03/22/2012 Meeting - Background Checks in Employment

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03/22/2012 Meeting - Background Checks in Employment

  1. 1. BACKGROUND CHECKS IN EMPLOYMENTBACKGROUND CHECKS IN EMPLOYMENT: Legal Requirements, Pitfalls, and Practical Considerations March 22, 2012 Copyright © 2010 by K&L Gates LLP. All rights reserved.
  2. 2. EXCLUSIVE RIGHTS TO MATERIALS THE FOLLOWING MATERIALS HAVE BEEN PREPARED BY K&LTHE FOLLOWING MATERIALS HAVE BEEN PREPARED BY K&L GATES TO BE USED EXCLUSIVELY BY PARTICIPANTS IN CONNECTION WITH THE K&L GATES SEMINAR ON BACKGROUND CHECKS.BACKGROUND CHECKS. THESE MATERIALS ARE NOT TO BE REPRODUCED, COPIED, TRANSMITTED OR USED IN ANY MANNER BY ANY OTHER PERSON OR ENTITY WITHOUT THE EXPRESS WRITTEN CONSENT OF K&L GATES. 2
  3. 3. Today’s Presenter Linda L. Usoz K&L GatesK&L Gates Palo Alto Office Phone: 650.798.6702 F 650 798 6701Fax: 650.798.6701 linda.usoz@klgates.com 3
  4. 4. Legal Framework St t LState Laws:  California Labor Code  California Civil Code  State Constitution Federal Law:  Fair Credit Reporting ActFair Credit Reporting Act 4
  5. 5. What is a Background Check?  Information obtained from various sources concerning an Information obtained from various sources concerning an employee or applicant’s:  character  general reputation  personal characteristics, or  mode of living mode of living 5
  6. 6. Background Checks May Include: Criminal conviction records Criminal conviction records  Civil litigation history  Employment references  Credit history  Department of Motor Vehicle records,  School records, andSchool records, and  Professional and personal references 6
  7. 7. Why Obtain the Information?  Background checks may be legally required based on Background checks may be legally required based on particular positions or industries  Government contracts/security clearance  DOT-regulated (transportation of goods or persons)  Certain employees in medical-related professions  Law enforcement/public safety officers Law enforcement/public safety officers  Public and private schools  FDIC Insured institutions  NASD Securities industry  Entity is subject to PCI DSS (Payment Card Industry Data Security Standard) 7 Security Standard)
  8. 8. Why Obtain the Information? (Cont.)  Good business practice (even if not legally required) Good business practice (even if not legally required)  Screens out employees who may be more likely to commit theft or engage in violent acts P t t i i titi i d t i di Protects companies in competitive industries regarding employee access to sensitive business information  Type of position (accounting, courier of sensitive i f ti bj t t t d t linformation or objects, access to trade secrets, employee will be driving on company business, etc.)  Helps protect companies from negligent hiring claims 8
  9. 9. Restrictions on Obtaining Background Info  While employers may have incentive to obtain as much While employers may have incentive to obtain as much background information on applicants and/or employees as possible, legal requirements impose various restrictions on the employer’s ability to do so:  Privacy Rights (Cal. Constitution, Art. I, Section 1)  Arrests and certain misdemeanors (Labor Code § 432.7)  Polygraph tests (L C § 432 2 and 29 U S C § 2002)Polygraph tests (L.C. § 432.2 and 29 U.S.C. § 2002)  Fingerprinting (Labor Code § 1051)  Obtaining/use of credit reports for employment (new Labor Code § 1024 5)Code § 1024.5)  Use of Credit Reporting Agencies and Investigative Consumer Reporting Agencies (ICRAA; CCRAA; FCRA) 9
  10. 10. Privacy Rights – Cal. Const. Art. I, Sect. 1  Applies to all private employers Requires “balancing” of employee Applies to all private employers – Requires balancing of employee privacy rights and legitimate business interests  Drug/Alcohol Tests  Applicants: okay to test pre employment Applicants: okay to test pre-employment  Employees: permitted only if “reasonable suspicion” of current use  Random drug tests: generally not permitted, except where required b l ( DOT R ’ ) f li it d f t iti itiby law (e.g. DOT Reg.’s) or for limited safety-sensitive positions  Personality Tests  Limits scope of some inquiries even if validated  Personnel Records  May not be disclosed without employee’s consent  Permitted to answer legitimate inquiry as to whether or not 10 g q y employer would rehire employee (Civil Code § 47)
  11. 11. Restrictions on Use of Criminal History - Arrests  California law prohibits an employer from asking in any manner about an arrest or detention that did not result in a conviction (Labor Code § 432.7)  Exception: May ask about an arrest for which applicant or employee is out on bail or on his or her own recognizance pending trialpending trial  Penalty: $200 or actual damages, whichever is greater, plus costs and attorneys fees I t ti l Vi l ti $500 t bl d hi h Intentional Violation: $500 or treble damages, whichever is greater, plus costs and attorneys fees, and also constitutes a misdemeanor, up to $500 fine 11
