Background Checks White Paper

Pre-Employment Background Investigations Often, employers are interested in obtaining information regarding the background of prospective employees. A background investigation may cover a variety of areas, depending on an employer’s specific concerns. A background investigation is not a guarantee but, depending on the job, can assist an employer in making an offer of employment. There are numerous companies that specialize in pre-employment background screening. Generally, these companies are not responsible for the results, or incorrect or incomplete information that they receive from providers. Further, the manner and extent of a background investigation is subject to the discretion of these companies, unless the employer makes a request for specific information. The most common types of investigations, and the legal issues related to each, are set forth below. Keep in mind that a release is needed from each applicant to obtain this information, and in some cases two separate releases are necessary. Drug and Alcohol Screening Virtually every employer explicitly prohibits the use, possession, distribution or sale of drugs or alcohol in any work setting, as well as the misuse of prescription or over-the-counter drugs. Nonetheless, the federal government has reported that 73% of current illegal drug users are employed. Thus, many companies wish to go further and conduct pre-employment drug and alcohol screening. Screening may be by blood draw, urine analysis (sometimes combined with a breath/alcohol test), or hair follicle analysis. A blood test is the most invasive form of screening and is therefore more susceptible to invasion of privacy claims. It is also the most expensive for employers. Urine analysis is still the most common and most cost-effective form of screening. DISCLAIMER: Cooper & Walinski publishes this bulletin to provide information about new developments in the labor and employment industry. It is not intended as legal advice, nor is it a solicitation for prospective clients. If you are seeking legal advice, you should consult an attorney who is familiar with your particular circumstances. Use of the information contained in this bulletin will not establish an attorney-client relationship. Such a relationship can only be established to the extent an attorney at Cooper & Walinski expressly agrees to undertake the relationship. © Cooper & Walinski, LPA. May not reproduce without permission. All rights reserved. 1

Although subject to tampering, under carefully controlled procedures, it is generally very effective. Hair follicle testing is gaining in popularity. Unlike urine testing, hair follicle testing can detect drug use in the last 60-90 days. Hair testing gets its biggest advantage from the fact that the hair strand becomes a permanent record of drug use whereas urine is quickly excreted from the body. Hair follicle testing frequently identifies more drug users than does urine testing. However, it takes several days for the hair to grow out long enough to be included in a testing sample. Therefore, a hair follicle test is not appropriate for post-accident or probable cause testing. In these circumstances, urine testing is more appropriate. The following considerations should precede any decision to engage in pre-employment drug or alcohol testing: • The type of job. Some jobs (involving transportation or safety-sensitive positions) are particularly suited to this testing (in fact, testing is required by law for some positions before and during employment), and some (office work) are less so. Consider also whether employees are in positions where drug and alcohol abuse would be difficult to detect (employees who work at home, traveling salespersons, etc.). • Cost. Consider the number of applicants, turnover, and frequency of hiring. • Community. Job applicants who can't pass drug/alcohol tests tend to apply to companies that don't require workplace drug testing. You cannot afford to be the only employer in your community that does not test. But if most employers do not test, it may not be necessary. • Effectiveness. Prospective employees who are recreational drug users will generally be able to refrain from use prior to the time of the test, and the length of time that drugs/alcohol remain in the system is widely known. Therefore, employers may only effectively screen out seriously addicted or completely uninformed/unintelligent applicants (which may be sufficient to justify the testing for some employers). Drug / Alcohol Screening and the ADA The Americans with Disabilities Act (“ADA”) does not protect an employee or applicant who is currently engaging in the illegal use of drugs. 42 U.S.C. § 12114. © Cooper & Walinski, LPA. May not reproduce without permission. 2

