‘Background checks’ of employees may violate a little-known law

As the job market has become more competitive in a down economy, a growing number of employers are conducting background checks to screen job applicants, looking for criminal records, credit problems and other issues.

But many employers who conduct these checks – and many job applicants who are subject to them – are unaware that a federal law strictly limits how they can be conducted.

Employers who don’t fully comply with the law can be sued, and if they routinely conduct these checks, they could be subject to a class action.

Recently, Wal-Mart paid $6.8 million to settle a class action under the law. And the company that owns the Greyhound bus service settled such a case for $5.9 million.

In the past, employers typically required background checks only for high-level jobs with security clearances. But the Internet has made background information much more readily available, and employers are taking advantage of it, particularly in a tight job market where they can afford to be selective. Today, background checks are routinely performed on potential telemarketers, fast-food cashiers, and pizza cooks.

The federal law that governs background checks is called the Fair Credit Reporting Act. The law has been around for many years, but historically it was used mostly by people who were denied housing or credit because of errors in their credit report. However, the law applies to employers as well.

And unlike many federal laws that apply only to larger companies, this one applies to any employer who conducts a background check – even a mom-and-pop business.

The law covers anyone who obtains a “consumer report” on someone – which includes credit reports, criminal background checks, and public records searches for liens, judgments or bankruptcy filings.

Anyone who obtains such a report must get authorization from the person in a disclosure document. And this must be a “stand-alone” document; it can’t be hidden in with other disclosures. Many employers have gotten into trouble because they buried a disclosure in the middle of other material for the applicant to sign, or relied on a “catch-all” waiver form at the end of a document.

Employers who collect job applications online need to be particularly careful, because it’s not clear whether a “click-on-the-box” consent to a background check is sufficient under the law.

The law also requires employers to notify a rejected applicant if the employer made a decision based on information in a consumer report. And the employer must then provide a reasonable amount of time for the applicant to dispute and correct the information.

Some employers are finding themselves in hot water for subjecting applicants to instant credit checks, and then telling the applicant on the spot that bad credit or other negative information disqualifies them.

The law provides penalties of $100 to $1,000 per violation, so if an employer routinely violates the law, the money can add up quickly.

If you have questions about background checks, we’d be happy to help you.