  12. 12. Restrictions on Use of Criminal History - Convictions  May freely ask about felony convictions  Nolo contendere and guilty pleas to a felony count as a conviction (regardless of sentence imposed)conviction (regardless of sentence imposed)  May NOT ask about certain misdemeanors (marijuana related, > two years old, per L.C. § 432.8) and convictions for which the record has been sealed expunged eradicated orwhich the record has been sealed, expunged, eradicated or dismissed pursuant to a pre-trial or post-trial diversion program (L.C. § 432.7 and Cal. Code of Reg.’s. § 7287.4.)  Penalties: Same as for arrests under L.C. § 432.7Penalties: Same as for arrests under L.C. § 432.7  Any violation, again, is also a misdemeanor per L.C. § 433 12
  13. 13. Restrictions on Use of Criminal History (Cont.)  No automatic disqualification for criminal convictions No automatic disqualification for criminal convictions  Even when use of criminal records is permitted, an employer may not automatically disqualify an applicant for employment merely because of a criminal record, as this has been held to have a disparate impact upon protected racial and ethnic groups, and is unlawful  Basis for disqualification must be job-related  Practice Pointer: When asking applicants about criminal records, be sure to inform them in writing that a criminalrecords, be sure to inform them in writing that a criminal conviction will not necessarily or automatically disqualify them from employment 13
  14. 14. Restrictions on Use of Polygraph Tests California Labor Code § 432 2 provides:California Labor Code § 432.2, provides: “(a) No employer shall demand or require any applicant for employment or prospective employment or any employee to submit to or take a polygraph, lie detector or similar test orsubmit to or take a polygraph, lie detector or similar test or examination as a condition of employment or continued employment.”  Exception: Does not apply to the federal government orp pp y g any agency, or the state government or any agency (or any political subdivision thereof) “(b) No employer shall request any person to take such a test, or administer such a test without first advising the person inor administer such a test, without first advising the person in writing at the time the test is to be administered of the rights guaranteed by this section.” 14
  15. 15. Restrictions on Use of Polygraph Tests (Cont.)  The Federal Employee Polygraph Protection Act (29 U.S.C. § 2002, et seq.) goes even further and provides that it shall be unlawful for any employer:  “(1) directly or indirectly, to require, request, suggest, or cause any employee or prospective employee to take or submit to any lie detector test.” (Emphasis added.)  Also unlawful to discharge or deny employment to any person who refuses to take such a test  Exemptions apply for all local, state and federal governmentp pp y , g employers, certain employers who manufacture or distribute drugs, certain security industry employers (armored car, security, alarm) and limited exemption for ongoing i ti ti i l i i l t th b i 15 investigations involving economic loss to the business
  16. 16. Requirements For Polygraphs When Investigating Suspected Wrongdoingg g p g g  Employee must be given notice in writing explaining incident being investigated and basis for testing particular employees  Notice must contain: Notice must contain:  Detailed description of the loss or injury to the business  Description of employee’s access to property which is subject of investigationsubject of investigation  Detailed description of employer’s reasonable suspicion of the employee’s involvement in the incident or activity in questionq  Signature of the employer or its agent (other than polygraph examiner) 16
  17. 17. Requirements For Polygraphs Under EPPA  Employers who seek to conduct polygraph tests under exceptions to Employers who seek to conduct polygraph tests under exceptions to the EPPA must provide written notice of:  Date, time and place of examination  Examinee’s right to consult legal counsel or employee Examinee s right to consult legal counsel or employee representative before each phase of the test  Nature and characteristics of polygraph instrument and instrumentinstrument  Extensive description of examinee’s rights (including lists of prohibited questions and topics, rights to end examination, right to file complaint with US DOLto file complaint with US DOL  Examiner must be given written notice identifying the examinees 17
  18. 18. Recordkeeping Under EPPA  Imposes recordkeeping obligations on both examiners andImposes recordkeeping obligations on both examiners and employers  Most records must be kept for 3 years  Must maintain all notices provided to employees and Must maintain all notices provided to employees and examiners  Must maintain all opinions, reports, etc. furnished by examiner to employerto employer  Examiner must also maintain records of all opinions, reports, graphs, charts, lists, written questions, and other records relating to the tests and number of exams conducted eachrelating to the tests, and number of exams conducted each day and length of each 18
  19. 19. Restrictions on Fingerprinting Cal Labor Code §1051 prohibits an employer from providingCal. Labor Code §1051 prohibits an employer from providing fingerprints to law enforcement agencies for the purpose of obtaining criminal record information about the applicant or employeeemployee Special exception applies for banks and savings associations to learn about certain crimes involving theft, fraud, dishonesty, etc (See for example Cal Financial Code §6525)etc. (See, for example, Cal. Financial Code §6525) Also, security clearance requirements mandated by federal law would preempt §1051, as would other federal statutory and regulatory requirements for certain professionals such asregulatory requirements for certain professionals, such as registered representative of broker dealers 19
