Background Checks: Legal Information for Small Business Owners

Posted by on March 21, 2012 in Employee Background Checks [ 2 Comments ]

Employee background checks are an important part of the hiring process for any small business owner. After all, it’s a matter of protecting yourself and your company from any employees or individuals who may not be the right fit for your business. Employee background checks are of particular importance for those positions that are trusted with a high level of secret information in industries such as finance or government, or are trusted with delicate populations in education, non-profit or healthcare settings.

Though you may be tempted to do a quick Google search for the prospective employee’s name and call it a day, you should consider this before emailing the offer letter: One study recently found that 50% of all reference checks done on prospective employees found discrepancies between the information the job applicant provided and what the source reported.

The Right Way

When it comes to conducting employment background screenings, the best policy is one of full disclosure: inform the prospective employee that you plan to perform an online search. The Fair Credit Reporting Act is the most important document governing background searches. This act spells out everything you’re allowed to look into, including:

  • Employment references & credential verification
  • Character references
  • Gaps in employment history
  • Credit history & bankruptcy
  • Criminal & court history
  • Drug tests

Other searches that look into sex offender registries and Patriot Act searches are becoming more common these days as well.

The FCRA requires that you get written permission from the candidate before you investigate anything that may be part of what is called a “consumer report”; any information communicated by a consumer reporting agency that reflects his or her credit standing, character, reputation, credit worthiness, etc. This information is gathered from credit reporting agencies, which are creditors (credit card companies, auto finance companies, banking institutions), employers, collection agencies, and state or municipal courts.

Small businesses are more likely than large companies to take on an employment screening themselves, as opposed to outsourcing it to a private company. If you plan to undertake the background check yourself, you must be aware of the regulations, procedures, and policies that you must comply with in order to perform a legal background search.

The biggest policy that you must legally abide by is this: you must notify the prospective employee that you plan to look into their consumer report.

The Wrong Way

The absolute wrong way to go about investigating the credit, criminal, and consumer report history of your candidate is to pull any and all information you can without their explicit permission. Despite the laws clearly noting the illegality of such actions, there has still been an increase in allegations of illegal background checks in the last few years.

In order to play by the rules, you may also want to reconsider using social networks and online searches to look into your future employees. This activity hasn’t been deemed illegal, but the practice of using sites like Facebook or search engines to run background screenings may violate the FCRA. The information you can get through these sites constitutes a consumer report, which can’t be used in your hiring decision unless it was consented to by your potential employee or you gathered it from a credit reporting agency.  Facebook, to date, has not been named a viable reporting agency.

Additionally, you can find out a lot about a person from their Facebook page, including information that is in a “protected category,” like race or religion. The law prohibits you from making employment decisions about this person based on this information. To cover yourself and ensure you’re not violating any privacy laws, you might want to develop a written document that outlines the collection of social media information and the expectations you, as an employer, have on what online actions you will deem inappropriate.

To be consistent, and in compliance with FCRA, if you do uncover something that doesn’t sit well with you and gives you reason enough not to employ this person, you are required to give notice to the applicant that their consumer report was reviewed, give them a copy of the report, and provide them the FTC’s A Summary of Rights Under the Fair Credit Reporting Act. Then, give them any other government-provided information on their rights now that you’ve made the decision not to hire them.

Also, beware if you decide to search your potential employee’s history through a database search (such as through KnowX or USSearch.com) that these compilations of aggregated data are often incomplete or outdated. You might consider this information as reason to conduct a full-on background search, but FCRA guidelines wouldn’t allow you to not hire an applicant based on the results of these public record database sites.

Overall, if you look into a person’s history on your own, instead of getting the help of a private company, understand that your checks could unearth information that is irrelevant, taken out of context, or completely inaccurate. Remember: the cost of a bad hire may just be worth the initial up-front investment of working with a third party.

For more information, see our guide on how to background check.

Photo source: debtloanrate.com, marketplace.org


2 thoughts on “Background Checks: Legal Information for Small Business Owners



  1. avatarXilium Assistant

    If using Facebook for checking an applicant’s background violates the FCRA, then there will be millions of violators around the globe. We really can’t blame hiring managers if they resort to using Facebook. After all, the world now is all about getting things done in a snap, and Facebook allows us to know someone in just a snap.


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