presents Pre-Employment Background Screening: Leg al Pitfalls

presents

Pre-Employment Background Screening: Legal Pitfalls

presents

gAvoiding Discrimination and Fair Credit Reporting Act Claims

A Live 90-Minute Teleconference/Webinar with Interactive Q&A

Today's panel features:Rod M. Fliegel, Shareholder, Littler Mendelson, San Francisco

Robert Pickell, Senior Vice President of Customer Solutions, HireRight, Inc., Irvine, Calif.Shawn Bushway Associate Professor University at Albany Albany N YShawn Bushway, Associate Professor, University at Albany, Albany, N.Y.

Wednesday, September 8, 2010

The conference begins at:The conference begins at:1 pm Eastern12 pm Central

11 am Mountain10 am Pacific10 am Pacific

You can access the audio portion of the conference on the telephone or by using your computer's speakers.Please refer to the dial in/ log in instructions emailed to registrants.

ARTICLE 23-ALICENSURE AND EMPLOYMENT OF PERSONS PREVIOUSLYCONVICTED OF ONE OR MORE CRIMINAL OFFENSES

Section 750. Definitions.751. Applicability.752. Unfair discrimination against persons previously convicted

of one or more criminal offenses prohibited.753. Factors to be considered concerning a previous criminal

conviction; presumption.754. Written statement upon denial of license or employment.755. Enforcement.

§ 750. Definitions. For the purposes of this article, the followingterms shall have the following meanings:(1) "Public agency" means the state or any local subdivision thereof,

or any state or local department, agency, board or commission.(2) "Private employer" means any person, company, corporation, labor

organization or association which employs ten or more persons.(3) "Direct relationship" means that the nature of criminal conduct

for which the person was convicted has a direct bearing on his fitnessor ability to perform one or more of the duties or responsibilitiesnecessarily related to the license, opportunity, or job in question.(4) "License" means any certificate, license, permit or grant of

permission required by the laws of this state, its politicalsubdivisions or instrumentalities as a condition for the lawful practiceof any occupation, employment, trade, vocation, business, or profession.Provided, however, that "license" shall not, for the purposes of thisarticle, include any license or permit to own, possess, carry, or fireany explosive, pistol, handgun, rifle, shotgun, or other firearm.(5) "Employment" means any occupation, vocation or employment, or any

form of vocational or educational training. Provided, however, that"employment" shall not, for the purposes of this article, includemembership in any law enforcement agency.

§ 751. Applicability. The provisions of this article shall apply toany application by any person for a license or employment at any publicor private employer, who has previously been convicted of one or morecriminal offenses in this state or in any other jurisdiction, and to anylicense or employment held by any person whose conviction of one or morecriminal offenses in this state or in any other jurisdiction precededsuch employment or granting of a license, except where a mandatoryforfeiture, disability or bar to employment is imposed by law, and hasnot been removed by an executive pardon, certificate of relief fromdisabilities or certificate of good conduct. Nothing in this articleshall be construed to affect any right an employer may have with respectto an intentional misrepresentation in connection with an applicationfor employment made by a prospective employee or previously made by acurrent employee.

§ 752. Unfair discrimination against persons previously convicted ofone or more criminal offenses prohibited. No application for any licenseor employment, and no employment or license held by an individual, towhich the provisions of this article are applicable, shall be denied oracted upon adversely by reason of the individual's having beenpreviously convicted of one or more criminal offenses, or by reason of afinding of lack of "good moral character" when such finding is basedupon the fact that the individual has previously been convicted of oneor more criminal offenses, unless:(1) there is a direct relationship between one or more of the previous

criminal offenses and the specific license or employment sought or heldby the individual; or

(2) the issuance or continuation of the license or the granting orcontinuation of the employment would involve an unreasonable risk toproperty or to the safety or welfare of specific individuals or thegeneral public.

§ 753. Factors to be considered concerning a previous criminalconviction; presumption. 1. In making a determination pursuant tosection seven hundred fifty-two of this chapter, the public agency orprivate employer shall consider the following factors: (a) The public policy of this state, as expressed in this act, toencourage the licensure and employment of persons previously convictedof one or more criminal offenses.(b) The specific duties and responsibilities necessarily related to

the license or employment sought or held by the person.(c) The bearing, if any, the criminal offense or offenses for which

the person was previously convicted will have on his fitness or abilityto perform one or more such duties or responsibilities.(d) The time which has elapsed since the occurrence of the criminal

offense or offenses.(e) The age of the person at the time of occurrence of the criminal

offense or offenses.(f) The seriousness of the offense or offenses.(g) Any information produced by the person, or produced on his behalf,

in regard to his rehabilitation and good conduct.(h) The legitimate interest of the public agency or private employer

in protecting property, and the safety and welfare of specificindividuals or the general public.2. In making a determination pursuant to section seven hundred

fifty-two of this chapter, the public agency or private employer shallalso give consideration to a certificate of relief from disabilities ora certificate of good conduct issued to the applicant, which certificateshall create a presumption of rehabilitation in regard to the offense oroffenses specified therein.