The ADA prohibits medical examinations and certain medical inquiries prior to an offer of employment. An unlawful inquiry is one that is “likely to elicit information about a disability.” But an employer is permitted to ask questions directed at an applicant’s ability to perform job-related functions. Also, an employer is specifically permitted to conduct pre- employment drug and alcohol screening. In response to a positive drug test, employers may validate the results by asking about lawful drug use or possible explanations for the positive result other than the illegal use of drugs. Disability-related questions are still prohibited. Applicants who take drugs under medical supervision may not be required to disclose their medical condition before a conditional offer of employment has been given. Harrison v. Benchmark Electronics Huntsville, Inc., 2010 U.S. App. LEXIS 632 (11th Cir. 2010). Criminal Records Investigations This is widely used by employers, and the cost varies directly with the number of jurisdictions searched. Records may be searched on the federal level (often through fingerprinting), on individual state levels, and by county. An FBI records check covers criminal conduct throughout the United States, which is more accurate, but also more costly, more intrusive, and it may take longer to receive the results. Unfortunately, there is no country-wide system of compiling state records, and many states do not have centralized recordkeeping.1 As a result, an employer may need to pay for a search in all individual counties to complete a full statewide search. Even then, results are not guaranteed as the effectiveness of each county’s reporting and recording varies. Also, an applicant who has lived in a variety of jurisdictions 1 Some states are working to make such records more accessible to the public. For example, in February of 2003, the Ohio Department of Rehabilitation and Correction opened an online database for public access to the state’s criminal records. Also, the state’s various courts have made their records available to the public online. Although a county-by-county criminal records search may be required, the Ohio government now provides a more convenient and practical way of accessing criminal records from a number of sources. © Cooper & Walinski, LPA. May not reproduce without permission. 3

would require a search of every jurisdiction to be complete, and even then, crimes committed in other locations would not be included. Another important consideration is that federal law, and most states’ laws, prohibit consideration of past arrests. This is because minorities tend to be arrested at a disproportionate rate, and an arrest does not equate to guilt. Many criminal record providers include information on arrests anyway, and it is incumbent on the employer to show that no arrests were considered in making a hiring determination. Many states also prohibit any inquiry concerning convictions that have been expunged, or set forth a period of time after which a conviction may not be disqualifying. Some states expressly indentify convictions that preclude employment with access to certain vulnerable individuals (such as children or the elderly). Certain employers will need to take those prohibitions into account. Convictions should not in all cases disqualify applicants, however. Employers should consider the nature of the offense as compared to the job, the seriousness of the crime, and how recently it occurred. For example, hiring a forklift operator who had a conviction for shoplifting as a juvenile many years earlier is probably not a concern. On the other hand, any crime of theft or dishonesty, at any time, may be relevant when hiring a bookkeeper. Any type of physical abuse would probably preclude any caregiving position. An employer must consider the job and the specific information regarding a conviction individually, for every applicant. An employer may never consider arrest information, no matter how recent, how frequent, or how serious the allegation. Potential benefits of a criminal records investigation include: • Precluding employment may prevent harm to another individual, employee or customer. It also may protect the reputation of the employer by avoiding any negative publicity that could follow such an incident. © Cooper & Walinski, LPA. May not reproduce without permission. 4

• Conducting criminal background checks may provide the employer with a defense to subsequent claims of negligent hiring, breach of duty to protect or provide a safe work environment, or other causes of action. The employer may be able to assert that, by conducting the criminal background checks, it exercised reasonable care to prevent the harm. Potential risks of a criminal records investigation include: • Performing criminal background checks exposes the employer to potential liability for negligently performing the task and thereby facilitating the injury of a third party by an employee who was not properly screened or precluded from having access to the injured person. Having assumed the duty to perform the checks, in cases where no such duty existed, may expose the employer to liability for negligently performing or failing to perform that duty. Similarly, the employer may face claims and criticism for failing to warn others of a potentially dangerous employee. • The use of criminal background checks may unfairly impact minorities. • Obtaining a criminal background check response which reflects no convictions may create a false sense of security, given the questions surrounding the accuracy and completeness of the background checks, their limited scope, chance for errors, and variation of offenses by states. Each employer must weigh the potential risks and benefits. Example In El v. SEPTA, the plaintiff claimed that an employer’s hiring policy unnecessarily disqualified job applicants because of prior criminal convictions – a policy he argued had a disparate impact on minority applicants because they were more likely than white applicants to have a criminal record. The Court noted the Equal Employment Opportunity Commission’s (“EEOC”) policy that an applicant may be disqualified from a job on the basis of a previous conviction only if the employer takes into account: (1) the nature and gravity of the offense; (2) the time that has passed since the conviction and/or completion of the sentence; and (3) the nature of the job held or sought. However, the Court held that even a bright-line policy of disqualification can be consistent with business necessity (and therefore lawful) if it can distinguish between individual applicants that do and do not pose an unacceptable level of risk. The Court found that the employer’s policy of excluding all violent offenders was therefore consistent with business necessity. 479 F.3d 232 (3rd Cir. 2007). Financial / Credit Information Employers sometimes want to conduct credit investigations, but this is a very problematic area. The Federal Bankruptcy Act prohibits employment discrimination based on the fact that a © Cooper & Walinski, LPA. May not reproduce without permission. 5

