June 17, 2014 Articles

Withstanding Legal Scrutiny in Employer-Conducted Background Checks

It's a good idea to revisit your forms and polices to ensure compliance.

By John F. Lomax Jr. and Jennifer R. Phillips – June 17, 2014

In a market where employers studiously scrutinize employees and applicants, background checks in the workplace have exploded in popularity. As one article in the Wall Street Journal noted [login required], 92 percent of employers use background checks for some or all job openings. Employers increasingly feel that criminal history and, in some cases, credit checks are prime indicators of an individual’s reliability, prospective job performance, and ultimately, his or her future success with the company. While it is permissible to ask certain questions about an individual’s background, or to require a background check, there is a complex framework of substantive and procedural requirements that employers must follow to avoid running afoul of federal and state law. Even companies that have detailed procedures already in place can benefit greatly from revisiting and updating their background-check policies, especially in light of new local requirements and the increased litigation and agency enforcement in this area.


A Brief Look at the “Ban the Box” Initiative
Bare compliance with federal law should not be the endgame for employers seeking background information on their employees or applicants. Although a survey of each state’s relevant laws is beyond the scope of this article, one recent trend is worth mentioning: the “ban the box” initiative. The initiative seeks to remove the question on job applications about an individual’s conviction history and delay the background-check inquiry until later on in the hiring process.

According to one recent nationwide survey, over 50 municipalities and 10 states—including locales in California, Georgia, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Missouri, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Tennessee, Texas, Virginia, Washington, and others—have “ban the box” legislation or ordinances in place. Furthermore, several large, private employers, such as Minnesota-based Target Corp., have sua sponte “banned the box” from their own employment applications.

This local trend indicates that federal, state, and even municipal authorities are paying close attention to how employers gain background information and how they incorporate it into their decision-making process.

The Explosion of FCRA Class-Action Litigation
On the other end of the spectrum lies the Fair Credit Reporting Act (FCRA), the federal law mandating, among other things, procedures and reporting requirements that employers must follow when conducting certain background checks through a third-party vendor. FCRA compliance has become a hot-button employment issue and a lucrative one for plaintiff class-action attorneys. As they have latched onto other laws with hyper-technical provisions, plaintiff class-action attorneys have latched onto the technical requirements in the FCRA that provide for statutory damages when violated.

Generally, to comply with the FCRA, an employer seeking a consumer report from a third-party vendor on its employees or applicants must (1) make a clear and accurate written disclosure to the employee/applicant of its intent to obtain the investigative consumer report; (2) obtain express authorization from the employee/applicant to obtain the investigative consumer report; (3) give the employee/applicant a pre-adverse-action notice if the employer plans to take an adverse action against the employee/applicant based on the information contained in the investigative consumer report; and (4) provide the employee/applicant with an adverse-action notice after taking the adverse action. Among other requirements, the FCRA also mandates that the employer provide a copy of “A Summary of Your Rights Under the Fair Credit Reporting Act” to employees/applicants when providing the pre-adverse-action notice.

In addition to the FCRA’s technical requirements, the damages available for FCRA violations make this area ripe for class-action lawsuits. Where an employer willfully violates the FCRA (which includes both “knowing” and “reckless” standards), a plaintiff may collect any actual damages sustained or statutory damages between $100 and $1,000 without having to prove any actual damages, punitive damages (if proven), and, if the prevailing party, the costs of the litigation together with reasonable attorney fees.

One of the recent FCRA class-action settlements and its case history illustrates the risks associated with systematic FCRA violations, particularly for a large employer. In Singleton v. Domino’s Pizza, LLC, No. 8:11-cv-01823-DKC, 2012 WL 245965 (D. Md. Jan. 25, 2012), a federal court denied a motion to dismiss a class-action complaint alleging class-wide willful FCRA claims against the popular pizza chain. In its decision, the court concluded that the plaintiff sufficiently alleged willful class claims based on the employer’s alleged knowledge of the FCRA requirements (by in-house and outside counsel) and its alleged continued, systematic failure to comply in connection with multiple employees. This case illustrates that, although seemingly trivial, allegations of a systematic, willful practice of FCRA violations will not be easily dismissed. After the court denied the motion to dismiss by Domino’s, the parties engaged in mediation, and in October 2013, the court finalized a settlement in which Domino’s paid $2.5 million to the settlement class, from which plaintiffs’ counsel received 25 percent for attorney fees.

