In June of 2005, the Federal Deposit Insurance Corporation (“FDIC”) issued Financial Institution Letter FIL-46-2005, which provides guidance to assist banks in developing an effective pre-employment background screening process. This Client Update elaborates on the FDIC’s guidance, by providing additional detail regarding important employment law issues inherent in such a screening process.1

THE FDIC’S GUIDANCE ON PREEMPLOYMENT BACKGROUND CHECKS

In its guidance, the FDIC promotes the use of pre-employment background checks as a means of reducing turnover, by verifying that potential employees have the requisite skills and/or credentials to perform the job; deterring theft and embezzlement; and preventing, or providing a defense for, litigation over hiring practices. A copy of the FDIC’s guidance on developing an effective pre-employment background screening process can be found at http://www.fdic.gov/news/news/ financial/2005/fil4605.pdf.

WHO SHOULD PERFORM THE BACKGROUND CHECKS?

The FDIC’s guidance indicates that background checks may be performed inhouse or by third-party service providers, without weighing the pros and cons of each. In short, apart from the cost savings associated with doing background checks in-house, there are almost no benefits associated with “do-it-yourself” background checks.

First, it is likely that in-house personnel lack the proper expertise for performing an accurate, thorough and effective background check. It goes without saying that a background check that is inaccurate or not thorough enough to reveal pertinent information is almost no better than no background check at all. In contrast, the third party service providers who perform background checks are in the business of providing results that are both accurate and thorough.

Second, hiring a third-party service will provide a bank with more legal protection than if it performs its own background checks. Specifically, the Fair Credit Reporting Act, 15 U.S.C. §§ 1681a et seq. (“FCRA”) (discussed below) provides limited legal immunity to employers who hire third-party agencies to perform background checks. This legal immunity applies to suits alleging defamation, invasion of privacy or negligence in connection with the investigation. There is no comparable immunity for employers who conduct their own background checks.

Finally, using a third-party may give applicants a greater sense of privacy and eliminate any impression that possible future co-workers are prying into their personal business. Outsourcing background checks on prospective employees is also a way of demonstrating that all applicants are handled objectively.

LEGAL RESTRICTIONS ON AN EMPLOYER’S USE OF EMPLOYMENT-RELATED BACKGROUND CHECKS

FCRA

As stated above, the FCRA provides some protection for employers who use third-party agencies, which are referred to in the FCRA as “consumer reporting agencies,” to perform background checks. The FCRA also, however, imposes certain requirements on an employer’s procurement and use of such employment-related background checks. These background checks fall within the FCRA’s definition of a “consumer report” or an “investigative consumer report,” depending upon the type of background check in question. Specifically, the FCRA’s definition of “consumer report” includes any communication of any information by a consumer reporting agency bearing on an applicant or employee’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics or mode of living which is or will be used or collected for purposes of establishing the individual’s eligibility for employment.

An “investigative consumer report” is a subset of consumer reports in which information on an applicant or employee’s character, general reputation, personal characteristics or mode of living is obtained through personal interviews (including telephone interviews) with neighbors, friends or associates of the individual, or others who may have knowledge concerning such information. Since a typical employment background check does not include such personal interviews, this article focuses on the requirements associated with consumer reports only, and does not set forth the additional requirements the FCRA imposes with respect to investigative consumer reports.

STEPS THAT BANKS MUST TAKE PRIOR TO OBTAINING A CONSUMER REPORT2

Generally, before obtaining a consumer report from a consumer reporting agency, an employer must take the following steps:

First, the employer must certify to the agency performing the background check (on a form typically provided by the agency):

• that the employer has complied with the FCRA’s disclosure requirements (set forth below);
• that, when and if applicable, the employer will comply with the FCRA’s requirements on use of the background check as the basis for an adverse employment action (also set forth below); and
• that the employer will not make improper use of information from the consumer report in violation of state or federal law.

Second, the employer must disclose to the applicant or employee, on a form separate from the job application, that it plans to obtain a consumer report and that the report will be used solely for employment purposes.

Finally, the employer must obtain the applicant’s or employee’s written authorization to obtain a consumer report regarding him/her. (This authorization may be included on the notice to the individual that the employer plans to obtain a consumer report for employment purposes. In other words, the disclosure document and the authorization document may be one and the same.)

