Tag Archives: background checks

March 2, 2017

Remove That Liability Waiver From Your FCRA Disclosure Form

By Mark Wiletsky

If you use an outside company to run background checks on your applicants or employees, you need to review your disclosure forms asap to make sure the forms don’t violate the Fair Credit Reporting Act (FCRA).

In a case of first impression by a federal court of appeals, the Ninth Circuit recently ruled that a prospective employer willfully violated the FCRA by including a liability waiver in its FCRA-mandated disclosure form it provided to job applicants. Syed v. M-I, LLC, 846 F.3d 1034 (9th Cir. 2017). In fact, any extraneous writing on the disclosure form can lead to significant liability for a willful FCRA violation. And if you think you are safe by using forms provided by your background check company, think again.

FCRA Refresher

Background checks that inquire into a person’s criminal history, driving record, employment history, professional licensing, credit history, or other similar records, can either be done in-house or by an outside third party. In other words, your HR department may make calls, check online resources, or contact law enforcement or the DMV to obtain this information directly, or your company may outsource this function to a background check company that can do the leg work for you. If you use a background check company or another third party to compile this information on your behalf, the information provided to you is considered a consumer report and is subject to the FCRA.

Because of the private nature of this information, the FCRA limits the reasons for which consumer reports may be obtained. Using consumer reports for employment purposes is a permissible purpose under the FCRA, but such use comes with numerous obligations. In 1996, concerned that prospective employers were obtaining and using consumer reports in a way that violated applicant’s privacy rights, Congress amended the FCRA to impose a disclosure and authorization provision. Pursuant to that provision, a prospective employer is required to disclose that it may obtain the applicant’s consumer report for employment purposes and it must obtain the individual’s consent prior to obtaining the report.

FCRA Disclosure Must Consist “Solely” of Disclosure

Specifically, the FCRA provision states that a person may not procure a consumer report for employment purposes with respect to any consumer unless “(i) a clear and conspicuous disclosure has been made in writing to the consumer at any time before the report is procured or caused to be procured, in a document that consists solely of the disclosure, that a consumer report may be obtained for employment purposes; and (ii) the consumer has authorized in writing (which authorization may be made on the document referred to in clause (i)) the procurement of the report by that person.”

It is clear that the required disclosure should be its own standalone document and should not be included within a job application or other onboarding documents. It is also clear that the authorization (consent form) may be included on the disclosure document. But what about other information? May the disclosure form include a statement that the applicant releases the employer (and/or the background check company) from any liability and waives all claims that may arise out of use of the disclosure and obtaining the background check report?

Court Nixes Liability Waiver As Willful FCRA Violation

What may or may not appear in an FCRA disclosure form has been a hot topic in recent years. Numerous class actions have been filed by job applicants (and their aggressive attorneys) alleging that any extraneous language in a disclosure form violates the requirement that the document consist “solely” of the disclosure. Although numerous lower federal courts have grappled with the meaning of that provision, the Ninth Circuit became the first federal appellate court to examine it. (The Ninth Circuit’s rulings apply to Montana, California, Idaho, Washington, Oregon, Nevada, Arizona, Alaska, and Hawaii.)

In Syed’s case, the prospective employer provided applicants with a document labeled “Pre-employment Disclosure Release” that appears to have been obtained from its background check company, PreCheck, Inc. The third paragraph on the single-page document included the following statement:

“I hereby discharge, release and indemnify prospective employer, PreCheck, Inc., their agents, servants and employees, and all parties that rely on this release and/or the information obtained with this release from any and all liability and claims arising by reason of the use of this release and dissemination of information that is false and untrue if obtained from a third party without verification.”

On behalf of a class of over 65,000 job applicants, Syed alleged that by including this liability waiver, his prospective employer and the background check company violated the statutory requirement that the document consist “solely” of the disclosure. The Ninth Circuit agreed.

The Court found that the text of the FCRA provision was unambiguous and that even though the law permits the authorization to be included on the disclosure document, that was an express exception authorized by Congress. The Court further explained the difference between an authorization and a waiver by stating that the authorization requirement granted authority or power to the individual consumer whereas the waiver requires the individual to give up or relinquish a right. Therefore, the Court rejected the employer’s argument that the FCRA permits the inclusion of a liability waiver in the disclosure.

