Financial Employers Conducting Employee Background Checks Must be Mindful of Trends in State and Federal Law

By Schaan Barth, Fafinski Mark and Johnson

More and more employers are stepping up their hiring practices by conducting background checks on their employees prior to the start of their employment. In particular, employers in the financial services industry, such as banks and credit unions, as well as insurance companies and other institutions that regularly deal with sensitive financial and confidential financial information, are increasingly requiring applicants to undergo background checks as part of the hiring process. While this practice does add an extra step to hiring practices, it can provide helpful information in assisting employers in deciding which applicant is the best fit for certain jobs. 

Financial institutions should assess the various positions within their businesses and determine which positions make sense to institute background check screening as part of the hiring process. Specifically, it may make sense for employees in positions with access to sensitive and confidential information, such as customer financial information, company passwords, or company confidential and/or trade secret documents, to undergo background checks prior to the start of their employment. In addition, it may also make sense to screen employees who will be entrusted with access to customer funds, cash, and customer valuables. For example, if a bank is hiring an employee to work as a teller, where the handling and transferring of customers’ funds will be a routine part of the job, it would be reasonable to check whether any of the applicants applying for the job have a history of embezzlement or theft.

If your business does decide to implement background checks as part of its hiring process for some or all of its employees, it is imperative that it is done in compliance with state and federal law. This area of the law has been evolving quickly. Most states, as well as federal law, include detailed compliance requirements employers must follow in conducting background checks. 

In particular, it is important to be aware of the obligations imposed by the Fair Credit Reporting Act (“FCRA”), which regulates background screening and the process employers must follow when obtaining consumer reports for purposes of making employment decisions.  Specifically, the FCRA and other similar state laws require certain disclosure and authorization obligations to candidates related to obtaining their consumer credit reports, along with notice obligations to candidates prior to making an adverse employment decision based on a consumer credit report. 

Consequences to employers for violating the FCRA can include actual damages sustained by the consumer as a result of the violation, a penalty of between $100-$1,000 per consumer (in the case of willful noncompliance), and the potential for punitive damages and reasonable attorneys’ fees and costs. In the event of a class action, these damages can add up significantly. 

A recent trend in FCRA litigation shows just how important it is to ensure that background check forms comply with federal and state law. In Gilberg v. California Check Cashing Stores, LLC, a putative class action filed in federal court in California, a former employee of CheckSmart Financial, LLC alleged on behalf of a class of applicants that CheckSmart’s background investigation disclosure forms violated the FCRA and California state law. On January 29, 2019, the Ninth Circuit Court of Appeals held that CheckSmart violated the FCRA’s “stand-alone document” requirement by including extraneous information in its disclosure form that was likely to confuse the reader and that did not further the FCRA’s purpose. The Court further held the disclosure did not satisfy the FCRA’s “clear and conspicuous” requirements because, although the disclosure was conspicuous, it was not clear.

Also in January 2019, a California judge gave initial approval to a $2 million settlement deal between food distributor Performance Food Group and potentially over 32,000 job applicants who were presented with illegal background check authorization forms that included extraneous and superfluous language that did not consist solely of the disclosure as required by the FCRA and state law.

Other notable settlements that have been reached in FCRA litigation over the past few years include an agreement by Dollar General to pay a $4.08 million class-action settlement, an agreement by Chuck E. Cheese to pay a $1.75 million class-action settlement, and an agreement by Home Depot to pay a $3 million settlement in a class-action lawsuit. These examples of recent cases illustrate the potential legal exposure for FCRA compliance issues and the significant reach the FCRA has over businesses in a broad range of industries.

It is equally important to become familiar with the requirements of applicable state laws concerning this subject. While there is frequently some overlap, there may be unique requirements in a specific state’s laws and employers are required to comply with both if they want to properly conduct their background checks. Moreover, even if employers follow the technical procedures in conducting the background checks, appropriate care and consideration must be taken in making employment decisions based upon the information contained in the consumer reports. Employers must make decisions that are based upon legitimate business interests specific to the applicant’s position and avoid implications of discrimination against applicants based on their protected classes.

As discussed above, failure to carefully follow the FCRA’s requirements, or similar state law requirements, regarding the use of consumer credit reports for employment purposes can result in serious consequences to your business. This is particularly true when involving technical compliance with the information contained in disclosure and authorization notices, as well as the process that must be followed before making adverse employment decisions, which have been the subject of high profile litigation.