Feb. 4, 2015 – For most of the last 25 years, employers faced very little risk from conducting background checks the “wrong way.” Times have changed. In just the last couple years, numerous employers’ background screening programs have been targeted in large class actions, including such familiar names as Disney, Domino’s, Home Depot, BMW, and Whole Foods. Settlements have routinely hit seven figures.

Although background checks remain a fundamental part of any smart employer’s due diligence with respect to job applicants and employees, it is now more important than ever that employers execute them thoughtfully and with an eye toward compliance.

This article highlights the most important background screening laws confronting Wisconsin employers, discusses recent developments, and pinpoints where conventional wisdom is no longer very wise.

Why Do Employers Need Background Screening Programs?

Studies suggest that somewhere between 75 and 90 percent of employers perform some type of background check on job applicants or current employees. Some companies do so because they are legally obligated under federal or state laws (see e.g., the Wisconsin Caregiver Law, which requires that background checks be performed on certain healthcare workers).

Most often, however, employers run background checks to verify that applicants have been truthful on their employment application and/or to ensure that applicants do not have something in their history that would render them ill-suited for the job. Given the trust and dollars that organizations invest in employees, this makes good sense.

What Types of Background Checks Do Employers Perform?

The types of background checks that employers perform vary. However, the most common assortment includes: (1) some form of criminal history check; (2) verification of prior employment; and (3) verification of education. Some employers also seek driving record information, credit history information, civil lawsuit information, and substantive reference information. In general, the type of background checks ordered by employers should take into account the nature of the company and the job. For example, a driving record check should only be ordered if a certain applicant will likely drive as part of his job.

What Types of Procedures are Necessary to Make Employers Legally Compliant?

A federal law, the Fair Credit Reporting Act (FCRA), imposes specific requirements on employers performing background checks through a third-party provider.

Note: The following procedures are not necessary if an employer is conducting its own check through CCAP or is seeking information directly from a county courthouse or governmental agency without the help of a third party. As explained below, however, even in those circumstances, certain restrictions still apply.

Procedure No. 1: Before ordering a background screening report from a third-party provider, the employer must provide the applicant/employee with an FCRA-compliant “disclosure” and obtain written consent.

Under the FCRA, before running a background check on a job applicant or employee, an employer must present the applicant or employee with a specific “disclosure.” In general, the “disclosure” should be concise, state that consumer reports will be ordered for “employment purposes,” and identify the types of checks to be performed (e.g., criminal history checks, credit checks, and employment verifications).

Although this requirement sounds innocuous, it is probably the greatest source of FCRA class action litigation right now. Many employers do not realize that the required disclosure must stand alone. In other words, it cannot be included in or stapled to an employment application or another document. Likewise, recent cases suggest that the disclosure should not have extraneous information within the body of the document, lest the employer be accused of violating the “stand-alone” requirement. In particular, employers should avoid including a release of liability in the disclosure.

Procedure No. 2: If the employer is going to take adverse action based in part or whole on a background screening report from a third-party provider, it must follow the three-step process required by the FCRA.

If an employer is considering rejecting an applicant, terminating an employee or taking another adverse action based in part or whole on a background screening report from a third-party provider, it must follow certain procedures specified in the FCRA.

First, the employer must provide a pre-adverse action notification to the employee or applicant enclosing a copy of the background screening report as well as a federal government notice entitled “A Summary of Your Rights under the Fair Credit Reporting Act.” It is sometimes forgotten that this governmental notice was updated in late 2012. If an employer’s notice refers to the Federal Trade Commission instead of the Consumer Financial Protection Bureau, it is using an obsolete version.

After providing the pre-adverse action materials identified above, the employer must wait a reasonable period of time to allow the applicant or employee to identify inaccuracies or mistakes in the report. At least one opinion letter from the Federal Trade Commission has suggested that five business days is reasonable, so that is a typical rule of thumb.

