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Rules for Conducting Employee Background Checks

Categories: Employment, Article

Rules for conducting an employee background check

During the hiring process, no doubt you try to verify the information on applicants' résumés to help weed out those who may be dishonest or unqualified. You probably ask references and previous employers about a candidate's competence, productivity and integrity. And you may call professional associations to confirm certifications and state agencies to confirm licenses.

These are basic screening steps for any new hire. Some employers do more extensive credit checks that might involve, for example, searching for criminal convictions, verifying Social Security numbers, ordering credit reports, inspecting motor-vehicle records and workers' compensation files, verifying military service, and interviewing neighbors.  We recomend that you use a qualified and reputable background checking company.

Liability for Negligent Hiring

But before you begin a background check, best you study the rules and then proceed cautiously. Federal and state statutes limit the kinds of information you may seek without an applicant's permission. The same statutes also restrict the ways you can use that information as a basis for rejecting a candidate. Violating these statutes can be just as damaging to your reputation and your bottom line as not conducting background checks at all. So you have to walk a narrow path between checking inadequately and checking too aggressively.

If you contract with an outside agency to conduct background checks, you still must know the law and ensure the agency complies - because in some cases you can be held liable for its negligence.

Federal Statutes

State statutes also may apply, but here are the three most important federal acts you must comply with when you conduct background checks:

  • Fair Credit Reporting Act of 1971,
  • Privacy Act of 1974, and
  • Americans With Disabilities Act of 1990.

You don't have to know everything about these acts. But you should be familiar with these important provisions relating to employee background checks:

Written authorization. You must obtain applicants' written authorization before you request their educational records (including transcripts, recommendations and financial-aid status), credit reports, medical records, or character investigations.

Medical records. Healthcare organizations can release medical records only if they relate to the employee's ability to perform specific job duties. But ask us to check HIPAA requirements.

School records. Some schools and colleges will release educational records only to a student or former student - not to an employer.

Military records. U.S. military branches may disclose a member's name, rank, salary, duty assignments, awards and duty status to an employer without the member's consent. But you usually need an applicant's consent to seek any other information - including disciplinary actions or character references.

Criminal records. State laws vary in allowing disclosure of information about criminal convictions. Most states require you to either notify an applicant or get his or her permission to conduct the search. Records of arrests that didn't result in conviction are generally not available to employers, unless an arrest relates to 1) job performance, or 2) related convictions or both. For employees who earn less than $75,000 annually, the government may not disclose criminal convictions or arrests older than seven years, and a private investigation agency that uncovers that information may not disclose it to an employer.

Other Requirements

Print each authorization form on a sheet separate from the employment application, and ask us for correct wording. In most cases, if applicants request, you must give them copies of any credit reports and character reports that you obtain from third parties. You must carefully word requests to a consumer-reporting agency or credit bureau for information about an employee or candidate.

You may not investigate job applicants randomly or based solely on whether they "seem suspicious." Doing so may appear discriminatory. The best policy is to consistently check all applicants for some positions - based on salary levels, job duties or other nonarbitrary criteria.


Let's look at what the statutes say about rejecting a candidate based on background information you uncover. If you take "adverse employment action" - that is, reject a candidate or fire an employee - based on a credit report or background check by a consumer-reporting agency, you must:

  • Notify the subject in writing of the reasons for your action,
  • Give the subject copies of the background information you obtained and the outside agency's name and address that conducted the background check,
  • Inform the subject that the outside agency played no role in making the decision and can't provide specific reasons for the action, and
  • Not base an adverse employment action solely on a candidate's criminal record, bankruptcy, disability or workers' compensation history unless it relates to the candidate's ability to adequately perform specific job duties.

We can advise you on these requirements.

Protect Yourself

Screening and investigating new employees isn't as simple as it used to be. But learning and abiding by the rules will help protect your business from allegations of negligent hiring, as well as from unqualified and disruptive employees. We'll be glad to provide more guidance on complying with the law.

Are You Liable for Your Contractors' and Distributors' Hiring Mistakes?

Sometimes, and for some kinds of positions - such as those involving entering customers' homes, security work, childcare, or processing confidential information - you should go beyond basic screening steps and conduct deeper background checks even in the case of independent contractors.

In fact, sometimes you are legally bound to dig deeper into a new employee's background. If you don't, you could be held liable for negligence if your new hire commits a crime, causes damage or hurts somebody while on the job.

Here's a case in point:

The Kirby Company makes vacuum cleaners and markets them through independent distributors. Kirby requires them to sell the product only door to door. The distributors in turn hire their own salespeople and call them "independent contractors."

After trying to sell a Kirby vacuum cleaner to a housewife, a salesman raped her in her Texas home in 1993. If the distributor had conducted a background check on the salesman when it hired him, it probably would have learned that he had previously received "deferred adjudication" in court for sexual misconduct.

The manufacturer didn't directly hire the salesman. But should it nevertheless be held responsible for his misconduct? The rape victim thought so, and filed civil charges against Kirby for its distributor's negligence. The victim argued that Kirby should have required the distributor to conduct background checks before hiring salespeople, because Kirby required in-home demonstrations as its distribution method and that method created significant risks to potential customers.

A civil court jury agreed with the victim and awarded her $160,000 in actual damages. The Texas Supreme Court upheld the verdict and the damage award.

The lesson: If you hire independent contractors or distributors, l) require them to conduct background checks on employees who get into potentially risky situations - such as entering customers' homes; 2) obtain appropriate insurance coverage; and 3) seek an indemnity from distributors and require them to have insurance coverage.

Founded in 1984, Phoenix law firm Jaburg Wilk offers extensive experience, diversity in practice areas and the ability to think like a business owner. We are an Arizona mid-sized AV rated law firm, the highest rating that a law firm can receive. Our attorneys, paralegals, and other support staff meet our clients' diverse legal needs and provide exceptional service through our 21 Fundamentals which comprise The JW Way.