  20. 20. New California Law Restricting Use of Credit Reports in Employment  New California Labor Code section 1024.5 became effective January 1, 2012  Prohibits employers from using a consumer credit report forProhibits employers from using a consumer credit report for employment purposes unless the position of the person whose report is sought falls into one of 8 specified categories  New law does not apply to a person or business subject topp y p j the Gramm-Leach-Biley Act found in 15 USC §§ 6801-6809 (concerning non-public, personal information sharing by and among financial institutions) and state and federal regulations implementing such if the person or business is subject toimplementing such if the person or business is subject to compliance oversight by a state or federal regulatory agency with respect to such laws 20
  21. 21. New California Law Restricting Use of Credit Reports in Employment (cont.) The eight categories are:  A managerial position (defined narrowly as one subject to the executive exemption under Wage Order No 4)executive exemption under Wage Order No. 4)  A position in the State Dept. of Justice  A sworn peace officer or other law enforcement position  A position for which the information contained in the report is required by law to be disclosed or obtained 21
  22. 22. New California Law Restricting Use of Credit Reports in Employment (cont.)  A position involving regular access, for any purpose other than the routine solicitation and processing of credit card applications at a retail establishment, to all of the following types of information:  Bank or credit card account information  Social Security NumberSocial Security Number  Date of Birth  A position in which the person is or would one of the following:  Named signatory on employer’s bank or credit card account  Authorized to transfer money on behalf of employer  Authorized to enter into financial contracts on behalf of the 22  Authorized to enter into financial contracts on behalf of the employer
  23. 23. New California Law Restricting Use of Credit Reports in Employment (cont.)  A position that involves access to confidential or proprietary information, including a formula, pattern, compilation, program device method technique process or trade secretprogram, device, method, technique, process or trade secret that derives independent economic value, actual or potential, from not being generally known to and not being readily ascertainable by proper means by other persons who mayascertainable by proper means by other persons who may obtain economic value from the disclosure or use of the information and is subject of an effort that is reasonable under the circumstances to maintain secrecy of the information  A position that involves regular access to cash totaling $10,000 or more of the employer, a customer or client during the workday 23
  24. 24. EEOC’s Stand on Credit Reports in Employmentp y  Increasing spotlight on practice of using credit reports in making employment decisions I O t b 2010 EEOC h ld bli h i th i d In October 2010, EEOC held public hearings on the issue and heightened concerns over the practice as it tended to unfairly disqualify protected groups (women, minorities, persons with disabilities and others unfairly disadvantaged at a time of highdisabilities and others unfairly disadvantaged at a time of high unemployment and tighter credit)  Various constituent groups have called on the EEOC to issue specific guidance on use of credit (and background checks) inspecific guidance on use of credit (and background checks) in employment 24
  25. 25. Use of Consumer Reports  California Investigative Consumer Reporting Agencies Act California Investigative Consumer Reporting Agencies Act (ICRAA); Cal. Civil Code §§ 1786 - 1786.60  Covers “character, general reputation, personal h t i ti d f li i ”characteristics, or mode of living”  California Consumer Credit Reporting Agencies Act (CCRAA); Cal. Civil Code §§ 1785.1 - 1785.36  Covers “credit worthiness, credit standing, or credit capacity”  Federal Fair Credit Reporting Act (FCRA)Federal Fair Credit Reporting Act (FCRA)  Covers both credit and background  California employers must comply with ALL three! 25
  26. 26. Use of Consumer Investigative Reports (State Law)  Governed by CA Investigative Consumer Reporting Agencies Act (“ICRAA”), but specifically excludes “credit reports” from its coverage  Is in addition to any other applicable laws (i.e., FCRA)  Defines “investigative consumer report” and “investigative consumer reporting agency” broadly (similar to “consumerp g g y y ( report” or “consumer reporting agency” under Fair Credit Reporting Act)  Must be used for proper employment purposes (evaluating forp p p y p p ( g employment, promotion, reassignment, or retention) 26
