Reference and Background Checks: New Requirements

The California Investigative Consumer Reporting Agencies Act (ICRA) and the Federal Fair Credit Reporting Act (FCRA) have always required prior written consent from an applicant or employee before an employer could have a third-party agency do a background, credit, or criminal records check. Effective January 1, 2002, the California Legislature added significant disclosure requirements to the ICRA, and attached hefty penalties for noncompliance. The reach of the amendments is currently subject to debate, but the amendments as enacted are potentially far-reaching. Any employer who conducts an employment reference check or other check, whether on applicants or employees, may now fall under the disclosure requirements of the ICRA. With this in mind, all California employers who conduct reference, employment, credit, or other background checks, must be aware of the change.

Before the Changes

Before the amendments, the federal and state laws required employers to obtain prior, written consent from an applicant or employee before having a third-party agency obtain a background, criminal records, or credit check. And, the employer was required to provide a copy of the report to the applicant or employee only if the employer relied on it to make an adverse decision, such as denial of employment or promotion, or termination.

The New Law

In addition to the changes below, the ICRA amended its definition of “consumer reports” to include checks that provide information of the individual's “character, general reputation, personal characteristics, or mode of living.” Employers who do background or reference checks that are more than just employment verifications are unquestionably governed by this law. This broad definition has been interpreted by some analysts as including employment reference checks, even if they are limited to job description, title, and dates of employment, because they might give information on an applicant's character, “personal characteristics” or “mode of living.” Since many employers conduct employment reference checks before hiring or promoting an individual, the new amendments could apply to a majority of employers.

Under the amendments to the ICRA, employers must:

• Get prior, written consent before checks are conducted, whether per formed in house by human resources or by a third-party agency.
• If using a third-party agency, certify to the agency that it made the required disclosures.
• Within three (3) days of requesting or compiling the report, provide written notice to the applicant or employee that a check is being done or has been requested. The name and address of the agency, and the nature and scope of the background check must be included.
• Provide a copy of the report(s) to the applicant or employee, either at a    meeting with the individual or within seven (7) days of the employer receiving the report, whichever is earlier. Provide a copy of the report regardless of whether the employer relies on the information to make a job determination.

The fine for violating the disclosure requirements was increased to $10,000 per individual plus attorneys' fees, from the prior fine of $2,500.

The only exception to the disclosure requirements is when an employee is suspected of wrongdoing or criminal activity. In that situation, the new law allows employers to conduct an investigation without first notifying the employee. While this is a welcomed addition to the ICRA, the federal law does not include this exception. Thus, an employer investigating a current employee suspected of wrongdoing may still have disclosure requirements under the federal law. Keep in mind, however, that the federal law only applies to third-party agency background checks, not in-house investigations. In sum, an employer may conduct an in-house investigation of suspected employee wrongdoing without making prior disclosures, but investigations by outside agencies will still require disclosure under the federal FCRA.

As stated above, the reach of this law to employment reference checks is still up to debate. The Legislature enacted these changes as part of the Anti-Identity Theft Bill, which was intended to alert individuals to false information contained in their personal records (which, in turn, will alert the individual to possible identity theft). The Legislature has stated an intention to pass a “clarifying” bill within the next few months that will clarify the extent to which this new law includes employment reference checks. It is questionable whether these amendments can be enforced against employers doing typical reference checks. Indeed, no Legislative Office or other authoritative body has stated that the amendments were intended to apply to such limited and widespread reference checks. Thus, the amendments should really only affect those employers who do more in-depth background checks, which include credit or criminal records checks.

Supreme Court Invalidates FMLA Regulation

The Family and Medical Leave Act (“FMLA”) guarantees qualifying employees twelve weeks of unpaid leave each year and encourages employers to adopt policies more generous than the required minimum. An FMLA-related regulation from the U.S. Department of Labor required employers to notify their employees in writing that medical leave taken would count against the twelve weeks guaranteed by the FMLA. Failure to comply automatically provided the employee with FMLA-leave in addition to leave-time already used by the employee. The U.S. Supreme Court recently invalidated the automatic extension of leave provided by that regulation.

In Ragsdale v. Wolverine Worldwide , plaintiff Ragsdale worked in a factory owned by defendant Wolverine Worldwide. Ragsdale was diagnosed with Hodgkin's Disease and was unable to work for an extended time. Wolverine's leave policy allowed for seven months of unpaid sick leave. Ragsdale did not work for seven months. During that time, her position was held open and Wolverine maintained her health benefits and paid her premiums. Wolverine did not notify Ragsdale that the seven months included her twelve weeks of FMLA leave.

At the end of the seven months, Ragsdale was not ready to return to work. She requested more leave time or permission to work part-time. Wolverine denied Ragsdale's requests and terminated her when she did not return. Ragsdale filed a lawsuit claiming she was entitled to an additional twelve weeks of leave because Wolverine had not notified her she was using her FMLA leave during her seven months off.

The FMLA provides relief to employees if their employer interferes with, restrains, or denies their FMLA rights, and the employee has been harmed by the violation. The Supreme Court held the Labor Department regulation that requires employers to notify employees they are using FMLA leave is invalid because it relieves employees of the burden of proving any real violation of their rights and harm resulting from that violation. Here, Ragsdale would not have changed her behavior even if Wolverine had notified her she was using her FMLA leave, so she was not harmed and Wolverine was justified in terminating Ragsdale when she did not return to work after seven months.

This decision does not relieve employers of their duty to notify employees that medical leave taken counts against FMLA leave. It simply ends the automatic grant of extra leave to employees whose employers failed to give them notice. Courts will now examine on a case-by-case basis whether the employer's failure to give notice harmed the employee.