What Employers Need to Know About Background Checks

When hiring someone into your company, you vet them for their experience and ability to present themselves professionally. You verify their expertise and skills first by absorbing their resume and then getting acquainted in one or more interviews. Most hiring managers have a good sense of people and can feel pretty confident about the personal qualities, skill set and cultural fit to the company. Nonetheless, taking someone at face value can be risky. A background check should be a policy routine; and all offers made by the company should be contingent on passing a background check.

Cost of Hiring

A background check is crucial for many reasons. The cost of recruiting and hiring a new person is expensive; estimates range at 1.5 to 5 times the annual salary. Think of the staff time involved, the recruiting fees or internal HR department costs, advertising, travel and relocation expenses, training costs and time. These are pretty standard costs, but they are often not calculated out.

If you hire the wrong person, you will have to start again and you will potentially face additional costs such as legal fees, severance pay, and loss of intellectual property. Having to separate yourself from a bad hire may cause the company to miss deadlines, cause unnecessary distractions, lower productivity, lost sales opportunities, and generally disrupt business. A bad hire risks damaging the morale of current staff, clients and other stakeholders.

Negligent Hiring

In a worst case scenario, you may face a lawsuit for “negligent hiring”. Neglecting to verify person’s history to rule out theft or embezzlement; drug or alcohol use; falsification of licenses; employment history; and educational certifications can be perilous. If a third party is injured in some way by your employee and brings a case against you for violating the “duty of care” in hiring, you face escalating legal and human costs, not to mention legal liability.

What’s in a background check?

Not all background checks are the same; there are various types of background checks. What you need will depend on the company and the position. Background checks may include: a credit check, a criminal background check, a reference check, and independent verification of employment or education. Credit and criminal background checks should be done by a third party vendor. Reference checks and independent verification can be done internally or by a third party.

Credit and Criminal Background Checks

The Fair Credit Reporting Act governs credit and criminal background data whether you do it yourself or through a third party vendor. The FCRA requires advanced notification to the applicant and specific documented authorization; employing a stand-alone document acknowledging and authorizing the check is highly recommended.

You should have a credit check only where relevant to the job or company. A financial services company may employ them widely due to the nature of the business. Certain roles require the handling of money, client’s financial information, or the company’s finances, so a credit check is relevant.

Performing a criminal check will also depend on the job description and the company. Certainly you would check the driving record of an employee who will be driving for the company. Investigating the criminal background of a property manager or care giver who enters client’s homes is relevant. Checking for theft or violent crimes to ensure the safety of the workplace and clients is considered a “duty of care” in hiring. If you are sued by a third party because of the action of an employee, and there is something in the employee’s past that was easily discoverable through a simple background check, you risk losing a suit of “negligent hiring”. This has also been applied to the hiring of independent contractors.

All information contained in a credit or criminal background check may not be material, for example you should seek to obtain only the last 7 years of data, and you should exclude history of bankruptcy or a single incident of wage garnishment. Determine and specify what data is actually provided to you by your vendor in advance.

The Equal Employment Opportunity Commission (EEOC) advises that you only look at convictions, not arrests, and only convictions that are relevant to the job description. The EEOC provides guidelines on their website.

The FCRA governs the use of the credit report. If there is negative data that comes back, and you choose to take “adverse action” (i.e. choose to pass on their candidacy) on the basis of this negative data, you have some procedural steps you must assure. You must provide the applicant with a copy of the consumer report to the applicant. It is recommended that the contact information for the credit reporting agency used be provided along with a copy of the “Summary of Your Rights” document from the Federal Trade Commission. You must also notify the applicant/employee that they have the right to contest the accuracy of the report, and provide a period of time in which the applicant can challenge the report data. The hiring process must be suspended during this time. As this is inconvenient, it would be wise to have a policy in place and consistently apply it.

Reference Checks and Independent Verification

Checking references should always be done. It is a good idea to obtain contact information independently, i.e. look up the number in the phone book, do a search on the internet, call the company and ask for the reference. When confirming a reference, there is a duty of honesty. This does not mean that a reference giver is obliged to disclose negative information, but they are not allowed to misrepresent an employee’s work history either.

Independent verification of jobs or education can be quite simple. An internet search may show the list of graduating degree holders in a given year, or a call to the school can confirm that a specific degree was awarded.

Applications should include questions. If there is negative data in the background check and the applicant lied on the application, then the adverse decision is based on the misleading answer or dishonesty of the applicant and not the actual negative data.


Federal and State legislation on background checks changes. Currently, only Hawaii, Illinois, Oregon, and Washington have laws limiting or prohibiting credit checks by employers. However 18 states have proposed legislation on the use of credit report data of job applicants and employees for employment screening background checks.

A proposed bill HR 3149 would alter the rules. The bill has been opposed by various industry groups but it is co-signed by 56 representatives. You can follow the status of HR 3149 at govtrack.us


Federal Trade Commission “Summary of Your Rights”

Equal Employment Opportunity Commission

HR 3149 status on govtrack.us

18 US States Consider Legislation to Limit Credit Checks for Employment Screening Background Checks

Employer Resources on the Redfish Technology Site