Background checks have become standard precautions for employers in the hiring process. Job applicants’ criminal histories and credit records are available for review and consideration by prospective employers who follow proper procedures. Unquestionably, they can and do help employers avoid bad hiring decisions. A federal law, the Fair Credit Reporting Act ("FCRA"), establishes the steps an employer must take to lawfully obtain an applicant’s background report. The FCRA governs procurement of "consumer reports" for a myriad of reasons, one of which is "for employment purposes with respect to any consumer." For purposes of this article, we will only be considering those consumer reports obtained by prospective employers to discern information on job applicants, such as their criminal histories and credit records. The law also contains certain safeguards to protect these job applicants from adverse hiring decisions based on erroneous background reports.

A decision from the 9th Circuit Court of Appeals last month demonstrates how painful it can be for an employer to botch the FCRA’s requirements. In that case, which involved a subsidiary of oil field services company Schlumberger Ltd., the court decided an issue under the FCRA never before addressed by a federal appeals court. It held that the company violated the FCRA by including a liability waiver on its job application form which disclosed to the applicant that the company might obtain a background report on the applicant. The application form, which disclosed to the plaintiff the company’s ability to request a report on him, contained the following waiver, "I hereby discharge, release and indemnify prospective employer … from all liability and claims arising by reason of the use of this information that is false and untrue …."

The court found that the inclusion of this liability waiver on the form disclosing the employer’s ability to obtain a background report was a willful violation of the FCRA. As the court observed, the FCRA requires that the disclosure document consist "solely" of the disclosure. Consequently, the court concluded that the law "unambiguously" prohibits the insertion of a liability waiver in the same document as the disclosure. The company hired the plaintiff after obtaining his background report, and he was not harmed by the report or the waiver.  Nevertheless, the court held that he could proceed with his class action lawsuit based on this willful violation. The FCRA imposes penalties of $100 to $1000 per willful violation, and the potential damages for a class of several thousand job applicants who submitted the same flawed application form could be in the millions of dollars.

So, what are the lessons for employers? First, it is important to understand that this court decision does not ban all liability waivers from all employment application forms. Instead, it simply underscores the requirement of the FCRA that the document an employer gives a job applicant disclosing that it may request the applicant’s background report must contain nothing more than that disclosure. (There is one exception. The FCRA has been amended to allow the applicant’s consent to the prospective employer’s request for a background report to be on the same document as the disclosure.) Second, and most important, this case offers another reminder to employers of the importance of periodically having their employment forms and documents reviewed by labor and employment counsel. Employers have been known to modify their application forms, employee handbooks, etc., without the advice of counsel by cutting and pasting language they found in other employers’ documents. Who knows how many companies across the land mistakenly thought they were improving their job application disclosure forms by adding a liability waiver? Might you be one of them?

For more information, contact Wayne "Skip" Adams or another member of our Labor, Employment and Immigration practice.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.

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