Ultimate Guide to Employee Background Check Compliance

As an employer, you have every right to subject candidates to a background check, ask direct questions about their qualifications during the interview process, and make hiring decisions based on whatever information you discover. But you must do so in compliance with federal, state, and municipal laws designed to protect applicants and current employees from discrimination.


If you use consumer information improperly, 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). Nondiscrimination laws are enforced by the EEOC while the rights of anyone subjected to a third-party background check (including prospective employees) are protected by the FCRA.


Here’s what you need to know about EEOC and FCRA compliance before you begin the background check process.


Understanding and Navigating the FCRA


The Fair Credit and Reporting Act (FCRA) is a federal act enforced by the Federal Trade Commission (FTC) that regulates the accuracy, fairness, and privacy of sensitive and personal information disclosed in consumer reports. It outlines protocols that must be followed when working with a credit reporting agency to collect background information. There are hefty and serious civil and statutory penalties for non-compliance with these protocols. 


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?


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 critical to 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?


FCRA regulations extend to:


  • Criminal and civil records
  • Civil lawsuits
  • Reference checks
  • DMV records
  • Medical records
  • 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. 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 acquire written authorization from the individual prior to ordering the report from a CRA such as VICTIG.


Failure to receive written authorization from your applicants and employees prior to 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 applicant’s background report. In other words, if an individual’s background check turns up something potentially disqualifying, tread carefully before revoking a job offer or terminating an employee. 


Steps for Acquiring Authorization and Taking Adverse Action


Before you even begin the process of conducting a check, the FCRA requires that you follow these procedural requirements:


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


Disclosure and Pre-Authorization


First and foremost, make it clear to existing employees or job candidates that the results of the background check may be used to inform your hiring decision. You must provide applicants with a written disclosure that is “clear and conspicuous.” 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; it cannot be attached to a job application, liability waivers, or other extraneous materials. You can include additional information on the notice, but don’t confuse or detract from the core purpose of the notice. Candidate’s written pre-authorization signature may be written on the disclosure or elsewhere, but it must be obtained. 


If you decide to run background checks periodically through the individual’s employment (prior to promotions, for example), this must be made clear and conspicuous as well. If the background check will include an “investigative report,” you must notify the applicant of their right to a clear description of the scope and nature of the investigation and then provide such a description. An investigative report is a more subjective exploration of a candidate’s character, reputation, personal traits, and lifestyle.


If you are working with a third-party background screening company or CRA, you must certify with the company that you:


  1. Have gotten permission from the applicant to run the report;
  2. Have made sure you’re in compliance with FCRA requirements; and 
  3. Will not misuse the information or discriminate against the individual.


Pre-Adverse Action Letter, etc.


If your findings prompt you to take adverse action, the FCRA has outlined protocol that must be followed to protect yourself from penalties. The purpose of a pre-notice is to give the candidate a chance to discuss or dispute the report before the action is made final. 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 copy of a document called “A Summary of Your Rights Under the Fair Credit Reporting Act” (this document should have been made available through the screening company that provided the report)
  • A notice that they have 60 days to dispute the contents of the report and to request another report for free from the same third-party vendor


Waiting Period


There is no explicit waiting period time dictated by 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


If your decision remains unchanged, you’re clear to send the final notice of adverse action after the suggested five-day waiting period. After taking adverse action, you must provide the individual (in writing, orally, or electronically) with the following information:


  • The 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
  • An explanation that they were rejected for the position because of information revealed in the report


A Close-Up Look at the EEOC


In the investigative period of the hiring process, you are legally free to delve into an individual’s work and education history, criminal record, financial history, and even their social media presence and habits. A standard employee background check covers all of these areas, but the EEOC mandates that if you are going to conduct a background check on any applicant, you must do so for every applicant.


A simple way of explaining the Equal Employment Opportunity Commission (EEOC) is that it lays the ground rules on what can be considered “disqualifying information” in a comprehensive background check. It protects candidates and employees from discrimination in the workforce and ensures that everyone is judged according to the same standards. If you decide to consider an applicant of one ethnicity despite certain financial or criminal histories, for example, you must also consider applicants of other ethnicities who have the same or similar histories. In sum, federal law prohibits you from using information to discriminate against candidates.


Certain state legislatures 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. The EEOC has issued clear enforcement guidance on how arrest records and criminal history should be handled nationwide, which we’ll cover below.


General Best Practices for EEOC Compliance


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


In order to best protect yourself from accusations of discrimination, the EEOC has outlined some general best practices: 


  1. Establish uniform policies that treat every candidate equally in the hiring process.
  2. Don’t ask questions about a candidate’s genetic information. This information is further protected under the Genetic Information Nondiscrimination Act (GINA).
  3. Refrain from asking questions about a candidate’s medical history before making a conditional job offer unless there is objective evidence that the individual cannot safely perform their job for medical reasons.


In addition, here are some best practices to follow when using criminal records to inform hiring decisions:


  1. Do not use blanket policies that disqualify candidates based on any criminal record.
  2. Appropriately train hiring managers and decision makers on Title VII and how to implement policies accordingly.
  3. Develop a policy that:
  • Identifies essential job requirements and determines specific disqualifying offenses;
  • Includes an individualized assessment of the candidate; and
  • Keeps a record of the justification for policy and procedures as well as consultations and research used in crafting them.
  1. Limit questions about criminal records to offenses for which exclusion would be justified for the position in question.
  2. Keep all records confidential.


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 identified 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 belong 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 defines 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.”


Pay close attention to and revise hiring practices within your company that have a “disparate impact” on certain protected demographics and which are not “job related and consistent with business necessity.” Be careful not to base hiring decisions on issues that may be: 


  • More prevalent among individuals of a certain race, color, national origin, sex, or religion;
  • More prevalent among those who have a disability or are aged 40 and older; or 
  • An unfair indicator of whether or not the individual will be an effective and safe employee.


If the report reveals a problem that is connected to an individual’s disability, be open to allowing the individual to demonstrate their ability to perform the requirements of the job unless doing so results in significant difficulty for your organization both financially and operationally.


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 the position in question.


How to Properly Maintain Your Screening Policy


Whenever changes or updates are made to your company background check policy, each employee should be informed of the changes. The policy may also establish what background check results are deemed permissible and what are not. For example, some companies may not consider anyone with a credit score below 650 as eligible for hire, while others may not run credit checks at all.


Ultimately, your process for running background checks should be transparent, structured, and fair — not to mention compliant with state and federal laws. To make sure your policy is up to scratch, VICTIG is available to answer any questions you may have.


Discarding of Records


Any and all records used during the hiring process must be kept for one year after personnel action was taken or after the records were made — whichever comes first. In the event that an employee or applicant files a charge of discrimination, you must keep the records until the case is closed.


Once you do dispose of records, you must do so in a secure fashion by burning or shredding the records and deleting all electronic files so that they can’t be reconstructed.


Learn More About Background Screening Laws and Regulations


To find out more about federal antidiscrimination laws, visit www.eeoc.gov, or call the EEOC toll-free, 800-669-4000 (voice); TTY: 800-669-6820. To find out more about federal laws relating to background reports, visit www.business.ftc.gov, or call the FTC toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261.

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