person has been bankrupt, a debtor in bankruptcy, or is associated with someone who was bankrupt or a debtor in bankruptcy. Also, the EEOC has found that the refusal to hire an applicant because of poor credit status can be problematic because minorities and women tend to have poorer credit records and a lower socioeconomic status generally. For this reason, the EEOC views with suspicion any investigation into an applicant's financial background, including inquiries as to bankruptcy, car ownership, home ownership or wage garnishments, unless it is directly related to the position (e.g. auditor). Any inquiry regarding finances should be carefully conducted, in compliance with the law. This line of inquiry should only be considered if it is job-related. The first consideration as an employer, for any employment requirement (especially concerning credit or financial issues) is whether the requirement adversely affects a particular group. This is known as “disparate impact” (meaning that a particular group is excluded from employment at a higher rate than other groups). Because of the negative impact of credit requirements on minorities and women, it has been relatively simple for litigants to demonstrate adverse impact. This is sometimes done with only a simple citation to census statistics in the United States which demonstrate that minority groups have a larger percentage of persons below the poverty level than whites. Once an assessment is made that a certain requirement is adverse or “disparate,” an employer would then have the burden of showing that the requirement has a “manifest relationship to employment.” In other words, an employer must demonstrate a business necessity to the workplace. A business necessity can be demonstrated only if the requirement is predictive or significantly correlated with important elements of work behavior which are relevant to the successful and efficient performance of the job(s) at issue. © Cooper & Walinski, LPA. May not reproduce without permission. 6

To do this, an employer would need to analyze the job(s) at issue, considering the actual tasks performed. The employer would next need to “validate” the credit or financial requirement, ensuring that it was necessary for success on the job. Even if an employer determines that this is the case, the requirement could still be unlawful if it is determined that a comparable requirement would be valid and have a less adverse impact. This type of requirement is more likely to be upheld if the position responsibilities include: • discretion or judgment in extending credit, lending authority; • review or supervision of collection and/or workout functions; • access or ability to control large dollar amounts or wire transfers; and • significant discretion or authority in other financial matters. It is least likely to be upheld for entry level positions. And, any employment decision should consider the reasons and circumstances for the credit or financial shortcoming (i.e., previous good credit, subsequent divorce or medical situation). Examples In Wallace v. Debron Corp., the plaintiff was discharged after his wages were garnished for a second time within a twelve-month period. The defendant conceded that its facially neutral garnishment policy subjected a disproportionate number of blacks to discharge from employment. The court denied the defendant’s motion for summary judgment, holding that employers are prohibited from establishing policies with respect to successive garnishments which have a disparate impact on blacks. 494 F.2d 674 (8th Cir. 1974). Similarly, in Howard v. Continental Illinois Natl. Bank and Trust Co., the plaintiff alleged that she was not hired by a bank because of her poor credit rating. She argued that as a black woman, she belonged to classes that tend to be poor, and therefore have a higher probability of receiving a poor credit rating. The court agreed that, upon a proper showing, a plaintiff could establish that the use of credit ratings in hiring decisions could have an unlawful disparate impact on minority job applicants. Summary judgment was still proper, however, as the plaintiff failed to present statistical evidence that blacks and women were more likely to suffer from poor credit ratings. Also, the court deferred to the bank’s contention that its policy of requiring good credit ratings from certain employees was job-related. 1983 U.S. Dist. LEXIS 11923 (N.D. Ill. 1983). © Cooper & Walinski, LPA. May not reproduce without permission. 7