  27. 27. ICRAA Requirements Apply:  When using an investigative Consumer Reporting Agency When using an investigative Consumer Reporting Agency (CRA)  To investigate job applicants OR  To investigate employees being considered for promotion, reassignment or routine checks (but not for suspicion of wrongdoing or misconduct)g g )  Applies to information obtained through any means, whether in written or oral form, and whether gathered through review of public records or through interviewsg  Also, required whenever employer obtains “public records” even without use of CRA 27
  28. 28. Conditions for Procuring Report Under CA Law  Must provide “clear and conspicuous” separate written disclosure to applicant or employee stating that:  An investigative consumer report may be obtained  Report will be used for permissible employment purposes (nature and scope of the investigation requested)  Report may include information on character, general reputation,p y , g p , personal characteristics, and mode of living  The name, address, website address (this is new as of January 1, 2012) and telephone number of the CRA (and as of January 1,) p ( y , 2012, the CRA must post its privacy practices on their website, or if none exists, mail the privacy practices notice upon request)  A summary of Civil Code section 1786.22 (describing the files 28 y ( g maintained by the CRA and how the employee or applicant can inspect the files with the CRA)
  29. 29. Conditions for Procuring Report Under CA Law (Cont.)  Disclosure must be provided before report is procured  Must obtain applicant/employee’s prior written consent/authorization on a separate documentp  Must provide written document containing a box to check by the employee or applicant to indicate if he/she wishes to receive a copy of the report. (This can be on either the disclosure form described above or on a separate consent form)  NOTE: The foregoing conditions need not be met if theg g employer is seeking the report because it suspects the employee of wrongdoing or misconduct 29
  30. 30. Other ICRAA Requirements  If box is checked employer must provide the report to the If box is checked, employer must provide the report to the applicant or employee within three business days after the employer receives the report, or contract with the CRA to send a copy directly to the applicant or employee within thesend a copy directly to the applicant or employee within the time period  Employer must also certify to the CRA that it has made the required disclosures and it will comply with its obligations torequired disclosures and it will comply with its obligations to provide a copy of the report if requested and inform the applicant/employee if adverse action has been taken based on the reportp 30
  31. 31. Information Contained in the Report Under ICRAA B k t i t 10 ld Bankruptcies, up to 10 years old  Convictions, from date of disposition, release or parole, up to 7 years old (unless full pardon granted)  But note the restrictions imposed by Labor Code section 432.7  Civil suits, judgments, unlawful detainer actions, paid tax liens, accounts placed for collection, and other adverse information, provided all less than 7 years old  Arrests, indictments, or misdemeanor complaints may be d di f j dreported pending pronouncement of judgment  Exceptions to time frames above apply if governmental regulatory agency mandates that the employer review older i f ti 31 information
  32. 32. Taking Adverse Action Based on Report  Under ICRAA must advise the applicant/employee if Under ICRAA, must advise the applicant/employee if employment is denied under circumstances in which a report has been obtained and provide the name and address of the CRA that made the reportCRA that made the report  NOTE: If an adverse employment action is taken, the employer must provide copy of the report to the applicant/employee pursuant to the FCRA before taking anyapplicant/employee pursuant to the FCRA before taking any adverse action, regardless of whether the box is checked under Cal. ICRAA. The employer must also provide a description in writing of the rights of the consumer under thep g g FCRA. (Usually provided by the CRA along with copy of the report) 32
  33. 33. Employer Searches Public Records On Its Own  Under ICRAA, even if employer conducts own in-houseUnder ICRAA, even if employer conducts own in house investigation without using CRA, employer still has to provide applicant or employee with info regarding certain “public records” accessed, obtained, or used in connection with employment purposes, whether received in written or oral form  “Records documenting an arrest, indictment, conviction,g civil judicial action, tax lien, or outstanding judgment”  Employer shall provide “waiver” box on application or other form  if checked, then do not need to provide copy of public records to applicant/employee If not checked then must provide copy of public records 33  If not checked, then must provide copy of public records within 7 days after receipt of information
  34. 34. Employer Searches of Public Records (Cont.)  If information is obtained as a result of suspicion of If information is obtained as a result of suspicion of wrongdoing or misconduct, employer may withhold the public records information until the investigation is completed (and does not need to provide if the employee had waived his/herdoes not need to provide if the employee had waived his/her rights under the “opt out” waiver box)  If adverse action is taken, a copy of the public records obtained or used must be provided even if the applicant orobtained or used must be provided, even if the applicant or employee checked the “waiver” box, and this applies even for investigations of misconduct  DO NOT have to provide employee with work referencesDO NOT have to provide employee with work references obtained directly by employer without the use of CRA 34
