The 411 on employment background checks in transactions | McDermott Will & Emery
Employment background checks help employers hire people of integrity whom they can trust and who do not pose a risk to the company, other employees, or the customers and customers the company serves. Buyers in deals may view target companies that perform background checks as lower risk for employee performance and retention issues. Background checks are also an important area for employment due diligence in transactions, because failure by an employer or background check provider to comply with Fair Credit Reporting’s hypertechnical disclosure and authorization requirements Act (FCRA) and other applicable state and local laws risk potentially significant exposure to a class action lawsuit. and penalties of $1,000 per violation. This article explores mitigation strategies buyers can use as part of due diligence to identify and assess potential exposure to FCRA.
The FCRA requires that before conducting a background check on a job applicant, employers provide job applicants with a clear and conspicuous disclosure, in writing and in a document consisting of the disclosure only, regarding the fact of the proposed background check. The FCRA also requires employers to obtain the job applicant’s authorization for the background check, which may be included in the same written disclosure.
Plaintiffs can recover actual damages for negligent violations of the FCRA, or statutory damages of $100 to $1,000 for each willful violation of the FCRA. Courts have found that certain provisions of disclosure forms (for example, disclaimers or state-specific disclosures) are in themselves violations of the FCRA that automatically entitle plaintiffs to statutory damages. Since statutory damages do not require proof of actual injury, these types of claims are handy fruit for plaintiffs’ attorneys who can point to a non-compliant disclosure form as evidence of an illegal policy. common law applicable to a category of individuals and, on this basis, file a class action. Statutory damages on a collective basis can quickly add up when a company has a habit of procuring hundreds or thousands of background checks each year.
POTENTIAL PITFALLS OF BACKGROUND CHECKS
A California district court recently ruled that FCRA disclosure forms should contain nothing more than a clear statement that “a consumer report may be obtained for employment purposes,” as well as a concise explanation of what this expression means. The court noted that a disclosure form could briefly describe what a “consumer report” entails, how it will be “obtained” and what kind of “employment purposes” it can be used for.
While these may seem like mere propositions, neither the courts nor the Federal Trade Commission (the administrative agency responsible for enforcing the FCRA) have provided clear guidance on the definition of “document that consists solely of the disclosure (the autonomous requirement) or “clear and visible”. For this reason, it’s no surprise that many employers can currently rely on disclosure forms that inadvertently include language that is in itself a violation of the FCRA.
Courts have, however, clarified that the following statements trigger statutory damages (and should be avoided as noted):
- Disclaimers. FCRA disclosures must not include language purporting to absolve any party of any liability in connection with obtaining background checks, such as “I hereby release the employer . . . “, “I waive. . . ” and “responsibility”.
- State-Specific Disclosures. FCRA disclosures shall not include state-specific notices or disclosures. These belong to a separate document. These notices include, for example, information about the applicant’s rights to a consumer report if they live in the states of California, Minnesota and Washington. Certain state notices should also be in their own stand-alone document and should not be combined with other state-specific disclosures.
Courts have also found statements regarding non-discrimination in hiring, or general statements regarding job seeker rights, to be problematic in disclosure forms.
Buyers should confirm that the target’s human resources professionals understand and are trained in FCRA disclosure requirements. In an unpublished 2022 California Court of Appeals opinion in Hébert v Barnes & Noble, Inc., the court reversed the trial court’s order granting Barnes & Noble’s motion for summary judgment on whether Barnes & Noble knowingly violated the FCRA by including foreign business-to-business language in its Audit Disclosure Form history, thereby allowing claims to proceed on a class basis. Barnes & Noble inadvertently left a footnote in its disclosure form that was intended to be an internal disclaimer of its third-party background check provider and posted it in the live disclosure form that it provided to its job applicants for the following two years.
The court held that a reasonable jury could conclude that Barnes & Noble willfully violated the FCRA based on the following:
- The disclosure form at issue violated an unambiguous provision of the FCRA.
- At least one of Barnes & Noble’s employees was aware of the superfluous information (the footnote) in the Disclosure before the Disclosure was posted to job applicants.
- Barnes & Noble may not have adequately trained its employees in FCRA compliance and Barnes & Noble’s most knowledgeable person admitted as much in his deposition.
- Barnes & Noble may not have had a monitoring system in place to ensure its disclosure complied with the FCRA.
FCRA class action litigation arising from employment background check disclosure forms has increased since 2017, when the United States Court of Appeals for the Ninth Circuit found that disclaimers in disclosure forms constitute a violation of FCRA law. Plaintiffs’ attorneys continue to exploit this underdeveloped area of law. Employers who conduct background checks on applicants and employees continue to be the target of class action lawsuits, and representations and warranties insurers have made employment background check practices a subject of investigation.
Buyers and their employment counsel should carefully consider the following issues regarding a target’s employment background check and hiring practices to assess this potentially significant area of risk:
- FCRA Disclosure and Authorization Form (often provided by third-party vendors);
- State-specific disclosures (including California, which has its own stand-alone form requirement);
- Background check policies in employee handbooks and other stand-alone policies;
- Letters of offer (including for language making employment conditional on passing a background check);
- Employment applications (to ensure that FCRA disclosures are segregated and separated, including on a separate computer screen); and
- Third party vendor agreements with background check companies (to confirm existence of a strong indemnification clause favoring the employer).