Upon completion of the waiting period, the employer must send an adverse action letter to the applicant or employee stating that it is taking adverse action based in part or whole on the screening report. The FCRA requires that employers include very specific content in the adverse action letter (approximately five different items), so they should be sure to check the statute before drafting the letter.

When Can an Applicant Be Rejected Based on Background Screening Reports?

Regardless of whether an employer conducts checks on its own or through a third-party provider, it faces limitations as to the types of information it can use. The most scrutinized checks are criminal background checks and credit checks.

1. Use of Criminal History Information. Wisconsin is one of the country’s most restrictive states as to employers’ use of criminal history information. In Wisconsin, employers may only consider criminal convictions that are “substantially related” to the job in question. Further, an employer may not consider arrest records or criminal charges unless the case remains pending and the underlying charge is “substantially related” to the job.

In light of Wisconsin’s restrictive law, employers should discard the long-favored “no felons” or “no convicts”-allowed policies and instead conduct case-by-case reviews to determine whether a “substantial relationship” exists. In our experience, violent offenses directed toward non-family members, fraud, perjury, and theft can be linked 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 fall somewhere in the middle in terms of risk.

Although federal law does not impose any substantive restrictions on the use of criminal history information, the U.S. Equal Employment Opportunity Commission (EEOC) has emphasized that employers’ use of screening information could and sometimes does raise legal issues under Title VII of the Civil Rights Acts.

According to the EEOC, employers’ overbroad exclusion of individuals with a criminal history can have a disparate impact on certain racial minorities. Therefore, the EEOC urges employers to not only consider the nature of the crime and nature of the job in each instance – which is consistent with Wisconsin law – but to also consider how long ago the offense occurred.

The EEOC further instructs employers to engage in an “individualized assessment” designed to tease out whether the applicant or employee may have matured since the crime such that he or she presents less risk than first thought. Some Wisconsin employers are incorporating “individualized assessments” into their background screening program and some are not. However, taking a thoughtful approach is critical.

2. Use of Credit Information. Approximately 10 states have passed laws restricting employers’ use of credit history information. However, Wisconsin is not one of them. Employers using credit history information should recognize, however, that the EEOC still views them as suspect.

Indeed, the EEOC regards them as creating even more of a disparate impact threat than criminal history and having less business justification. The conservative approach is to limit the use of credit history information to high-level financial positions and perhaps cash handling positions.

What Can Happen If the Employer’s Screening Program Is Not Legally Compliant?

The litigation risks associated with employment-related background checks are significant and growing, as further explained below.

FCRA Class Actions. FCRA suits accusing employers of failing to follow required procedures when using a background screening company have increased sharply in the last few years. Some commentators have referred to them as a “new boom” or “potentially the next wage and hour” for employment-based litigation.

Most plaintiffs bring FCRA cases as large class actions (for example, accusing an employer of failing to provide a proper disclosure to all applicants during the last several years). Due to the typical size of the classes involved, the relatively easy class certification, the availability of “statutory damages,” and the possibility of unlimited punitive damages, FCRA suits routinely result in multi-million dollar settlements.

WFEA Discrimination Cases. The principal state-law claim that Wisconsin employers face is a “criminal history discrimination” charge under the Wisconsin Fair Employment Act. These cases, which have become fairly common in Wisconsin, are brought as single plaintiff cases, not class actions. Employees who prevail can obtain back pay and attorneys’ fees. Typical damage awards and/or settlements fall in the $5,000 to $75,000 territory.

Title VII Cases. EEOC charges alleging that an employer’s background screening policy caused “disparate treatment” against African-Americans and/or Latinos in violation of Title VII are increasing. The EEOC itself has brought two highly publicized class actions based on this theory. Although some private plaintiffs’ attorneys have followed the EEOC’s lead in bringing Title VII cases, Title VII suits based on background screening information remain fairly uncommon. At the moment, risks associated with FCRA and state law claims raise much greater concern for employers.