Background Checks for Contract Employees, Quirky Question # 98

Quirky Question # 98:

We hired another company (we’ll call it Company ABC) to provide our firm with contract employees.  Company ABC performs background checks on its employee pool, utilizing publicly available sources of information.

We typically use a third-party vendor to perform background checks on the employees we hire, but we do not do so for the contract employees provided to us by Company ABC.  A contract employee we hired through Company ABC recently stole our property.  It turns out the employee had multiple arrests for similar crimes, which were not revealed by Company ABC’s background check.  We are confident that this information would have been revealed had we used our normal third-party vendor.

We have decided that in the future, we would prefer to use our own third-party vendor to perform background checks on the contract employees provided to us by Company ABC.  Is there any reason we cannot do so?

Dorsey’s Analysis:

This scenario is more common than you might think, often arising when a company like yours uses an agency to find temporary or permanent employees and the subsequent hires prove problematic, or even worse, criminally dishonest. In this situation, your company (and other similarly situated employers) need to ensure that it does not experience this business loss again. The question is how this goal can be accomplished without terminating your firm’s relationship with the hiring agency, which you have described as “Company ABC.”

You have two options. First, you can ensure that the contract with Company ABC contains terms requiring it to utilize a reputable third-party vendor to conduct appropriate background checks. The likely reason Company ABC is not doing so already is to avoid the costs associated with complying with the notification and other requirements of the Fair Credit Reporting Act (FRCA), which are triggered when one does not perform the background check internally.

Second, and the preferred option in my view, is for your company to take the reins on obtaining the records and screen the recommended employees yourself. Especially when you are hiring employees (whether temporary or permanent) who will have job responsibilities that you consider sensitive, conducting an appropriate background check can be crucial. For example, if the employees were going to be given access to customers’ credit card information, you will want to have complete confidence in the personal integrity of the employees you retain. Similarly, if you were hiring an engineer whom you planned to assign to a highly confidential software or hardware project, the disclosure of which would have great value to your competition, your company will want to ensure you are retaining honest and loyal individuals.

If your firm elects to screen the recommended employees (or use your standard vendor to do so), you will need to ensure that Company ABC, which is providing you the potential candidates, furnishes those prospective employees with the proper notices and authorizations for your company, or your vendor, to conduct the background check you deem necessary. After proper notice and authorization is provided to the potential hires, your company would be free to conduct systematic checks.

The main drawback to this second approach is the cost your firm will incur. The main benefit is that you will exercise substantially greater control of the screening process.

A standard credit check, often an important part of evaluating a candidate’s fitness for a position, implicates significant legal requirements to which you need to be attuned.

First, the Washington Fair Credit Reporting Act (WFCRA) prohibits an employer from obtaining a consumer report bearing on an employee’s creditworthiness unless the information is substantially job-related, or required by law. RCW § 19.182.020. If such information is substantially job-related, an employer may obtain it only after the reasons for the use of such information are disclosed to the employee in writing. Id.

Second, the FCRA imposes certain requirements related to “consumer reports,” a term that includes credit reports. Before obtaining a credit report, an employer must: (a) inform an applicant or employee in a written disclosure statement that a report may be obtained for employment purposes; and (b) obtain the individual’s written authorization to obtain the report. 15 U.S.C. 11681b(b)(2). The employer also is obligated to certify to the consumer reporting agency that it has complied with all disclosure requirements. 15 U.S.C. § 1681d(a)(2). It is not entirely clear whether a vendor relationship would be considered to meet the “for employment purposes” prong of this requirement. However, to be safe, we recommend that your company comply with both the FCRA and WFRCA.

Third, the WFCRA imposes additional requirements. For current employees, the disclosure must notify the employee that the consumer report may be used for employment purposes. RCW § 19.182.020(2)(b). A statement to this effect contained in an employee manual will suffice. Id.

Fourth, both the FCRA and the WFCRA require certain disclosures before taking an adverse employment action, if such action is based in whole or in part on the information contained in the consumer report. The FCRA requires that after the report is completed, but before taking any adverse action, an employer must provide the individual with: (a) an unedited copy of the report; and (b) a copy of “A Summary of Your Rights Under the Fair Credit Reporting Act.” 15 U.S.C. § 1691d(a)(1).

After taking adverse action based, even partially, on information in the report, the employer must orally or in writing: (1) give notice of the adverse action to the person; (2) provide the name, address and telephone number of the consumer reporting agency making the report; (3) state that the consumer reporting agency did not take the adverse action and is unable to give specific reasons for the action; and (4) provide notice of the person’s right to obtain a free copy of the consumer report from the consumer reporting agency within sixty days and the right to dispute the accuracy of any information in the report. 15 U.S.C. § 1681m(a).

The WFCRA requires the employer to provide to the employee written notice of the adverse action, plus: (1) the name, address and telephone number of the consumer reporting agency; (2) a description of the consumer’s rights under the Washington Act; and (3) a reasonable opportunity to respond to any information in the report that is disputed by the employee. RCW § 19.182.020(2)(c); RCW 19.182.110(2).

With regard to a criminal background check, you should keep in mind that such checks can be found to violate Title VII due to the disparate impact they have on minorities. To minimize the risk of such a claim, you must be able to show a business necessity to justify the exclusion of an applicant on the basis of prior criminal convictions.

Generally, an employer cannot use a prior felony as an absolute bar to employment in all situations, and a blanket policy of excluding all applicants with conviction records is likely to constitute unlawful discrimination. Such pre-employment inquiries should be accompanied by a statement that convictions will not disqualify the applicant automatically, and that you will consider the particular circumstances of each case when deciding whether employment of that particular person for the particular job is manifestly inconsistent with the safe and efficient operations of the employer.

Despite the seemingly onerous requirements associated with both the FCRA and the WFCRA, by conducting careful background checks either directly or using your own vendor, your company will gain greater control over the hiring process for your independent contractors/temporary employees. This should enable your firm to avoid the repetition of the problems you recently experienced when relying on another company to evaluate the backgrounds of these individuals. Finally, as your company becomes more familiar with the FCRA and the WFCRA, and your company works with these statutory schemes more routinely, you likely will find that compliance with these statutes is less burdensome than you might anticipate.

Dorsey & Whitney

Dorsey is a business law firm, applying a business perspective to clients' needs. We make it our first priority to know the context in which you do business - your market, your competitors, your industry.

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