Background Check Compliance
This article provides a summary of the key requirements for completing background checks as established by federal law. Additional standards can be set by individual states and local municipalities. The state or local consumer protection agency or state Attorney General has details about the relevant laws in their state.
Fair Credit Reporting Act
The Fair Credit Reporting Act (FCRA) is a federal law that promotes the accuracy, fairness, and privacy of consumer information contained in the files of consumer reporting agencies. These agencies include credit bureaus, medical information companies and businesses that do tenant screening. The three most well-known consumer reporting agencies in the U.S. are Equifax, TransUnion and Experian. Some of the other organizations using this information include banks, credit unions and insurance companies evaluating their risk for a loan or coverage.
The FCRA regulates how credit reporting agencies can collect and sell data. Originally passed in 1970, the guidelines were expanded in 1996. All businesses irrespective of their size or form must follow FCRA standards if they use any form of background checks. The Federal Trade Commission (FTC) is the primary enforcement authority for the FCRA.
Making an inquiry about the background of a prospective applicant requires two documents. First is a notification that a background check report may be obtained for employment or other permissible purpose. Second is an authorization from the candidate for employment agreeing to a background check taking place. Information in a consumer report cannot be provided to anyone who does not have a purpose specified in the FCRA.
Here’s a list of a person’s major rights under the FCRA. These rights establish the framework for the FCRA provisions and guidelines.
- You must be told if information in your file may be used against you.
- You have the right to know what is in your file.
- You have the right to ask for a credit score, where applicable
- You have the right to dispute incomplete or inaccurate information.
- Consumer reporting agencies must correct or delete inaccurate, incomplete or unverifiable information.
- Consumer reporting agencies may not report outdated negative information.
- Access to your file is limited.
- You must give your consent for reports to be provided to employers.
- You may seek damages from violators.
- Identity theft victims and active duty military have additional rights.
- Consumers have the right to obtain a security freeze on their credit reports
Importance of Equality
Hiring decisions cannot be based on race, ethnicity, sex, religion, age, or any other protected class. A business should develop written guidelines for obtaining background reports uniformly according to the requirements of the open position, and not subjective demographic considerations.
Some states and local jurisdictions have laws prohibiting credit reports or other “ban the box” questions for individuals with a criminal history or the use of credit reports for employment purposes, depending upon the role of the applicant. Depending on the state, criminal records more than 7 years old may excluded from consumer reports.
States have different laws that allow companies to perform certain types of background checks based on a person’s position or title. For example, in California Bill 22 (September 2011) prohibits employers from using consumer credit to help make hiring decisions. This was partly a legacy from the 2008 downturn that left many qualified employees jobless. The example is a reminder to become familiar with state and local laws and guidelines regarding background checks.
Rules of Disclosure
The rules of disclosure also vary between states. In a handful of states, companies are required to release the results to the candidate when asked for at the time of authorization. Under the FCRA, if you may take an adverse decision based on the whole or in part of the background report, you must provide the applicant with a pre-adverse action notice, a copy of the report and a copy of their summary of rights. Since the information in such reports includes verification of identity, biographical details, driving records, and other public or private information that could possibly be inaccurate, the applicant has a legal right to dispute any of the facts.
The law provides for a reasonable amount of time, often 5 business days, for the employer to send an adverse action notice to the applicant. This adverse action letter often states the employer is rescinding their job offer, and other legal language is also required. If the applicant notifies the CRA of an intent to dispute the report, a CRA has 30 days to re-investigate the report and send its findings back to both the employer and the applicant.
Conducting a candidate background check can be a risky business for employers who don’t have in-house expertise in this area. Over the last 10 plus years, companies have paid more than $300 million to settle claims related to background check violations. This is why many businesses work with a third-party company that specializes in doing background checks, and that also has indemnity coverage to avoid potential liability.
Here are some links to help you stay updated about the laws and practices related to background checks:
- U.S. Equal Employment Opportunity Commission: Background Checks
- U.S. Equal Employment Opportunity Commission: Background Checks: What Employers Need to Know
- FTC Consumer Advice: Employer Background Checks and Your Rights
- SHRM: Conducting Background Investigations and Reference Checks
- SHRM: FCRA 101: How to Avoid Risky Background Checks
From verification of identity to the sourcing of criminal records, it’s important to avoid violations during candidate background checks. For more information on our employment screening services, please contact us at +1 (800) 295-7109.