Other courts also require plaintiffs to present statistical evidence when making such a disparate impact argument. In Freeman v. Atlantic Refining & Marketing Corp., the plaintiff alleged that the defendant’s reliance on credit reports for hiring or promoting had a disparate impact on blacks. To make out a prima facie case, the court held that the plaintiff had to make a statistical presentation comparing the qualified persons in the labor market with the persons holding the jobs at issue. Here, the plaintiff had no evidence other than what he termed a “common sense” argument that the credit requirement disparately impacted blacks because blacks are generally poorer than whites and must therefore have more bad credit reports than whites. Without any evidence to support such a stereotype, the plaintiff could not meet his burden of proof. 1994 U.S. Dist. LEXIS 5345 (E.D. Pa. 1994). Releases for Criminal and Credit Investigations The Fair Credit Reporting Act (“FCRA”) regulates consumer reports, specifically those that are obtained by a current or prospective employer for employment purposes. A consumer credit report is defined in the FCRA as “any written, oral or other communication of any information by a consumer reporting agency bearing on a consumer’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living” used for employment purposes. Whereas a consumer credit report bears on a consumer’s credit worthiness, an investigative report provides information on the individual’s criminal background. Both types of reports are treated the same under the FCRA and are collectively referred to as “consumer reports.” The information contained in these reports comes from consumer reporting agencies, which are agencies that regularly engage in the practice of “assembling or evaluating consumer credit information or other information on consumers for the purpose of furnishing consumer reports to third parties…” Employers often base decisions to hire, promote or retain employees or applicants on the information contained in the consumer reports. The FCRA requires employers to comply with © Cooper & Walinski, LPA. May not reproduce without permission. 8

certain requirements prior to obtaining the reports or before taking any adverse employment action based on the report (such as not hiring). Obtaining a Consumer Report To fully comply with the law, employers must do the following to obtain a consumer report from a consumer reporting agency: • Provide a clear and conspicuous separate disclosure to the applicant/employee that a consumer report may be obtained for employment purposes; • The disclosure must be made in writing before the report is procured. This can be done at the time of application or at a later time before the report is actually requested; and • The applicant or employee must authorize the report in writing by signing a release before the report is procured. The disclosure and release may be one document, but the disclosure must be separate from the application form. Nothing else can be included in the disclosure and release document. A consumer reporting agency cannot furnish a report to an employer until the employer certifies that it has given the required notice and received written authorization from the employee or applicant to obtain the report. The employer must also certify to the agency that it will comply with the requirements if it subsequently uses the consumer report as a basis for adverse action against the employee/applicant. Example In Kelchner v. Sycamore Manor Health Ctr., the plaintiff alleged a violation of the FCRA after she was terminated for failing to sign a blanket authorization entitling the employer to obtain her credit report in the future. The court noted that under the FCRA, an employer may obtain a credit report for employment purposes if certain conditions are first met. The court denied plaintiff’s claim, holding that the plain language of the FCRA authorizes the employer to obtain an employee’s written authorization at “any time” during the employment relationship. The court also found that the FCRA does not prohibit an employer from taking adverse action against an employee or applicant who refuses to authorize the employer to procure a consumer report. 135 Fed. Appx. 499 (3rd Cir. 2005). © Cooper & Walinski, LPA. May not reproduce without permission. 9

