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Is Your Organization Ready to Pay $6 Million for an Employee Background Mistake?

Posted in News & Events, News Articles on 06/01/2011


By Scott Paler

A recent class action settlement for $5.9 million with First Transit, Inc. reinforces the need for employers to review their background screening forms and procedures to ensure compliance with federal and state laws.

The quick version—the plaintiff walked away with a smooth $5.9 million, which left First Transit, Inc., gasping for air over their purported mistake of violating the Fair Credit Report Act. The long version—in Hunter, et al v. First Transit, Inc., the plaintiff argued the inclusion of a release of liability in the background screening disclosure and authorization form violated the Fair Credit Reporting Act’s (“FCRA”) requirement that the form stand alone. The plaintiff also alleged that the employer failed to follow a three-step process required under the FCRA before rejecting job applicants based on their background screening report. After completing some fact discovery on the allegations in the complaint, the plaintiff obtained a lucrative settlement.

The case signals a new litigious trend in the employment arena. Five to ten years ago, there were very few employment cases related to gathering and use of background screening information. However, times are changing. The Equal Employment Opportunity Commission (EEOC) is now pursuing several highly publicized class actions alleging that the use of background screening information disproportionately impacts minorities. In addition, there are several well-known plaintiffs’ firms now seeking out background screening cases on their websites with the belief that procedural violations of the FCRA could give rise to lucrative class actions. Anecdotally, we have also seen an increase in single-plaintiff cases before the Wisconsin Equal Rights Division related to employers’ use of criminal history information.

To limit the risks associated with background checks consider taking the following steps:

 1.   Ensure that your background screening consent form stands alone.

Among other things, the consent form, or “disclosure and authorization form,” should not be incorporated into an employment application or stapled to an employment application. It should be presented to applicants or employees as a separate document. Also, to the extent you currently include a release of liability in your disclosure and authorization form, it would be prudent to remove it. In order for the disclosure and authorization to be effective, it should be separate, conspicuous, and clear.

 2.   Only consider criminal history information that is substantially related to the job.

Wisconsin is one of the country’s most restrictive states with respect to employers’ use of criminal history information. In Wisconsin, state law only allows employers to consider criminal convictions that are “substantially related” to the position. Therefore, you should not institute a policy (or practice) of rejecting all felons or all individuals previously convicted of a crime. Instead, make a case-by-case assessment as to whether a particular conviction is substantially related to the job.

Here are some general rules of thumb for complying with Wisconsin law. In our experience, violent offenses directed towards non-family members, fraud, perjury, and theft can be linked by employers to most positions. However, domestic offenses, driving offenses, and some drug offenses are less likely to be found “substantially related,” absent unique circumstances. Other offenses may fall somewhere in the middle. In addition, the less recent the offense, the less weight it should be accorded. Finally, keep in mind that you should generally not consider arrest records where the underlying arrest did not result in a conviction.

Federal law requires employers to exercise caution where the use of criminal history information has a disparate impact on those in protected classes. For the most part, though, Wisconsin employers who diligently comply with Wisconsin’s “substantial relationship” requirement will be well-positioned to defend against disparate impact suits under federal discrimination laws.

 3.   Only consider credit reports for select positions, or not at all.

Since the recession, the use of credit reports by employers has become very controversial. The EEOC has suggested that employers’ reliance on credit reports is problematic whenever it has a disparate impact on minorities or members of a protected class. In fact, the EEOC has filed several class actions related to the use of credit reports by employers. Although Wisconsin is not currently among the group of states that has legislated restrictions on employers’ use of credit reports, that too could change in the next few years.

For the time being, you should be cautious about using credit reports to the extent you receive any material number of applications from minorities or members of a protected class. The conventional wisdom is that employers should only consider credit information for those seeking high-level financial positions or cash-handling positions. However, even that is subject to challenge. As with criminal history, your analysis of credit history information should focus on whether the individual’s track record substantially relates to the job.

 4.  Follow the three-step process required by the Fair Credit Reporting Act if you plan to take employment action based upon a background screening report.

If you are considering rejecting an applicant or taking another employment action based upon a background screening report, make sure to abide by the procedural requirements in the FCRA. First, send a pre-adverse action letter to the employee or applicant stating that you are contemplating making an employment decision based in whole or part on a background screening report. Along with this letter, you should enclose a copy of the background screening report and a federal government notice entitled “A Summary of Your Rights under the Fair Credit Reporting Act.”

Second, after providing the pre-adverse-action materials wait a reasonable period of time to allow the applicant or employee to identify inaccuracies or mistakes in the report that could potentially change your mind. At least one opinion letter from the Federal Trade Commission has suggested that five business days is reasonable, so that is the minimum amount of time recommended.

Third, after the waiting period, remember to send an adverse action letter indicating that you are taking the action previously disclosed to the applicant or employee. Note that the FCRA requires specific content in the adverse action letter to appraise the individual of some of his or her rights under federal law, so make sure to check out the statute before you draft the letter. See 15 U.S.C. § 1681b(b)(3). Among other things, the letter must: (1) identify the name, address, and toll-free telephone number of the background screening company; (2) state that the background screening company did not make the decision and is unable to provide the consumer the specific reasons why the actions were taken; and (3) indicate that, upon providing proper identification, the individual may receive a free copy of the report and may also dispute the accuracy or completeness of the report with the background screening company.

Given the new class action and single-plaintiff risks associated with the use of background screening reports, Wisconsin employers are well-advised to audit their process for conducting background checks, consult with an attorney to ensure that legally compliant forms and procedures are being used, and reach out to counsel before excluding applicants or employees based on a background screening report.

— Paler is an employment attorney practicing at the law firm of DeWitt Ross & Stevens. He routinely counsels employers on background screening issues, has helped defend employers’ background screening practices before administrative or judicial bodies in Wisconsin, New York and Michigan, and has written numerous articles and presentations on background screening compliance matters.