  35. 35. ICRAA Exception for Investigations Regarding Misconduct or Wrongdoing  Under ICRAA employer does NOT have to first notify employee or Under ICRAA, employer does NOT have to first notify employee or obtain consent if a third party CRA has been hired to investigate suspicion of misconduct or wrongdoing by the employee (such as harassment, theft, etc.)harassment, theft, etc.)  Effective March 31, 2004, the FCRA was also amended to exclude from the FCRA disclosure and employee authorization requirements any communications made to an employer inq y p y connection with an investigation of--  “(i) suspected misconduct relating to employment; or  (ii) compliance with Federal State or local laws and(ii) compliance with Federal, State, or local laws and regulations, the rules of a self-regulatory organization, or any preexisting written policies of the employer;”  This exception does not apply to “credit” related inquiries 35 This exception does not apply to credit related inquiries  If “adverse action” is taken, then certain info must be provided
  36. 36. Remedies for Violation of ICRAA  Actual damages or $10 000 whichever is greater Actual damages, or $10,000, whichever is greater  Costs and reasonable attorneys fees  Punitive damages, if court finds violation was grossly li t illf lnegligent or willful  No liability if violation resulted in more favorable investigative consumer report  Statute of limitations is 2 years  No “double liability”: if applicant or employee has brought suit against employer for violation of Fair Credit Reporting Actg y g (“FCRA”), employer is not subject to suit under ICRAA for same acts constituting violation under FCRA 36
  37. 37. CA Law Governing Use of Credit Reports in Employment  Credit reports (“credit worthiness, credit standing, or credit capacity”) are not considered “investigative consumer reports” under CA law, and are excluded from ICRAA  Credit reports obtained for employment purposes in CA are governed by the Consumer Credit Reporting Agencies Act (CCRAA) and now also by Labor Code section 1024.5  Employer must first provide a written notice that a report will be used and the source of the report (CRA), and have a box to check for the person to receive a copy of the credit report 37
  38. 38. Contents of Report Under CCRAA  Generally contains “credit scores” and other similar “public Generally, contains credit scores and other similar public record” information as provided under ICRAA (bankruptcies, civil suits and judgments, convictions, accounts placed in collection etc ) as long as no more than 7 years old (exceptcollection, etc.) as long as no more than 7 years old (except bankruptcies, which may be 10 years old)  Cannot contain information about the age, marital status, race color or creed of the applicant or employeerace, color, or creed of the applicant or employee  Cannot contain any medical information about the person 38
  39. 39. Adverse Action Under CCRA  If adverse action is taken employer must: If adverse action is taken, employer must:  Provide written notice  Provide name, address, telephone number of agency l i th t (800 # if ti l CRA)supplying the report (800 # if national CRA)  State the adverse decision was based in whole or in part on information contained in the report  Provide a notice telling the applicant or employee that he/she has the right to obtain a copy of the report within 60 days after learning of the adverse action AND telling the li t h / h h i ht t di t th f thapplicant he/she has a right to dispute the accuracy of the information 39
  40. 40. Remedies Under CCRA  Negligent violation: actual damages including court costs Negligent violation: actual damages, including court costs, lost wages, attorneys fees, pain and suffering  Willful violation: same as negligent violation, and punitive damages of $100 $5 000 for each violation in the court’sdamages of $100-$5,000 for each violation in the court s discretion, except punitive damages for class actions is in court’s discretion  Obtaining information under false pretenses or knowingly Obtaining information under false pretenses or knowingly without permissible purpose: same as negligent violation but a minimum of $2,500  Injunctive relief Injunctive relief  Statute of limitations: 2 years, but not more than 7 years after liability could have arisen (or 2 years after plaintiff discovers willful misrepresentation by defendant affecting liability of 40 willful misrepresentation by defendant affecting liability of defendant
  41. 41. Inaccuracies of Credit Reports According to 1998 study conducted by US Public Interest Research Group (PIRG):  70% of credit reports contain some kind of error  29% of credit reports contained serious errors that could result in denial of credit or employment  20% of credit reports were missing creditworthiness information th t ld h i t d i bt i i ditthat would have assisted consumer in obtaining credit 41