SEPARATE DISCLOSURES/AUTHORIZATIONS NOT REQUIRED FOR SUBSEQUENT CONSUMER REPORTS

The FDIC’s guidance recommends taking a “riskfocused” approach to background screening; i.e., performing more in-depth screening or subsequent background checks for employees in sensitive positions. This is sound advice, but begs the question of whether an employer must provide separate disclosures and obtain new authorization for each subsequent consumer report. The short answer is no. The FCRA permits a single consent form to be signed covering all future reports.

STEPS A BANK MUST TAKE BEFORE TAKING AN ADVERSE EMPLOYMENT ACTION BASED ON INFORMATION IN A CONSUMER REPORT

The FCRA also imposes certain conditions on the use of information in a consumer credit report as the basis for an adverse employment action. Specifically, before taking such action, which includes not hiring an applicant or terminating an existing employee’s employment, the employer must:

• advise the applicant or employee of the imminent adverse action;
• provide a copy of the consumer report to the applicant or employee;
• provide a written description of the applicant’s or employee’s rights under the FCRA. A sample “Notice of Rights Under the FCRA” can be found at 16 CFR § 601, App. A or http://www.ftc.gov/ bcp/conline/pubs/credit/fcrasummary.pdf.

An employer should give an applicant or employee a reasonable period of time to contest the information. While the FCRA does not specifically state what constitutes a reasonable period of time, one Federal Trade Commission Staff Opinion Letter states that five days is reasonable for an individual to straighten out any incorrect information in the report.

STEPS A BANK MUST TAKE AFTER TAKING AN ADVERSE EMPLOYMENT ACTION BASED ON INFORMATION IN A CONSUMER REPORT

Once the employer has given the applicant or employee a reasonable opportunity to respond, the employer is free to take adverse employment action. In so doing, the employer must:

• provide the applicant or employee with a notice of adverse action, informing him or her of the negative decision. Notably, an employer is not required to disclose to the individual which part of the consumer report influenced the employer’s adverse employment decision. As a practical matter, however, this is often patently obvious;
• provide another copy of the applicant’s or employee’s rights under the FCRA; provide the name, address and telephone number of the consumer reporting agency that furnished the consumer report to the employer; and
• advise the applicant or employee that the consumer reporting agency did not make the decision to take the adverse action and is unable to provide the individual with specific reasons why the adverse action will be taken.

PENALTIES FOR NONCOMPLIANCE WITH THE FCRA

Banks should be aware that there are penalties associated with noncompliance with the FCRA. Specifically, the FCRA provides for actual damages (capped at $1,000), punitive damages and attorney’s fees for willful failure to comply with the FCRA; and actual damages and attorney’s fees for negligent failure to comply with the FCRA. The foregoing penalties apply even where the bank is able to provide undisputed proof that the adverse decision was inevitable without the consumer report.

STATE LAW

Although many states, including Maine, Massachusetts, New Hampshire, New Jersey, New York and Virginia, have restrictions in addition to those imposed by the FCRA with respect to the use of background checks in the employment context, Connecticut does not. Accordingly, banks with employees exclusively in Connecticut need only concern themselves with the requirements of the FCRA when obtaining and using background checks for employment purposes.

OTHER POTENTIAL PITFALLS ASSOCIATED WITH PRE-EMPLOYMENT BACKGROUND CHECKS

Banks that fully comply with the FCRA can nevertheless still be sued under other federal and state statutes if they use information obtained from background checks in a discriminatory fashion. For example, if a bank learns, from a consumer credit report, that an otherwise excellent job candidate lied in his or her job application about having a college degree, it is important that the bank be consistent in its decision-making in the face of such a misrepresentation. If the bank hires the person despite the lie, a subsequent applicant with a similar discrepancy could allege discriminatory treatment if he or she is rejected because of it, and falls into a protected class.

Another example of an inappropriate use of information obtained from a background check is where a bank declines to hire an applicant because a background check revealed that she sued her previous employer for gender discrimination, or because she had previously filed a worker’s compensation claim.

Thus, banks should be wary that the way they use the information obtained in consumer reports can lead to liability.

[1] Although this article is directed to the FDIC’s guidance to banks regarding employee background checks, the legal issues discussed herein apply to all employers and are by no means restricted to banks.

[2] The FCRA also imposes requirements on the consumer reporting agency. For this reason, it is important to select an established and reputable consumer reporting agency, which will be knowledgeable about the FCRA’s requirements, to conduct background checks.