Adverse Action Before taking any adverse action (a decision not to hire, or any other decision adverse to the employee/applicant) based on the contents of the consumer report, the employer must: • Provide oral or written notice of the intended adverse action (written is the better option due to the protection and verification it provides); • Provide a copy of the report to the applicant/employee (this allows the consumer to check for inaccuracies in the report and to contact the agency to make the necessary corrections); • Provide a statement of the employee’s or applicant’s rights; • Provide the consumer reporting agency’s name, address, and telephone number (including an available toll-free number); and • Provide a statement that the consumer reporting agency did not make the decision to take the adverse action and is unable to provide specific reasons as to why the adverse action was taken. The Federal Trade Commission has stated in an advisory opinion that a period of five (5) business days is a reasonable amount of time between the notice of intended adverse action and the actual conduct. Contents of the Report Finally, the FCRA sets forth information which is no longer available or included in consumer reports: • Bankruptcy suits which are over ten (10) years old; • Suits or judgments which are over seven (7) years old or in which the statute of limitations has expired, whichever is longer; • Paid tax liens which, from the date of payment, antedate the report by more than seven (7) years; • Accounts placed for collection, which antedate the report by more than seven (7) years; and © Cooper & Walinski, LPA. May not reproduce without permission. 10

• Arrests, indictments or convictions which, from the date of disposition, release or parole, antedate the report by more than seven (7) years. These exemptions do not apply to an individual whose expected salary will be seventy-five thousand dollars ($75,000.00) or more. Employer Liability Any employer who willfully fails to comply with these requirements will be liable to the employee/applicant for actual damages, punitive damages, costs and attorneys’ fees. The FCRA limits “actual damages” to an amount not less than one hundred dollars ($100.00) and not more than one thousand dollars ($1,000.00). An employer who obtains a report under false pretenses or knowingly without a permissible purpose is liable to both the consumer reporting agency and the employee/applicant for the actual damages sustained or one thousand dollars ($1,000.00), whichever is greater. Example In Cassara v. DAC Services, Inc., the plaintiff brought suit under the FCRA alleging that the defendant failed to adopt appropriate procedures to ensure the accuracy of the reporting of plaintiff’s employment history in a DAC-prepared report furnished to prospective employers. The court held that if the plaintiff could prove that DAC failed to adopt reasonable procedures to eliminate systematic errors that it knew about, or should have reasonably been aware of, resulting from procedures followed by its member employees, and that this failure resulted in distribution of inaccurate reports that caused the plaintiff injury, then the defendant could be liable to the plaintiff in damages. 276 F.3d 1210 (10th Cir. 2002). Legal Actions And Other Protected Activity Most employers would likely be interested in knowing whether applicants have ever sued prior employers for any reason, or filed administrative claims, such as workers’ compensation claims. While this information is often a matter of public record, it is completely prohibited as part of any pre-employment inquiry. If employers or prospective employers become aware of © Cooper & Walinski, LPA. May not reproduce without permission. 11

this type of information, it must be completely disregarded. It must never be a part of a hiring decision. Past Education and Employment History One of the least expensive and most effective ways to screen applicants is to verify and investigate past education and employment history. Also, with a proper release, this is a line of inquiry with virtually no risk of liability. Obviously, a more senior-level position or a position of increased responsibility will justify a more in-depth inquiry. However, every prospective applicant’s reported education should be verified. In most cases, the verification is free, as it generally involves a phone call or fax and very little time. Although schools will usually not release student records due to confidentiality, they can release “directory information” which typically includes name, address, dates of attendance, degrees earned, and activities. It may also be possible to verify an applicant/employee’s standardized test scores. Even though an employer may not require a certain degree or test score for an employment position, most employers would be advised to avoid hiring an applicant who lied about his or her education history. It is said that the best predictor of future success is past performance. Employment history is also inexpensive to investigate, very effective, and virtually risk-free with a proper release. Even employers with very restrictive reference policies will often answer the question of whether they would rehire the applicant/employee. Also, specific questions about any incidents of violence in the workplace can be asked, and are probably relevant to all employers. Again, this line of inquiry will be more thorough for more senior positions and positions of more responsibility. But even an entry-level position merits verification of education and employment. © Cooper & Walinski, LPA. May not reproduce without permission. 12