The Singleton case is not unique; 2013 and 2014 thus far have seen numerous high-dollar FCRA class-action settlements against employers. See, e.g.Bell v. U.S. Xpress, Inc., No. 1:11-cv-00181-CLC-WBC (E.D. Tenn. Apr. 7, 2014) (granting preliminary approval of $2.75 million settlement in which plaintiffs’ counsel would receive 33 percent for attorney fees); Pitt v. K-Mart Corp.,No. 3:11-cv-00697-JAG-MHL (E.D. Va. May 24, 2013) (granting final approval of $3 million settlement in which plaintiff’s counsel received 30 percent for attorney fees). Plaintiff class-action attorneys are not the only ones focusing on this litigation trend; federal administrative agencies are also actively pursuing enforcement.

The EEOC and FTC Weigh In
In 2012, the Equal Employment Opportunity Commission (EEOC) issued Enforcement Guidance on the Consideration of Arrest and Conviction Records in Employment Decisions. The enforcement guidance, coupled with a wave of disparate-impact litigation against employers (further discussed below), firmly established the EEOC’s position that employer-conducted background checks were a top enforcement priority for the agency.

In March 2013, the EEOC and the Federal Trade Commission (FTC) joined forces and issued further guidance for employers and employees or applicants, which explained, from the agencies’ point of view, how companies must conduct their background inquiries to comply with federal antidiscrimination laws and the FCRA.

The employer guidance generally explains that it is not illegal for an employer to ask questions about an employee’s or applicant’s background, or to require background checks, except with respect to medical and genetic information (including family history), which triggers protections under the Genetic Information Nondiscrimination Act (GINA). The guidance advises employers not to ask any medical questions before making a conditional job offer—employers should ask medical questions only if there is objective evidence that the individual is unable to do the job or poses a safety risk because of a medical condition.

The agencies also caution employers to take special care when basing employment decisions on background problems that may be more common among people of a certain race, color, national origin, sex, or religion; among people who have a disability; or among people aged 40 or older. For example—and hinting at the recent proliferation of disparate-impact lawsuits—the agencies direct employers to “not use a policy or practice that excludes people with certain criminal records if the policy or practice significantly disadvantages individuals of a particular race, national origin, or another protected characteristic, and does not accurately predict who will be a responsible, reliable, or safe employee.”

From the FTC’s standpoint, the employer guidance reminds companies that if the employer gets a consumer report from a third-party vendor, the employer must comply with the detailed procedures outlined in the FCRA. That said, the EEOC is actively pursuing companies, even for facially neutral background policies, if they cause a “disparate impact” on protected groups.

The EEOC’s Disparate-Impact Cases
An employer can be liable under a disparate-impact theory where its neutral policy or practice has the effect of disproportionately screening out a protected group and the employer fails to demonstrate that the policy is job-related for the position in question and consistent with business necessity. Dothard v. Rawlinson, 433 U.S. 321, 329 (1977). A valid concern for many companies is that their neutral request for an employee’s or applicant’s background information will expose them to liability under a disparate-impact theory.

The first step in a disparate-impact case is to determine whether a policy disproportionately screens out members of a protected group. Based on statistics, many (if not most) policies could have this effect. For example, national studies show that conviction and incarceration rates are substantially higher for African American and Hispanic males than for other segments of the population.

Once it has been shown that a neutral policy disproportionately impacts a protected group, the burden shifts to the employer to demonstrate that the policy is supported by business necessity. In other words, the employer must show that the individual’s exclusion from consideration for hire, promotion, etc., “ha[s] a manifest relationship to the employment in question” and helps to ensure safe and efficient job performance. Griggs v. Duke Power Co., 401 U.S. 424, 432 (1971).

The EEOC is actively pursuing disparate-impact claims, filing numerous lawsuits involving companies’ reliance on criminal history and various types of background checks. For example, the EEOC recently filed lawsuits in Illinois and South Carolina challenging two employers’ background-check policies as having a disparate impact on African American applicants by failing to include an individualized assessment of their qualifications. See EEOC v. Dollar Gen., No. 1:13-CV-04307 (N.D. Ill. June 11, 2013); EEOC v. BMW Mfg. Co., LLC, 7:13-CV-01583-HMH-JDA (D.S.C. June 11, 2013). Employers, however, are beginning to have some success in rebuffing these disparate-impact attacks.

In EEOC v. Kaplan Higher Education, the EEOC challenged Kaplan’s reliance on credit history as part of the hiring process and alleged that the practice had an unlawful disparate impact on African Americans. The federal district court in Ohio granted Kaplan’s motion to strike the EEOC’s expert report and its motion for summary judgment. The court held, and the U.S. Court of Appeals for Sixth Circuit recently affirmed, that the EEOC failed to provide reliable statistical evidence of discrimination and therefore failed to satisfy its threshold burden of proving that Kaplan’s use of credit history resulted in a disparate impact on protected class members. EEOC v. Kaplan Higher Ed. Corp., No. 1:10-CV-2882, 2013 WL 322116 (N.D. Ohio Jan. 28, 2013), aff’d,No. 13-3408, 2014 WL 1378197 (6th Cir. Apr. 9, 2014).

