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May 19, 2004
Background Checks on Background Checks

Ad industry employment has trended downward since the Internet bubble burst a few years ago; layoffs, hiring freezes and other cost-saving steps were the keys to protecting profitability during the downturn. Now, all signs point to a revival in the business, and agencies may, for the first time in years, become net hirers.


Some agency managers may be out of practice when it comes to adding staff, and may have missed some changes in the legal landscape. These developments, while not exactly new news, are starting to matter on Madison Avenue, and are even getting some coverage in the general press.

As companies shift into hiring mode, it’s common for them to ask job applicants for a list of former employers. In addition to contacting the individuals whose names are provided by the applicants, some companies contact other former employers or former co-workers to gain additional insights. More and more companies are digging up candidates’ credit histories and criminal records, too. That’s all fine provided employers conduct these background checks in compliance with the law.

For example, the federal Fair Credit Reporting Act (“FCRA”) imposes certain requirements on employers when obtaining a “consumer report” from a consumer-reporting agency for use in employment decisions. A “consumer report” contains information about an applicant’s credit history, it may also contain information about the applicant’s character, general reputation, personal characteristics, or mode of living.

Many employers do not realize that the law requires them to notify the applicant, in writing before actually running a background check. In addition, the employer must obtain written authorization from the applicant prior to obtaining a consumer report. The disclosure and authorization may be in the same document, but must otherwise be separate from any other application materials.

The employer is required to provide a copy of the “consumer report” prior to actually rejecting a candidate if consumer report influences the company’s decision not to hire. The FCRA requires that the report be accompanied by a summary of rights prescribed by the Federal Trade Commission. Only after the employer has done this and waited a reasonable time period, may the employer actually deny the candidate’s application.

After rejecting the applicant, the employer must also provide the individual with an adverse action notice containing: (a) the name, address, and telephone number of the consumer reporting agency that furnished the report; (b) a statement that the consumer reporting agency did not make the decision not to hire the applicant; (c) notice of the right to obtain a free copy of the report from the consumer reporting agency; and (d) notice of the right to dispute with the consumer reporting agency the accuracy of any information in the report.

Employers who fail to comply with the FCRA are liable for actual damages sustained by the applicant as well as the applicant’s attorneys’ fees in the prosecution of the suit. Employers are liable for additional damages if it is determined that they acted willfully in failing to comply with the FCRA.

The FCRA requirements only apply when a company obtains a report from a “consumer reporting agency”—a company that regularly assembles consumer reports and provides them to third parties for a fee. The FCRA generally does not apply to first-hand information obtained directly from a candidate’s former associates or supervisors.

Is it always better to give than to receive? When it comes to reference checks, companies should be more concerned with giving information than receiving it. When a company makes statements about a current or former employee, it may face liability for invasion of privacy or defamation. In order to limit that exposure, companies should consider obtaining written releases from departing employees that permit providing references. Alternatively, the former employer may limit its potential liability by giving only perfunctory information such as dates of employment, title, and salary. Additional information, if given at all, should be limited to true factual statements. The safest thing is to avoid providing opinions and subjective statements – even though the very reason for the reference check may be to get “the lowdown” on the applicant. Many employers who adopt these limitations find it helpful to designate one or two people as the company’s sole reference providers.

In addition to the FCRA, employers must also be aware of state and local laws that apply to background checks. For example, the California Consumer Credit Reporting Agencies Act has it own requirements for employers who utilize background reports. Many state laws prohibit employers from refusing to hire an applicant based on prior arrests or misdemeanor convictions, even though that information is usually a matter of public record. The bottom line: as companies delve further and further into an applicant’s history, they must be increasingly careful in how they conduct investigations and how they act on the information they obtain.

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Michael Lasky and Daniel Feinstein of law firm Davis & Gilbert in New York City help companies retain key talent and restrict former employees from using company trade secrets, technology, and other proprietary information; and avoid potentially disruptive litigation. Read their advice now, and perhaps you may not need them later.

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