  42. 42. Federal Law: Fair Credit Reporting Act (“FCRA”)  Unlike CA the FCRA includes credit as well as other Unlike CA, the FCRA includes credit as well as other investigative consumer reports in one Act  Has separate requirements for “investigative consumer reports” which are the product of a third party who is hired toreports which are the product of a third party who is hired to conduct interviews concerning the person’s character, general reputation, and mode of living 42
  43. 43. FCRA Requirements  Similar to ICRAA: Similar to ICRAA:  Requires separate written disclosure to applicants or employees (i.e., not part of standard form application)  Requires separate written consent (may be combined with notice)  Requires the employer to certify to the consumer reportingRequires the employer to certify to the consumer reporting agency (“CRA”) that it will comply with FCRA 43
  44. 44. Other Purposes for Obtaining Reports  Extend credit  Business transaction initiated by consumer  Application for insurance  Government security clearances  At consumer requestq  For government officials (eligibility for license or similar benefit, in connection with child support payments, government sponsored individually billed travel cards, ing p y , connection with failed financial institution by FDIC or NCUA) 44
  45. 45. Use of Consumer Report Under FCRA by Employer If adverse action is contemplated, the employer must provide a written pre-adverse action notice containing:  Statement that adverse action is contemplatedStatement that adverse action is contemplated  Name, address, and telephone number of CRA providing the report (800 number if national CRA)  Statement that CRA is not responsible for any adverse Statement that CRA is not responsible for any adverse action  Statement of the applicant or employee’s right to obtain a copy of the report within 60 dayscopy of the report within 60 days  Statement summarizing the employee or applicant’s right to dispute the information contained in the report 45
  46. 46. New Revised FCRA Summary of Rights  August 27, 2010 FTC issued proposed revised Summary of Rights, Furnisher Notice, and User Notice, located in Federal Register, Volume 75, No. 52655  Public comment period supposedly closed on September 21, 2010  FTC turned over their proposed rule to the Consumerp p Financial Protection Bureau (CFPB), and, to date, no further action has been taken on the proposed rule 46
  47. 47. Highlights of Changes to Summary of Rights  On July 1, 2009, FTC issued the Furnisher Direct Dispute Rule, which became effective on July 1, 2010 P i t i f thi R l l h d i ht t Prior to issuance of this Rule, consumers only had a right to dispute accuracy of information contained in a report with the CRA who issued the report Si J l 1 2010 h th dditi l i ht t Since July 1, 2010, consumers have the additional right to dispute the accuracy of information with the furnisher of the information 47
  48. 48. Highlights of Changes to Summary of Rights (cont.)  Contains reference directing consumers to FTC’s website for further information concerning their rights t di t i f tito dispute information  Changes format, reorders information  Deletes unnecessary information, such as list of federal agencies responsible for enforcing FCRA (information is not required by FCRA, already provided by CRAs, and is contained on FTC’s ebsite)website) 48
  49. 49. Furnisher Obligations Under New Rule  Notice must reflect right of consumer to dispute accuracy of information directly with furnisher  Notice format and verbiage changed for clarity ease of Notice format and verbiage changed for clarity, ease of understanding  Furnisher obligated to develop policies and procedures to ensure accuracy and integrity of information furnished toy g y CRAs 49
  50. 50. User Obligations Under New Rules  Notice must reflect new duties imposed by rules finalized under the FACT Act, including Risk-Based Pricing Rule (applicable to users extending credit to consumers under less favorable terms than it offers to others)  Under the Address Discrepancy Rule (effective January 1, 2008), if CRA notifies user of consumer address discrepancy, user must verify the report relates to the correct consumer and must implement i t d f ifi tiappropriate procedures for verification process 50
  51. 51. User Obligations Under New Rules (cont.)  Must provide CRA with information as to when an account delinquency began  Must state whether an account closed at the request of the consumer or the creditor  If notified by CRA that negative information provided is result of identity theft, must have procedures to respond and to not supply the information again  If notified by consumer that information supplied is result of identity theft, cannot supply that information again unless/until consumer notifies furnisher that the information is correct 51
  52. 52. User Obligations Under New Rules (cont.)  Users who verify the address and regularly furnish information to CRAs have additional obligations  Financial institutions which extend credit and regularlya c a st tut o s c e te d c ed t a d egu a y supply information to CRA must notify consumer in writing whenever supplying negative information to CRA  Under Medical Information Rules (effective April 1, 2006), if( p , ), furnisher’s primary business is medical services, products or devices, must notify CRA that furnisher is medical information furnisher and consumer must give informed consent (disclosure of scope, purpose) unless for insurance transaction 52
