New Rules on Gathering Information about Applicants and Employees

by Steve Holden

Authored by Steve Holden. Published in the Sacramento Business Journal December 2012

The process of gathering information about applicants and employees has grown ever more complicated and difficult over the years. Keen on protecting the privacy interests of job seekers and employees, policy makers seem less concerned about the numerous roadblocks created for employers. Beginning in the New Year employers who conduct background checks will need new disclosure forms. While the changes for 2013 are minor and technical, the changes implemented at the beginning of 2012 were not. A quick reminder and overview may help employers avoid big problems down the road. As is the case with many aspects of employment law, employers must comply with both state and federal laws governing background checks. As used in this article, the term “background check” refers to an employer’s use of a third-party to gather information about an applicant or employee such as a credit reporting agency or a private investigator. Employers who do nothing more than contact an applicant’s prior employers and references directly to obtain information are not subject to the extensive rules that apply when an third party is engaged. Nevertheless, they must still be careful in how they gather information.

Disclosure Form Changes Required for 2013

Beginning on January 1st, employers who conduct background checks will be required to use updated disclosure forms. Under the federal Fair Credit Reporting Act (FCRA) an employer may not obtain information from a consumer reporting agency without first giving the applicant or employee a “clear and conspicuous” written disclosure in a document that consists “solely” of the disclosure. In other words, the disclosure cannot be a paragraph on an employment application. It must be a separate document. This disclosure must include a summary of the applicant/employee’s rights under the FCRA. The agency-drafted Summary of Rights form has been amended. The amendment reflects the transfer of much of the responsibility for interpreting and enforcing the FCRA from the Federal Trade Commission to the newly created Consumer Financial Protection Bureau (CFPB). Applicants and employees must be advised that complaints can be directed to the new Bureau. It is important to note that despite its name, Fair Credit Reporting Act, the FCRA reaches well beyond credit reports. Background checks performed by a third party and even some background checks performed by the employer are subject to the FCRA rules regardless of whether they seek credit information or not.

No Credit Checks for Most Employers

Over the years many employers have found a person’s credit history and rating to be good predictors of employee reliability and performance. As a result, many employers use credit reports as part of the evaluation process. Unfortunately, the Legislature either does not see the relationship or does not care. At the beginning of last year, California severely restricted employers’ use of credit reports in selecting and evaluating employees. The Consumer Credit Reporting Agencies Act (CCRAA) was amended to prohibit employers from using credit reports unless the person for who the report is sought falls within a specific exception. An employer may use a consumer credit report for the following positions:

  1. A managerial position (defined as an employee meeting the “executive exemption”).
  2. A position in the State Department of Justice.
  3. A sworn peace officer or other law enforcement position.
  4. A position for which the information contained in the credit report is required by law to be disclosed or obtained.
  5. A position that involves regular access to bank or credit card information, social security numbers or dates of birth, except if this information is due to the routine solicitation and processing of credit card applications in a retail establishment.
  6. A position where the person is or would be a named signatory on the bank or credit card account of the employer, authorized to transfer money on behalf of the employer or authorized to enter into financial contracts on behalf of the employer.
  7. A position that involves access to confidential or proprietary information that derives independent economic value by not being known to other persons and which the employer makes a reasonable effort to maintain its secrecy.
  8. A position that includes regular access during the workday to the employer’s, a customer’s or a client’s cash totaling $10,000 or more.

Recommendations

The rules on background checks and the protections for employee privacy have changed significantly in recent years. The rules are far more detailed and go well beyond the changes discussed in this article. As a result, employers should consider a comprehensive review of policies and practices relating to background checks. Employers should start by clearly identifying the desired information to be obtained, the planned use of the information and the value of the planned use of the information to the organization. If the planned use and value are legitimate, the employer must nonetheless make sure that its actual policies and practices comply with the regulations on background checks. Professional help in this regard is often advisable. At a minimum, employers should update their background checking forms and make sure to include the new FCRA Summary of Rights form. Employers who use credit reports in any way to evaluate applicants or employees should double-check that they are specifically permitted to do so.