Moreover, the Court deemed this FCRA violation to be willful. Stating that “this is not a ‘borderline case,’” the Court ruled that the employer acted in reckless disregard of its statutory duty under the unambiguous disclosure requirement. As a willful FCRA violation, the employer faces statutory damages of between $100 and $1,000 per violation (remember, there were over 65,000 class members), plus punitive damages and attorneys’ fees and costs. Read more >>

April 16, 2014

EEOC Loses Kaplan Credit Check Appeal

By Brad Cave 

In 2010, the Equal Employment Opportunity Commission (EEOC) sued Kaplan Higher Education Corporation, claiming that Kaplan’s use of credit reports had a disparate impact on black applicants.   The trial court threw out the EEOC’s suit because it used an invalid method for determining the race of Kaplan’s applicants. The EEOC appealed, and lost again.  In a stinging opinion, the Sixth Circuit Court of Appeals agreed with Kaplan and rejected the methodology promoted by the EEOC’s expert witness.  The Sixth Circuit’s opinion dooms the agency’s background check disparate impact lawsuit against Kaplan and slaps the EEOC for suing a private employer “for using the same type of background check that the EEOC itself uses.”  The ruling also illustrates the EEOC’s failure to show that an employer’s use of neutral background checks results in a disparate impact on African-American applicants. EEOC v. Kaplan Higher Educ. Corp., No. 13-3408 (6th Cir. April 9, 2014). 

Credit Checks Aimed At Preventing Employee Abuses 

Kaplan is a for-profit test preparation and higher education provider.  Because some Kaplan students receive financial aid, some Kaplan employees have access to students’ financial information, including information that is subject to the U.S. Department of Education confidentiality regulations.  Years ago, Kaplan discovered that some of its financial-aid officers had stolen aid payments and some executives had engaged in self-dealing by hiring relatives as vendors for the company.  To help stop these abuses, Kaplan began conducting credit checks on applicants for senior-executive positions as well as accounting, financial aid and other positions where employees have access to company or student financial information.  Neither Kaplan nor its credit check vendor provided or linked the applicant’s race with the applicant’s credit report. 

EEOC Alleges Kaplan’s Credit Checks Screen Out More African-Americans 

Consistent with its efforts to target employers who use background check policies to screen applicants, the EEOC sued Kaplan alleging that Kaplan’s use of credit checks resulted in more African-Americans being rejected than whites, creating a disparate impact in violation of Title VII.  To support its claim, the EEOC hired industrial and organizational psychologist Kevin Murphy to analyze Kaplan’s credit check data and offer an expert opinion based on the statistics.  However, because the credit check information did not include the applicant’s race, Murphy and his team needed another method to determine race.  They created a process that the EEOC called “race rating” in which a team of five “race raters” reviewed drivers’ license photos for a portion of the applicants to visually identify their race.  Despite having credit information for 4,670 applicants, Murphy based his “expert” analysis on only 1,090 applicants, of whom 803 had been racially classified using Murphy’s “race rating” process. 

“Homemade Methodology” Rejected by Court 

The Sixth Circuit wholeheartedly rejected Murphy’s “race rating” process, stating that “[t]he EEOC brought this case on the basis of a homemade methodology, crafted by a witness with no particular expertise to craft it, administered by persons with no particular expertise to administer it, tested by no one, and accepted only by the witness himself.”  The Court upheld the exclusion of Murphy’s testimony not only due to his faulty methodology, but also because the group of 1,090 applicants in Murphy’s statistical analysis was not representative of the applicant pool as a whole.  Of Kaplan’s entire pool of 4,670 applicants, only 13.3% of the applicants were rejected on the basis of credit checks, but Murphy’s smaller pool of applicants had a fail rate of 23.8%.  The Court found that Murphy’s unrepresentative sample might not equate to the respective fail rates of black versus white applicants and therefore, was an unreliable method for the EEOC to show disparate impact. 

EEOC’s Own Background Check Policy Contradicts Its Attack on Private Employers For Use of Credit Checks 

Although not central to the exclusion of the EEOC’s expert, the Court put the EEOC’s own background check policy front and center.  Through the discovery process, Kaplan had successfully obtained information on the EEOC’s background check policies and pointed to the agency’s personnel handbook which states “[o]verdue just debts increase temptation to commit illegal or unethical acts as a means of gaining funds to meet financial obligations.”  To address those potential concerns, the EEOC runs credit checks for 84 of the 97 positions within the agency.  The Court highlighted the disconnect between the EEOC attacking Kaplan for a credit check policy that the agency used itself. 

Future EEOC Challenges to Employer Use of Credit Checks 

The Kaplan decision is the latest in a string of EEOC losses in class actions alleging disparate impact based on an employer’s use of a neutral background check process.  The EEOC seems unable to provide evidence to support a finding that African-Americans, Hispanics or other groups are being rejected for employment at higher rates than whites based on background checks.  In addition, the EEOC’s own use of credit checks in hiring will be used against it in any future similar lawsuits. Although it remains to be seen whether the EEOC will back off of its systemic enforcement efforts related to the use of background checks, the trend for employers is positive.