  53. 53. Adverse Action Under FCRA  Once a decision is made to take adverse action, the employer must send an adverse action notice containing most of the same information as the pre-adverse action notice (copy of th t d t b f i h d if it l d f i h d tthe report need not be furnished if it was already furnished to the employee in connection with the pre-adverse action notice) C ti FCRA i l t id bl Caution: FCRA requires employers to provide reasonable opportunity for employees or applicants to remedy or correct information in a report after providing the pre-adverse action notice Period of time may vary depending on circumstancesnotice. Period of time may vary depending on circumstances, but period of 5 business days has been held in many instances to be “reasonable.” 53
  54. 54. Investigations Pursuant to Suspicion of Wrongdoing or Misconduct Under FCRA Communication is not a “consumer report” under FCRA if:  Report obtained as part of investigation by employer or its agent based on suspicion of wrongdoing or misconduct byagent based on suspicion of wrongdoing or misconduct by the employee  Investigation not for purpose of determining the employee’s creditworthiness or capacityemployee s creditworthiness or capacity  After taking adverse action against the employee based in whole or in part on the information so obtained, the employer provides the employee with a summary of theemployer provides the employee with a summary of the nature and substance of the communication, but need not disclose the source of the information 54
  55. 55. Proper Disposal of a Report Law imposes requirement to implement disposal practices that are reasonable and appropriate to prevent the unauthorized access to – or use of – information in a consumer report  Burn, pulverize, or shred papers containing such reports  PERMANENTLY delete from electronic files and back up storage any media containing consumer reportg y g p information  Contract with secure document disposal company (after conducting due diligence) and store information in lockedg g ) facility with limited access until it can be disposed of 55
  56. 56. Remedies Under FCRA F Willf l N liFor Willful Noncompliance  Any actual damages sustained, or damages of not less than $100 and not more than $1,000  Punitive damages allowed by the court  Costs and reasonable attorneys fees For Negligent Noncomplianceg g p  Any actual damages sustained  Costs and reasonable attorneys fees 56
  57. 57. Best Practices to Minimize Liabilities in Obtaining and Using Consumer Reports  Engage services of reputable, known CRA  Ensure CRA and employer mutually certify compliance with applicable law; ensure CRA selected is familiar with and complies with state laws, not just FCRA  Review current forms and ensure the Company has, and regularly uses, a separate disclosure/consent form that contains all required disclosures under ICRAA, CCRA, and FCRA; if they have not been reviewed in the last 2-3 years by legal counsel, it’s time to have them reviewed, as changes to the law or regulations have occurred as recently as 2011the law or regulations have occurred as recently as 2011  Ensure you have a Pre-Adverse Action notice form, and an Adverse Action Notice form 57
  58. 58. Best Practices to Minimize Liabilities in Obtaining and Using Consumer Reports (Cont.)  Ensure employees who will be responsible for dealing with background checks and related issues are properly trained and update that training at least annually  Ensure that all decisions to take adverse action are reviewed by the proper personnel and/or legal counsel before taking the action 58
  59. 59. Company’s Use of Internet Sources S i l t ki it (F b k M S t )Social networking sites (Facebook.com, MySpace.com, etc.), blogging pages are sometimes sources of information to which employers might not otherwise have access – These are neither “public records” nor CRAspublic records nor CRAs  BUT be wary that you cannot prove who posted or authorized the information (spoofing occurs, and posting can occur without the knowledge or consent of the personcan occur without the knowledge or consent of the person who owns the page)  Information on these sites, however, can provide useful information if work related on which the employer caninformation, if work-related, on which the employer can question or confront the employee 59
  60. 60. Beware of New Mobile Apps In February 2012, the FTC warned markets of 6 mobile apps that the apps may violate FCRA:  Everify Inc (Police Records app) Everify, Inc. (Police Records app)  InfoPay, Inc. (Criminal Pages app)  Intelligator, Inc. (Background Checks, Criminal Records S h I ti t d L t A P l S h dSearch, Investigate and Locate Anyone, People Search and Investigator People using mobile apps for purposes covered either by FCRA or t t CCRA ICCRAstate CCRA or ICCRA 60
