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Winter 2000 Employer Beware

Pre-employment background checks can save your business from the costly error of hiring a bad apple. Got a hot prospect for a supervisory position? You’ll want to check out the authenticity of that college degree he claims to have earned. How about the bright applicant for the bookkeeping job? You’ll want to know if she was fired for raiding the till on her last go-round. As for the fellow who wants to drive the car with your logo emblazoned on it: If he already has a desk drawer stuffed with traffic violations, you’ll want to know about it.

And let’s not overlook getting sued. Business owners may end up on the losing side of a costly negligent-hiring lawsuit if they failed to check the background of a new employee who later attacks co-workers or customers. “Negligent hiring is an attractive theory for attorneys looking

to make money from your business,”

cautions Daniel Cohen, a labor and employment attorney with Charfoos, Reiter, Peterson, Holmquist, and Pilchak (Farmington Hills, MI). “You can be sued if there were something in a new hire’s background that created a risk to your workplace—and you didn’t bother to try to find out that information,” he says.

So how do you get valuable background information? If you’ve placed many calls to check references, you know that former employers are reluctant to disclose anything beyond dates of employment. That’s because they have been advised to do little else: under a legal theory called “negligent referral,” ex-employees can sue a former employer for making damaging, inaccurate statements. Fortunately, the Internet rides to your rescue. A growing number of online employee-screening services offer background checks that include credit reports, criminal conviction records, Workers’ Compensation claims, court judgments, lawsuits, home-address histories and more.

Used correctly, screening services can save you from hiring people with bogus resumes or dangerous backgrounds. The fact that you engaged in this background checking can be a good defense against charges of negligent hiring. Depending on what you’re looking for, the costs range from about $10 to $200—cheap insurance against the cost of hiring the wrong person.

But beware: used improperly, employee-screening services can also lead to costly lawsuits—for violation of federal law, employment discrimination, or invasion of privacy.

“Generally speaking, one has the right to access and rely on information obtained in background checks,” says Michael G. Cleveland, an employment attorney with Chicago-based Vedder Price Kaufman & Kammholz. “But there are risks that lurk out there for the uninitiated. Some information is protected by law, and in some cases, use of information can result in unlawful discriminatory decision- making.”

The secret to walking the fine line between prudent investigation and illegal intrusion is a matter of knowing what the law requires.

Don’t violate the Fair Credit Reporting Act

When you gather information about a prospective employee, your greatest risk is running afoul of the Fair Credit Reporting Act (FCRA), which was amended in September 1997 to require disclosure of all background checks to people who apply for work.

“The FCRA is a major issue that a lot of employers don’t know about,” says Kevin Prendergast, vice president and general counsel at Research Associates, Inc. (RAI), a pre-employment background-checking firm in Cleveland. “If you run a background check, you must comply with this law.” Here are the law’s key points:

• Before you obtain any pre-employment report, you must notify the applicant in writing—a document consisting solely of this notification. Also, you must get that person’s written authorization before you retrieve the report.

• If you rely only partly on the report for an adverse job action (that is, a decision not to hire), you must give the applicant a “pre-adverse action disclosure” that includes a copy of the report and a copy of a document called “A Summary of Your Rights under the Fair Credit Reporting Act,” which you can get from the Federal Trade Commission. And the potential employee must have time to respond.

• After you have taken the adverse action, you must give that person an “adverse action notice.”

These FCRA notification requirements kick in whenever you obtain information about a job candidate from third parties, including the Web-based employee-screening services. And you must meet FCRA stipulations even if you conduct seemingly minor background checks, such as scanning public records for driving violations or past home addresses. Failure to produce the proper documents subjects you to costly penalties, as well as possible lawsuits by the people you’re checking on.

For more guidance on how to stay out of hot water, read the comprehensive and valuable document, “What Employers Need to Know” on the Federal Trade Commission’s (FTC) website.

Once you understand what the FCRA requires, following its rules is fairly straightforward. “The FCRA requirements are not much of a problem in the application process,” says Cohen. “After all, the prospect who refuses to authorize the report can apply elsewhere.”

Things get dicey, though, when you find you must run a background check on a current employee. Suppose an employee starts to exhibit violent behavior on the job. This violates your company-behavior guidelines, so you are obligated to initiate an investigation. And if you want to run a background check as part of that investigation, under the rules of the FCRA you have to ask the employee to sign a form authorizing the check. “You have to provide notice to someone who might be a dangerous person that you are accessing this information,” says Cohen. “That might upset the person, and if he has a mental disability, it might make him more dangerous.”

And you can’t get around the problem by asking all employees to sign blanket forms authorizing such investigations when they join your business. According to FCRA requirements, every time you launch a new investigation, you have to draw up a new set of forms.

This requirement places you in a difficult position. Cohen suggests one solution: the FCRA does not apply if you access the information directly: “The FCRA is triggered when you retain a third party to perform the investigation,” he says. “If you go to the courthouse yourself, you do not have to disclose the investigation.” Of course, this means you need some training in researching court records.

Beware employment discrimination

Let’s say you run background checks online, discover who among your applicants lack clean slates, and so you toss their applications into the trash. Not so fast! You’re now up against another way to be on the losing end of a crippling lawsuit or government action. Many states have laws that prohibit use of specific records in making employment decisions. New York, for example, limits an employer’s ability to make decisions based on incarceration records. And in Michigan, you may not access or rely on criminal arrests that did not result in convictions.

“The law varies by state,” says Cohen. “You have to find out what your state allows prior to reviewing records.” Indeed, one of the drawbacks of Web-based employee-screening services is their national scope. Some of their information may be legally accessed in some states but not in others.

It’s less risky to rely on actual conviction records than arrest records. But even then, says Cleveland, using such records carries risk. “Some opinions from the Equal Employment Opportunity Commission [EEOC] state that since some minority groups have been convicted more often of crimes, having a policy of disqualifying people with criminal backgrounds is racially discriminatory.” The courts don’t always rule that way, says Cleveland, but you are taking a chance if you go too far.

The solution, he says, is to tie your hiring criteria to the requirements of the job. “If you say, ‘I won’t hire anyone with a criminal conviction, no matter what its nature,’ you are being too aggressive,” says Cleveland. “I think it’s wiser to ask this question: ‘What does the criminal conviction have to do with the particular job that is involved?’”

Suppose you’re hiring someone for a position that involves handling money. If the applicant was convicted of theft, the criminal record is relevant. “On the other hand, would conviction for driving under the influence be a pertinent consideration?” asks Cleveland. “Maybe not. To successfully defend against a discrimination charge, go beyond compliance with the letter of the law. Make sure you are able to defend your decision on a rational basis.”

Avoid lawsuits for invasion of privacy

Once you get the information you need, keep it under lock and key. If you share details with the wrong people and the workplace gossip mill starts grinding, the person you investigated can sue for invasion of privacy. “Don’t disclose why you did not hire someone to people who do not have a need to know,” says Cleveland. “You run the risk of defamation.”

It’s prudent to lock the information in files devoted to that purpose. “You need to maintain confidentiality of information in an appropriate way, for people you hire and don’t hire,” cautions Cleveland.

Despite the risks, conducting background checks is essential. Today’s business climate is characterized by a fluid movement of workers from one employer to another. “One bad apple can poison a company,” warns Prendergast. But knowing, understanding and abiding by pertinent laws during the hiring process is the antidote.

Phillip M. Perry

Perry is a freelance writer based in New York, NY.

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