on how criminal records can be used to disqualify candidates during the hiring process.

In California, employers are not allowed to investigate or allow employment decisions to be swayed by certain types of criminal records, including:

  • An arrest or detention that did not result in a conviction
  • Certain marijuana infractions
  • Misdemeanor convictions that are older than two years

In Massachusetts, arrests without convictions are also off limits to hiring managers. However, whether or not you reside in these states, the EEOC has issued clear enforcement guidance on how arrest records and criminal history should be handled nationwide, which we’ll cover below.

Important EEOC Considerations

The EEOC’s enforcement guidance focuses on discrimination based on race and national origin and provides clarifying information on Title VII, the analytical frameworks of “disparate treatment” and “disparate impact,” arrest records versus convictions, and employer best practices.

Title VII

Title VII of the Civil Rights Act of 1964 was established to prohibit employment discrimination on the basis of race, national origin, color, and religion. EEOC’s enforcement guidance was issued to provide further scrutiny of the way private employers as well as federal, state, and local governments impact protected classes through the stages of employment screening for hiring and retention purposes.

Disparate Treatment and Disparate Impact

The enforcement guidance takes into consideration criminal justice system statistics over the past twenty years. Recent decades have seen a commensurate increase of Americans who have “had contact with the criminal justice system” and working-age individuals with criminal records.

  • 1991: 1.8% of American adults had spent time in prison
  • 2001: 1 in 37 or 2.7% of American adults had spent time in prison
  • 2007: 1 in 31 or 3.2% of American adults were either on probation or parole or in prison or jail.

Currently, African American and Hispanic men are arrested at 2 to 3 times the rate of other demographics according to their proportion of the general population. Enforcement guidance seeks to determine employment discrimination using two analytical frameworks to ensure that racial prejudices and stereotyping are not at play in employment decisions when it comes to vetting minority and non-minority candidates with criminal records: disparate treatment and disparate impact.

Disparate Treatment

Disparate treatment of Title VII-protected groups can sometimes be spotted with the following evidence:

  • History of biased statements by employers or decision makers
  • Inconsistent hiring processes (i.e., selective background checks on protected groups)
  • Similarly situated comparators (i.e., individuals who are similar in every regard but belonging to a protected group being treated differently)
  • Employment testing and statistical evidence (i.e., what an employer’s applicant, workforce, and criminal background check data shows)

Disparate Impact

EEOC enforcement guidance puts the definition of disparate impact plainly: when “an employer’s neutral policy or practice has the effect of disproportionately screening out a Title VII-protected group and the employer fails to demonstrate that the policy or practice is job-related for the position and consistent with business necessity.”

Arrest Records Versus Convictions

  • An arrest without a conviction doesn’t establish that criminal conduct has occurred, but employers may still disqualify candidates based on the conduct underlying an arrest if the position in question would expose the candidate to vulnerable groups, such as children and the elderly.
  • A conviction record is generally reliable as evidence of certain disqualifying behavior, but convictions should be scrutinized on a case-by-case basis as it relates to job and business necessity for the position in question.

Employer Best Practices

The EEOC offers boiled-down guidance for best practices when using criminal record information in employment decisions.

  • Do not use blanket policies that disqualify candidates based on any criminal record.
  • Appropriately train hiring managers and decision makers on Title VII and how to implement policies consistent with the measure.
  • Develop a policy that
    • Identifies essential job requirements and determines specific disqualifying offenses (what would make a candidate unfit for a specific job?)
    • Includes an individualized assessment of the candidate.
    • Keep a record of the justification for policy and procedures as well as consultations and research used in crafting them.
  • Limit questions about criminal records to offenses for which exclusion would be justified for the position in question and business necessity.
  • Keep all records confidential.