  61. 61. Gray Areas  What if there is information contained in a criminal history that What if there is information contained in a criminal history that is not technically a conviction but leads you to believe the person might be a “bad seed”, and you no longer wish to hire the person?the person?  What if an indictment is unsealed shortly after you’ve hired an employee who passed the background check with flying colors?colors?  When in the hiring process should you conduct the background check? 61
  62. 62. Special Industry Rules and Considerations S i l l d ti l f t i i d t i ithSpecial rules and exceptions apply for certain industries with respect to conducting background checks, including:  Financial institutions  NASD Securities Industry  Payment Card Industry, Data Security Standard  Hospitals and health facilitiesp 62
  63. 63. Financial Institutions  Federal Deposit Insurance Act prohibits an insured from Federal Deposit Insurance Act prohibits an insured from employing individuals who have been convicted of any criminal offense involving dishonesty, breach of trust, or money launderingmoney laundering  Insured has duty to make a reasonable inquiry as to the applicant’s history, including criminal convictions  For FDIC banks 12 U S C §1829 mandates inquiries about For FDIC banks, 12 U.S.C. §1829 mandates inquiries about pretrial diversion or similar programs in connection with a prosecution for any offense involving dishonesty, breach of trust or money laundering – exception to Labor Code § 432.7trust or money laundering exception to Labor Code § 432.7 63
  64. 64. Financial Institutions (Cont.)  Special exception also applies to banks and savings Special exception also applies to banks and savings associations under Cal. Financial Code §6525 and other provisions (condition of granting certain licenses, for example) with respect to use of fingerprints to check criminal recordswith respect to use of fingerprints to check criminal records with authorities, which would otherwise be prohibited by Labor Code § 1051  Covered financial institutions may provide fingerprints toCovered financial institutions may provide fingerprints to authorities to learn about crimes involving robbery, burglary, theft, embezzlement, fraud, forgery, bookmaking, receipt of stolen property, counterfeiting, or crimes involving checks,p p y, g, g , credit cards or use of computers 64
  65. 65. NASD Securities Industry  NASD Conduct Rule 3010(e) requires members to investigate NASD Conduct Rule 3010(e) requires members to investigate “the good character, business repute, qualifications, and experience of any person”; includes reviewing U-5  NASD Conduct Rule 3070 requires member to report NASD Conduct Rule 3070 requires member to report association with person who is subject to a “statutory disqualification” 65
  66. 66. Note on PCI DSS  Acronym for Payment Card Industry Data Security Standard Acronym for Payment Card Industry Data Security Standard  Started in 2005 by consortium of major players in payment card industry C t d t d d i i d h t t Created common standard requiring covered merchants to comply with 12-step standard  Affects covered entities employing employees who have t t d i f ti f taccess to payment card information of customers 66
  67. 67. PCI DSS Requirement Applicable to Employment  “12 7 Screen potential employees to minimize the risk of 12.7 Screen potential employees to minimize the risk of attacks from internal sources. For those employees such as store cashiers who only have access to one card number at a time when facilitating a transaction this requirement is atime when facilitating a transaction, this requirement is a recommendation only.”  12.7 “Inquire of Human Resource department management and verify that background checks are conducted (within theand verify that background checks are conducted (within the constraints of local laws) on potential employees who will have access to cardholder data or the cardholder data environment. (Examples of background checks include pre-( p g p employment, criminal, credit history, and reference checks).” 67
  68. 68. Hospitals and Health Facilities An exception to Labor Code § 432 7 regarding not asking aboutAn exception to Labor Code § 432.7 regarding not asking about arrests is provided for health facilities:  With regard to an applicant for a position with regular t ti t t di l t d tiaccess to patients, to disclose an arrest under any section specified in Penal Code § 290 (Registration of Sex Offenders) With d t li t f iti ith t With regard to an applicant for a position with access to drugs and medications, to disclose an arrest under any section specified in Health & Safety Code § 11590 (Registration of Controlled Substance Offenders)(Registration of Controlled Substance Offenders) 68
  69. 69. Independent Schools  Education Code section 44237 mandates all non credentialed Education Code section 44237 mandates all non-credentialed personnel who will be engaged by the school and have interaction with minor students submit to a DOJ fingerprint background check before being permitted to workbackground check before being permitted to work  “Employment” is defined broadly to include those whose services the school intends to engage  Outsourcing positions will not alleviate the obligation to conduct the DOJ checks  Education Code section 33190 requires annual reporting tog the state, including reporting on Education Code section 44237 compliance 69
  70. 70. Questions? 70

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