Similarly, in EEOC v. Freeman, the EEOC challenged an employer’s use of credit and criminal-background checks in the hiring process, alleging that the employer engaged in a “pattern or practice” of discrimination against African American, Hispanic, and male job applicants. The court granted Freeman’s motion to strike the EEOC’s expert reports and its motion for summary judgment. EEOC v. Freeman, 961 F. Supp. 2d 783 (D. Md. 2013), appeal filed, No. 13-2365 (4th Cir. Nov. 7, 2013). The court eviscerated the EEOC’s expert reports, determining that one expert’s “inaccurate database renders his conclusions unreliable,” that he had access to but failed to use materials “necessary to create an unbiased, accurate testing database,” and that his analysis was faulty because it was not based on “a random sample of accurate data from the relevant applicant pool and time period.” The court also pointed to other “egregious” examples of “scientific dishonesty,” including evidence that the expert cherry-picked individuals to include in his database and did not include data from all of the employer’s offices.

Although the employers were successful in these two instances due to the EEOC’s faulty experts, this line of cases—coupled with recent agency guidance—is a harbinger for the litigation trends in this area. Now, more than ever, employers should scrutinize their own policies to help minimize their legal exposure.

Background-Check Policies That Can Survive the Scrutiny
As an initial matter, employers who obtain a consumer report from third-party vendors must comply with local consumer-protection laws and the detailed procedures outlined in the FCRA. While a complete review of local consumer-protection laws and the FCRA is beyond the scope of this article, suffice it to say that companies will greatly benefit from revisiting their background-check forms and policies to ensure that they pass muster under the current standards. While consumer-protection-law compliance is critical in its own right, employers must also consider how to craft their background-check policies to avoid a disparate-impact attack.

The good news is that, when an employer uses a multi-step screening process for employees or applicants, the plaintiff must identify a specific employment practice that results in the alleged disparate impact. See, e.g.Freeman, 961 F. Supp. 2d at 799 (“[I]t is not enough for the plaintiff to show that ‘in general’ the collective results of a hiring process cause disparate impact. Statistical analysis must isolate and identify the discrete element in the hiring process that produces the discriminatory outcome.”).

Thus, as a first step in minimizing their disparate-impact exposure, employers should deploy a “targeted screen” of individuals that considers the three Green factors (derived from Green v. Missouri Pacific Railroad, 549 F.2d 1158, 1160 (8th Cir. 1975)): (1) the nature and gravity of the individual’s offense; (2) the time that has passed since the offense and/or completion of the sentence; and (3) the nature of the job held or sought. The focus should be on an “individualized assessment” of the employee or applicant that considers the “whole package” rather than one specific black mark on the individual’s record.

Second, employers should ensure that their policies explicitly state which offenses are grounds for exclusion and to what positions the exclusion applies and for how long—rather than issuing an across-the-board mandate that any individual with a “rap sheet” or poor credit history will be disqualified from further consideration.

Third, the more narrowly tailored the policy, the more likely that the employer will be able to meet its burden of showing that the policy is supported by business necessity. Blanket policies excluding anyone with a particular characteristic have long been considered unjustifiable by business necessity. See, e.g.Green v. Missouri Pacific Railroad, 523 F.2d 1290, 1298 (8th Cir. 1975) (“We cannot conceive of any business necessity that would automatically place every individual convicted of any offense, except a minor traffic offense, in the permanent ranks of the unemployed.”). For example, in the criminal context, the exclusion of an individual based on arrests rather than convictions can never be supported by business necessity because an arrest does not establish that the individual actually engaged in criminal conduct. Employers may rely on the conduct underlying the arrest but not the mere fact that an arrest occurred. See Enforcement Guidance at 12.

Although no policy is immune from challenge, a fairly applied policy that “measure[s] the person for the job and not the person in the abstract” will have a higher likelihood of withstanding a disparate-impact attack. Griggs, 401 U.S. at 436. Furthermore, employers who are cognizant of local rules such as “ban the box” and the technical requirements of the FCRA and local consumer-protection laws will be equipped to withstand legal scrutiny.

Despite recent local trends to remove hiring barriers such as the “ban the box” initiative, the fact remains that nearly all companies nationwide use background checks for some or all job openings. Employers and their legal counsel will greatly benefit from revisiting their forms and policies regarding background checks to ensure compliance with the technical requirements of the relevant state and federal laws.

Keywords: litigation, employment law, labor relations, background checks, credit checks, ban the box

John F. Lomax Jr. is a partner and Jennifer R. Phillips is an associate with Snell & Wilmer, L.L.P., in Phoenix, Arizona.

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