Examples 1) Education History Employers may expose themselves to liability under the Age Discrimination in Employment Act (“ADEA”) if they require an education history simply as pretext to weed out applicants over a certain age. This was the plaintiff’s allegation in Cady v. Miss Paige, Ltd. In this case, the defendant employer defeated the plaintiff’s claim by providing a legitimate, non- discriminatory reason for requiring job applicants to include their high school graduation dates on its application form. Because high-school diplomas were required for the jobs in question, having applicants disclose their high school attendance dates facilitated the verification process. 2004 U.S. Dist. LEXIS 7613 (N.D. Ill. 2004). It is best, however, not to ask for an applicant’s date of graduation. It is generally unnecessary for verification purposes. 2) Employment History Verification of an applicant’s employment history is not only inexpensive, effective, and virtually risk-free, but a failure to do so could sometimes lead to a risk of employer liability for the applicant’s future acts. For example, in Griffin v. City of Opa-Locka, the plaintiff filed suit against a municipal employer alleging deliberate indifference for its failure to investigate the background of an employee that had sexually harassed the plaintiff. To impose liability on a government employer based on a hiring decision, a plaintiff must demonstrate that the entity disregarded a known or obvious consequence of hiring the applicant. Although a cursory check into the employee’s prior employment history would have alerted the City employer to prior complaints of sexual harassment, the City ignored its own policy and failed to conduct a background check. The court affirmed the trial court’s ruling that the City was properly liable for sexual harassment committed by the employee. 261 F.3d 1295 (11th Cir. 2001). Government Contractors’ Adverse Impact Analysis Requirement Government contractors face additional hurdles in utilizing any testing or other pre- employment selection procedures. The Uniform Guidelines on Employee Selection Procedures, 41 CFR 60-3.1, et seq. (the “Uniform Guidelines”) mandate that employers assess the impact of their selection procedures on the hiring, promotion, or other employment of members of any race, sex, or ethnic group. The Uniform Guidelines apply to tests and other selection procedures which are used as a basis for any employment decision. They require recordkeeping and analysis of employment decisions, better known as “adverse impact analysis.” An employer is required to keep records which will disclose the impact that its tests and other selection procedures have © Cooper & Walinski, LPA. May not reproduce without permission. 13

on employment opportunities of persons by identifiable race, sex and ethnicity. 41 CFR 60-3.4B. 80% Test The common initial test for adverse impact is the “80 percent” or “four-fifths rule.” The 80 percent rule merely establishes a numerical basis for drawing an initial inference of adverse impact and for requiring additional information and investigation. A selection rate for any race, sex, or ethnic group which is less than 80 percent of the rate for the group with the highest rate will generally be regarded as evidence of adverse impact. In such a case, further analysis is generally required using refined data and statistically valid tests. Standard Deviation Test When the 80 percent rule indicates a potential adverse impact, it is necessary to perform a test of statistical significance. The Standard Deviation Test, based on a level of statistical significance of two (2.0) or higher, is a method recognized by the Office of Federal Contract Compliance Programs (OFCCP) to indicate that systematic discrimination may be occurring unlikely by chance. Important Recordkeeping and Adverse Impact Analysis Considerations 1. Applicant. Based on court decisions, it is defensible to argue that an applicant is an individual who: (1) is minimally qualified for the job at issue; (2) applied for the opening in question; and (3) is considered by the contractor for the opening in question. For those individuals that apply electronically, the OFCCP recently defined the term “internet applicant.” To meet this definition, an individual must satisfy all of the following criteria: (1) The individual submits an expression of interest in employment through the Internet or related electronic means; (2) The company considers the individual for employment in a particular position; (3) The individual’s expression of interest indicates that he or she meets the basic qualifications for the position; and (4) The individual at no point in the recruitment process (prior to receiving an offer of employment) indicates that he or she no longer is interested in the position. 2. Tracking Applicants for a Specific Job Opening. The suggested practice is to always identify applicants in relation to a specific job opening. © Cooper & Walinski, LPA. May not reproduce without permission. 14

3. Applicant Self-Identification Form. To comply with the obligations to maintain a record of the gender, race, and ethnic background of each applicant, applicants should be provided a self-identification form that is separate from the application. The form should explain that the information is being requested for compliance purposes only and that neither the information provided nor the failure to provide information will be used in making employment decisions. © Cooper & Walinski, LPA. May not reproduce without permission. 15

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