The Correct and Incorrect Way to do Background Investigations

Employers have a choice in conducting background investigations on individuals. You can, relatively easily, comply with the Fair Credit Reporting Act (FCRA) by following basic steps and comply with the law. Or you can decide to not to comply with the FCRA and end up owing millions. More often than not employers, even large employers, are continuing to disregard basic steps when obtaining background investigations on individuals.

What are the basic steps? Employers are required to give a separate written disclosure an individual will be subject to an investigation. Obtain the individual’s authorization to do the investigation into their background. so, and if any information in the report is used to make an adverse hiring decision, pre-adverse letter and an adverse letter, if needed, must be issued.

Implementing compliance is not insurmountable. Our technology allows all the FCRA-compliant forms to be reviewed and signed on-line. This allows an audit trail if your process is challenged.

Recently two large firms agreed to settlements for alleged violations in their process of obtaining background investigation reports. A Virginia federal court is being asked to give preliminary approval for a $4 million class action settlement with Dollar General Retail stores. And Publix Super Markets Inc. is scheduled to pay nearly $6.8 million in a class-action lawsuit settlement over background checks.

While both companies deny wrongdoing, it seems obvious that if they had a process in place that refuted the allegations, they could have easily avoided the payouts. There are two excellent examples of companies that successfully defended these types of claims.

First Example: Kaplan Higher Education Corporation defeats an EEOC discrimination lawsuit. But Why?

On April 9, 2014, the Sixth Circuit Court of Appeals affirmed summary judgment in the case of Equal Employment Opportunity Commission (EEOC) v. Kaplan Higher Education Corporation, et al.

Specifically, the EEOC alleged Kaplan’s use of credit checks screened out more African-American applicants than white applicants and created a disparate impact in violation of Title VII of the federal Civil Rights Act. Why did Kaplan win? Kaplan won firstly because their expert’s testimony was thrown out as inadequate. That is important. But secondly and even more crucial is the process Kaplan was able to show in using the results of credit checks. Kaplan used defined parameters for reviewing credit reports. The race of the individual was not known by Kaplan’s decision makers.

Specifically, Kaplan had credit checks performed by a third-party vendor, which reports, among other things, whether the applicant

• has ever filed for bankruptcy,
• is delinquent on child-support payments,
• has any garnishments on earnings,
• has outstanding civil judgments exceeding $2,000, or
• has a social-security number that does not match the number the credit bureau has on file.

If an applicant’s credit history includes any of the enumerated items, the vendor flags the applicant’s file for “review. Race of the applicant was not known.

Second Example: Freeman defeated the EEOC’s discrimination lawsuit over use of credit checks and criminal conviction reports. But why?

It is crucial to understand why Freeman was successful. Freeman demonstrated a process compliant with EEOC requirements, consistent use of the reports and decisions motivated by business reasons. And, the EEOC totally botched the documentation they used to allege the discrimination.

Background

The EEOC sought an injunction prohibiting Freeman using any credit history or criminal history information when hiring employees. It also sought “make whole” relief for affected class members.

What did Freeman do right?

For “general employees,” i.e., those who did not hold credit sensitive jobs, the check included only a criminal history investigation and social security verification.

For “credit sensitive” positions, the check also included a credit history. A position was deemed credit sensitive if the employee holding that position had access to client or company credit card information, handled money, checks, or similar valuable items, had budgetary authority, had authority to make agreements with respect to customer invoices, or made

1. 1. Freeman considered whether the applicant was truthful about criminal convictions on the application and authorization forms. An applicant who failed to disclose a conviction, seriously misrepresented the circumstances of a criminal offense, or made any other materially dishonest statement on the application, was automatically disqualified.
   2. Freeman examined any outstanding arrest warrants. Applicants with pending warrants were given a reasonable opportunity to resolve the matter and have the warrant withdrawn; failure to do so made it unlikely, but not impossible, for the applicant to be hired.

• Freeman considered the existence of any criminal convictions which the applicant committed, or was released from confinement for, within the past seven years.

Freeman had a sort of criminal conviction matrix and evaluated whether the criminal conduct underlying a particular conviction made an applicant unsuitable for employment. Convictions that were of particular concern to Freeman, and would generally disqualify an applicant, included those involving violence, destruction of private property, sexual misconduct, felony drug convictions, or job-related misdemeanors.

In general, initial decisions by Freeman’s office manager not to hire an applicant because of a particular conviction were reviewed and approved by Freeman’s senior vice president for human resources or vice president of benefits and compliance.

For credit checks during the relevant time period covered by the EEOC’s complaint, Freeman’s policy consisted of a list of hiring criteria. Applicants whose credit histories revealed any of the following issues were excluded from employment for a credit-sensitive position:

1. More than two accounts of $300 or more that were 90 days past due;
2. More than three collection accounts that were not medically related;
3. More than two paid charge-offs in the prior 12 months;
4. Any unpaid charge-offs in the prior 12 months;
5. A car repossessed in the prior three years;
6. A house foreclosure in the prior three years;
7. Filed for bankruptcy in the prior seven years;
8. A judgment in the prior seven years;
9. A default on student loans;
10. Any unsatisfied liens;
11. Any satisfied liens in the prior three years;
12. Any delinquency in paying child support.

Pay attention to the evidence that Freeman was able to produce:

1. Freeman properly supplied the EEOC with complete background check logs for the entire period covered by the complaint.
2. These logs list applicant names, the branch where application was made, the date a background check was performed, and each applicant’s resulting status (coded as Hireable: Y or N).
3. For individuals who were listed as not hireable, a brief explanation was provided (e.g., “failed drug test” or “Resisting arrest, falsified app”).
4. Freeman also provided during discovery all EEO datasheets filled out by applicants during the relevant time period and the criminal background check reports prepared by the Consumer Reporting Agency, and applicant flow logs containing applicant names, application date, position sought, branch applied to, race, gender, and application disposition.
5. Finally, Freeman provided EEOC with all of its adverse action notices sent to applicants.