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Lawsuits a Wake-Up Call on Proper Use of Background Checks

by Wayne "Skip" Adams III

Ice Miller, LLP

Since the start of 2014, the number of lawsuits filed against employers and staffing firms alleging the use of unlawful background check practices has increased dramatically. Many of these cases were class action lawsuits with millions of dollars in potential liability. This sudden surge in litigation underscores the importance of understanding and complying with the requirements of the Fair Credit Reporting Act (FCRA) when obtaining background reports on job applicants.

Although one might infer from the name of the law that it only applies to use of credit reports, the FCRA also regulates the use of other types of consumer reports, including reports on backgrounds and criminal histories of job applicants. It requires that anyone who uses such a report to deny an application for credit, insurance or employment – or to take another adverse action against the applicant – must inform the applicant and provide the name, address and phone number of the agency that provided the information. The FCRA also requires that the applicant be given an opportunity to correct any inaccuracies in the report before any adverse action is taken based on the report.

It has become a common and prudent practice for employers to seek information on applicants' histories, including prior employment, credit history and criminal records, before deciding whether to make job offers. Some states and municipalities also have passed laws and ordinances imposing restrictions on when in the interview process prospective employers may consider applicants' criminal records. Others prohibit receipt or consideration of information about expunged convictions. However, most of the recently filed cases involve claims that employers violated the disclosure and notice requirements of the FCRA, a federal law applying to employers throughout the US.

In some cases, class action lawyers file suits on behalf of large classes of unsuccessful job applicants, even though none of them can prove that the alleged FCRA violations prevented them from being hired or that they otherwise were actually harmed by any FCRA violations. Why are they entitled to sue? Because courts have interpreted the FCRA as allowing plaintiffs to bring FCRA lawsuits for employers' willful violations of the law without claiming or proving that they suffered actual damages. If they prevail, the plaintiffs may recover up to $1,000 in statutory damages for each member of the class, plus punitive damages, attorneys' fees and any actual damages plaintiffs can prove for any of the class members. After such damages are multiplied by hundreds or thousands of class members, these "victimless" lawsuits can cost employers millions of dollars. By the way, the Supreme Court has held that in order to be a willful violation qualifying for such damages, it need not be intentional. Instead, in violating the FCRA, the employer's conduct need only be "reckless" and such that the employer knew or should have known it was not complying with the FCRA.

What kinds of violations can expose employers to such damage awards? FCRA violations can occur at two different phases of the application process: before and after the employer has obtained a job applicant background report. An employer is prohibited from obtaining such a background report unless it first has disclosed to the applicant its intent to request such a report and obtained the applicant's consent. One of the primary FCRA violations alleged in many class actions is the employer's failure to make proper disclosure to each of its applicants. The FCRA requires that the disclosure must clearly and conspicuously inform the applicants that the employer may obtain a background report for employment purposes. Employers frequently run afoul of the requirement that this disclosure be set forth "in a document that consists solely of the disclosure." Employers violate this requirement – and subject themselves to liability – simply by including this disclosure in their job application form, instead of making it a separate, free-standing document as the FCRA requires. In addition, the Federal Trade Commission (FTC) has taken the position that inserting a liability release or waiver in the disclosure, whereby the applicant agrees to release the employer from liability for any claims arising out of the employer's use of the background report, also violates the requirement that the document contain only the disclosure. Companies sued within the past few years for alleged violations of these FCRA disclosure requirements include Home Depot, Whole Foods, Dollar General and Michaels Stores.

Other employer violations of the FCRA can occur after the employer receives a background report on an applicant. In those cases, the plaintiffs usually allege that they suffered serious actual damages due to job loss or harm to their reputation – in addition to the statutory damages capped at $1,000 – by the employer's failure to comply with the FCRA. For example, Roger Culbertson sued Walt Disney Parks and Resorts in 2013 claiming that the company relied on a criminal background report it received on him in deciding not to hire him, but failed to provide him with a copy of the report or an opportunity to refute it. In his lawsuit, Culbertson acknowledged that he was convicted of battery in 1998, but that the conviction was expunged from his record in 2010. Disney hired him in 2011, but before Culbertson appeared for orientation, the company received a background report inaccurately indicating that the 1998 conviction had occurred in 2010. The day after receiving this report, Disney's security department placed a "no-hire recommendation" in Culbertson's file.

When Culbertson contacted the company to inquire about his status, he was informed for the first time about the conviction in the background report, and he alleges the company told him he no longer had a job. The next day, Culbertson contacted the background check agency that had provided the report to Disney and informed it of the incorrect date of the conviction. Six days later, the agency issued a corrected report removing any mention of the conviction. However, by the time the report was corrected, Disney claims it was too late for him to receive the required orientation for his seasonal job and that Disney no longer needed him. Disney contends that Culbertson lost his job not because of the background report, but because by the time the report was corrected, it no longer needed him. However, in refusing to grant summary judgment for Disney, the court held that the issue of whether Disney gave Culbertson a reasonable opportunity to respond to the inaccurate background check must be decided by a jury.

Regardless of the final outcome of the cases mentioned in this article, they deliver an important reminder to all employers about best practices in requesting and using background checks. An employer must inform a job applicant in a separate document (not part of the application form and not containing a release of liability) of its intent to obtain a background report and must receive the applicant's written consent. Before denying employment or taking any other adverse action against an applicant or employee on whom it has received a negative background report, an employer should send a packet to the individual containing the following:

  • a copy of the report;
  • the name, address and phone number of the agency that produced the report;
  • the government publication "A Summary of Your Rights Under the Fair Credit Reporting Act," issued by the Consumer Financial Protection Board ("CFPB") and found on the CFPB website (this summary was updated as of Jan. 1, 2013, and has replaced the summary previously issued by the Federal Trade Commission (FTC) so employers must make sure they are giving the current version to applicants); and
  • a letter warning the individual of the job denial or other adverse action which may result from the negative report and setting forth a reasonable amount of time (at least five business days) for the individual to respond.

Only after that period of time has elapsed without a correction or other acceptable explanation should the employer reject the applicant or take other adverse action based on the report. The employer must notify the individual of this action, and written notice is recommended.

This article was submitted by Wayne "Skip" Adams III, a partner in the Labor and Employment Law Section of Ice Miller, LLP. For more information on background checks, contact him at 317.236.2117 or wayne.adams@icemiller.com.