Excerpted from a McDermott Will & Emery Blog by Marjorie Clara Soto and Michelle Strowhiro
Employment background checks help employers hire individuals they can trust. Buyers in transactions may view target businesses running background checks as a precursor for positive employee performance and retention. Background checks also constitute an important area for diligence in transactions because an employer or background check vendor’s failure to follow the requirements of the Fair Credit Reporting Act (FCRA) with potential risks of $1,000 penalties per violation.
THE LAW
The FCRA requires prior to a background check on an applicant, employers provide a clear disclosure, made in writing and in a document consisting solely of the disclosure, regarding the fact of the background check. The FCRA also requires employers obtain the job applicant’s authorization, which may be included in the same disclosure.
Plaintiffs may recover actual damages for negligent FCRA violations of $100 to $1,000 per violation. Courts have found that certain provisions in disclosure forms are potential FCRA violations entitling plaintiffs to damages. These types of claims are low-hanging fruit for lawyers to file a class action. Statutory damages can quickly add up if a company procures hundreds of background checks annually.
BACKGROUND CHECK PITFALLS
A California district court recently opined that FCRA disclosure forms should contain nothing more than a plain statement disclosing “a consumer report may be obtained for employment purposes,” along with a concise explanation of what that means. The court noted a disclosure form could describe what a “consumer report” entails, how it will be “obtained,” and what type of “employment purposes” it may be used.
While these provisions sound simple, neither the courts nor the Federal Trade Commission have provided clear guidance on the definition of a “document that consists solely of the disclosure” or “clear and conspicuous.” It’s no surprise many employers may rely on disclosure forms that inadvertently constitute an FCRA violation.
The courts say the following statements trigger damages:
- • Liability Releases. FCRA disclosures should not include language purporting to release any party from liability in connection with background checks, such as “I hereby release Employer,” “I waive,” and “liability.”
• State-Specific Disclosures. FCRA disclosures should not include state notices or disclosures. These belong on a separate document.
Courts have also found statements regarding nondiscrimination in hiring or statements regarding a job applicant’s rights as problematic.
Buyers should confirm that the target’s HR professionals understand and are trained in FCRA requirements. In the 2022 California Court of Appeal opinion Hebert v. Barnes & Noble, Inc., the court reversed the order granting Barnes & Noble’s summary judgment motion on the issue of whether it willfully violated the FCRA by including extraneous business-to-business language in its disclosure form. Barnes & Noble inadvertently left a footnote in its disclosure form that was intended to be an internal disclaimer from its third-party background check vendor and published it in the live disclosure form.
MITIGATION STRATEGIES
FCRA litigation arising from employment background check disclosure forms have increased since 2017 when the US Court of Appeals found that liability waivers in disclosure forms were a violation of law. Employers that run background checks continue to be a target, and insurers have made background check practices a focus of inquiry.
Buyers and their counsel should carefully review the following issues with a target’s employment background check and hiring practices:
- • FCRA disclosure and authorization form (often provided by third-party vendors);
• State-specific disclosures;
• Background check policies in employee handbooks;
• Offer letters (including for language making employment contingent on satisfactory passage of a background check);
• Employment applications (to ensure FCRA disclosures are separate and apart, including on a separate computer screen); and
• Third-party vendor agreements with background check companies (to confirm existence of a strong indemnity clause favoring employer).
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