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July 29, 2013

The Battle Over Background Checks Continues — State AGs Accuse EEOC of “Gross Federal Overreach”

By Mark Wiletsky 

Is it discriminatory if an employer does not hire anyone with a particular criminal conviction, regardless of that person’s race, gender, religion, or other protected characteristic?  According to the EEOC’s April 2012 Enforcement Guidance, it might be.  But in a July 24, 2013 letter sent to EEOC Commissioner Jacqueline Berrien and the four EEOC Board Members, nine state Attorneys’ General (AGs) disagree.  The AGs chastise the EEOC for filing recent lawsuits against BMW Manufacturing Co., LLC and Dolgencorp (Dollar General), in which the EEOC alleges that these employers violated Title VII’s disparate impact prohibition by using a bright-line screening policy that rejected all individuals with past convictions in certain categories of crimes, such as murder, assault, reckless driving and possession of drug paraphernalia.   

The letter then criticizes the EEOC’s April 2012 Enforcement Guidance on Arrest and Conviction Records, stating that the EEOC’s policy guidance incorrectly applies the law and constitutes an unlawful expansion of Title VII.  The AGs argue that if Congress wishes to protect former criminals from employment discrimination, it can amend the law, but it is not the EEOC’s role to expand the protections of Title VII under the guise of preventing racial discrimination. 

The Republican state AGs from Colorado, Montana, Utah, Kansas, Nebraska, West Virginia, Alabama, South Carolina and Georgia joined in this missive to say “enough is enough” on the EEOC’s background check lawsuits.  Citing the burden on businesses to undertake more individualized assessments of an applicant’s criminal history, the AGs urge the EEOC to rescind its April 2012 Enforcement Guidance and dismiss the lawsuits against Dollar General and BMW.  Not likely, but it may get the attention of federal lawmakers who may try to rein in the EEOC’s position on this issue.

Disclaimer:This article is designed to provide general information on pertinent legal topics. The statements made are provided for educational purposes only. They do not constitute legal advice and are not intended to create an attorney-client relationship between you and Holland & Hart LLP. If you have specific questions as to the application of the law to your activities, you should seek the advice of your legal counsel.

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May 6, 2013

Colorado Restricts Employers’ Use of Credit Reports

By Mark Wiletsky 

Employers using credit reports to evaluate applicants and employees take note: Colorado recently enacted the “Employment Opportunity Act” limiting the use of credit reports in employment decisions.  In passing this law, Colorado joins eight other states–California, Connecticut, Hawaii, Illinois, Maryland, Oregon, Vermont and Washington–in restricting employers from obtaining and/or using credit history information when evaluating applicants and employees.   The new Colorado law exempts certain job positions from the prohibition on the use of credit reports, but the exceptions are very fact specific.  Employers need to analyze the job responsibilities of the position at issue in order to determine if they may use credit information under this new law. 

Prohibition on the Use of Consumer Credit Information for Employment Purposes 

Effective July 1, 2013, section 8-2-126 of the Colorado Revised Statutes provides that an employer shall not use consumer credit information for employment purposes unless the credit information is substantially related to the employee’s current or potential job.  This means that Colorado employers are prohibited from using credit information in the employment context except in those limited situations where credit or financial responsibility is substantially related to the job.  The type of information prohibited under this law includes any written, oral or other communication of information that bears on a consumer’s creditworthiness, credit standing, credit capacity or credit history.  This includes a credit score, but does not include the name, address or date of birth of an employee associated with a social security number. 

“Substantially Related” Analysis Looks to Job Responsibilities 

When determining whether a particular position falls within the exception where credit information is “substantially related to the employee’s current or potential job,” employers may not rely on an informal, best-guess determination.  Instead, employers must carefully analyze whether the job in question meets the parameters detailed in the new law.  

Under Colorado’s law, “substantially related to the employee’s current or potential job” is defined to apply to positions that: 

1)         Constitute executive or management personnel or officers or employees who constitute professional staff to executive and management personnel, and the position involves one or more of the following: 

                A)    Setting the direction or control of a business, division, unit or an agency of a business;

                B)    A fiduciary responsibility to the employer;

                C)    Access to customers’, employees’, or the employer’s personal or financial information (other than information ordinarily provided in a retail transaction); or

                D)    The authority to issue payments, collect debts or enter into contracts; OR 

2)         Involves contracts with defense, intelligence, national security or space agencies of the federal government.

Consider this example:  you are hiring a human resource specialist who will administer employee benefits within your company.  May you obtain and use a credit report on applicants for this position?  Assuming this position does not involve federal defense, intelligence, national security or space agency contracts, you first must determine if this position is an executive or management position, or alternatively, if this position is considered professional staff to an executive or manager.  In our example, the employee benefits specialist position may or may not be an executive or management position at your company.  If not, the position may be considered professional staff to an executive or manager if the position reports to an HR Director, Vice President or other similar high level manager or officer.  If we assume this position meets this threshold determination, you next must analyze if the position involves one or more of the four areas of responsibilities where credit information will be deemed substantially related.  Because an employee benefits specialist is likely to have access to employees’ personal and perhaps financial information, it appears to fall within the third area of responsibility where credit information will be deemed substantially related to the job, but the answer is certainly not clear-cut.

Requesting Employee Consent to Obtain a Credit Report  

In addition to the prohibition on the use of credit information for employment purposes, the new Colorado law prohibits employers or their agents from requiring an employee to consent to a request for a credit report that contains information about the employee’s credit score, credit account balances, payment history, savings or checking account balances, or savings or checking account numbers as a condition of employment unless: 

            1) The employer is a bank or financial institution;

            2) The report is required by law; or

3) The report is substantially related to the employee’s current or potential job andthe employer has a bona fide purpose for requesting or using information in the credit report and is disclosed in writing to the employee.   

The written disclosure requirement here is a new procedural step with which most employers meeting this exception will not be familiar.  Employers meeting these criteria now need to provide applicants/employees with a notice of their business purpose for requesting credit information.

Employee May Be Allowed to Explain Circumstances Affecting Credit 

In those cases when an employer is permitted to use credit information because it is substantially related to the job, an employer may ask the employee to explain any unusual or mitigating circumstances that affected their credit history.  For example, if the credit report shows delinquent payments, the employer may inquire further allowing the employee to explain circumstances that may have caused the delinquencies, such as an act of identity theft, medical expense, a layoff, or a death, divorce or separation.   

Adverse Action Disclosure Required 

If the employer relies on any part of the credit information to take adverse action regarding the employee or applicant, the employer must disclose that fact and the particular information relied upon to the employee.  This disclosure must be made to the employee in writing but can be made to an applicant via the same medium in which the application was made (e.g., if the application was submitted electronically, this disclosure may be sent electronically). 

FCRA Obligations Still Apply 

Employers who are permitted to obtain and use credit reports under the Colorado law must also comply with the requirements of the Fair Credit Reporting Act (FCRA) in order to obtain a credit report from a consumer reporting agency.  These additional FCRA duties include: 

1)         Providing a clear and conspicuous written disclosure to the applicant/employee before the report is obtained, in a document that consists solely of the disclosure, that a consumer report may be obtained;

2)         Getting written authorization from the applicant/employee before obtaining the report;

3)         Certifying to the consumer reporting agency that the above steps have been followed, that the information being obtained will not be used in violation of any federal or state equal opportunity law or regulation, and that, if any adverse action is to be taken based on the consumer report, a copy of the report and a summary of the consumer's rights will be provided to the consumer;

4)         Before taking an adverse action, providing a copy of the report and a summary of FCRA consumer rights to the applicant/employee; and

5)         After an adverse action is taken, sending an adverse action notice to the employee/applicant containing certain FCRA-required statements. 

Credit Check Compliance 

Colorado employers need to review and update their background check policies as they relate to conducting credit checks on applicants and existing employees.  In addition to FCRA obligations, employers wishing to use credit reports have additional restrictions and duties under state law.   

Employers now must analyze whether each position for which they wish to obtain credit reports meets the “substantially related to the employee’s current or potential job” criteria.  If the position meets that criteria and the employer wishes to obtain a credit report on an applicant or existing employee, the employer first must provide a written disclosure to the applicant/employee describing the bona fide purpose of obtaining the credit information.  If the credit report reveals questionable or negative information, the employer may (but is not required to) ask the applicant/employee to explain any unusual circumstances that may have led to the unfavorable credit information.  If the employer rejects the applicant/employee for the position based in any way on the credit report, the employer must provide the required FCRA adverse action notices as well as a written explanation of the particular information in the report that led to the employer’s decision. 

Multi-state employers face unique challenges when obtaining and using credit reports for employment purposes as they must comply with various state laws that now restrict such use.  Given the intricacies of complying with the FCRA and applicable state laws, employers are wise to consult with their counsel to review and update their credit check policies.