§ 754. Written statement upon denial of license or employment. At therequest of any person previously convicted of one or more criminaloffenses who has been denied a license or employment, a public agency orprivate employer shall provide, within thirty days of a request, awritten statement setting forth the reasons for such denial.

§ 755. Enforcement. 1. In relation to actions by public agencies, theprovisions of this article shall be enforceable by a proceeding broughtpursuant to article seventy-eight of the civil practice law and rules.2. In relation to actions by private employers, the provisions of this

article shall be enforceable by the division of human rights pursuant tothe powers and procedures set forth in article fifteen of the executivelaw, and, concurrently, by the New York city commission on human rights.

Littler Mendelson, P.C. • littler.com • 1.888.littler • [email protected]

A Timely Analysis of Legal Developments

On August 6, 2010, Massachusetts Governor Deval Patrick signed legislation overhauling the Commonwealth’s Criminal Offender Record Information (CORI) system. The long-sought CORI reform is aimed, in part, at increasing employment opportunities for reformed offenders. The legislation includes a so-called “ban the box” provision, which bars employers from requiring applicants to check a box if they have a criminal history. This provision becomes effective on November 4, 2010. The provisions that govern the access to and use of CORI records are not effective until February 6, 2012.

Ban the Box Legislation

In 1998, Hawaii became the fi rst state to “ban the box,” prohibiting public and private employers from inquiring about an applicant’s criminal history until after a conditional offer of employment has been made. A movement to enact similar legislation across the country is starting to gain momentum. In 2009, Minnesota enacted “ban the box” legislation proscribing public employers from asking a job applicant about criminal records or conducting a criminal record check until after an applicant has been selected for an interview. New Mexico and Connecticut followed in 2010, passing comparable legislation applicable to public employers. Similar legislation is currently pending in Nebraska, New Jersey, and Rhode Island. Cities and counties nationwide, including Boston, Providence, and New Haven, have also adopted similar local ordinances or regulations applicable to municipalities and public contractors.

Effective November 4, 2010, Massachusetts will become the second state in the nation to ban both public and private employers from requesting criminal record information on initial job applications. The legislation contains a narrow exception that permits employers to inquire about an individual’s criminal history on a job application if: (1) the applicant is applying for a position for which any federal or

In This Issue:

August 2010

Massachusetts has joined Hawaii to become only the second state in the nation to ban both public and private employers from inquiring about an applicant’s criminal history on initial job applications.

Massachusetts Becomes the Second State to “Ban the Box” on All Employment Applications

By Carie Torrence

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ASAP® is published by Littler Mendelson in order to review the latest developments in employment law. ASAP® is designed to provide accurate and informative information and should not be considered legal advice. ©2010 Littler Mendelson, P.C. All rights reserved.

A S A P ™ Littler Mendelson, P.C. • littler.com • 1.888.littler • [email protected] Mendelson, P.C. • littler.com • 1.888.littler • [email protected]

state law or regulation creates a mandatory or presumptive disqualification based on a conviction of certain criminal offenses; or (2) the employer is subject to an obligation under any federal or state regulation not to employ persons in one or more positions who have been convicted of certain criminal offenses.

Unlike Hawaii’s law, the legislation does not require employers to wait until a conditional offer of employment has been made before questioning an applicant about his or her criminal record or before requesting CORI records. The restriction only bars employers from requesting criminal history information on the “initial written application form.” Accordingly, employers may ask an applicant about his or her criminal history during the interview process. Employers should bear in mind, however, that the Massachusetts Fair Employment Practices Act bars an employer from asking an employee about arrests that do not result in convictions and convictions for certain misdemeanors. The Massachusetts Commission Against Discrimination (MCAD) will enforce this portion of the new law, and available remedies to an aggrieved applicant could include equitable relief, compensatory and punitive damages, interest, and attorney’s fees.

Access to and Use of Criminal Records

Employers may request CORI records from the Commonwealth after an applicant signs an acknowledgement form authorizing the request and after the employer verifies the applicant’s identity by reviewing a form of government-issued identification. CORI records include information concerning every person who comes into contact with the Commonwealth’s criminal justice system, even if the case is dismissed or the person subsequently receives a not guilty disposition. Under the legislation, however, the scope of CORI records available to most employers will be narrowed to include only: (1) felony convictions for 10 years following disposition; (2) misdemeanor convictions for 5 years following disposition; and (3) pending criminal charges. Employers whose employees interact with children or other vulnerable populations, such as the elderly and the disabled, will have access to complete CORI records.

Employers are permitted to question an applicant about his or her criminal record during the interview process and may take adverse actions based on that record. However, prior to questioning an applicant or taking an adverse action based on criminal record information, an employer must provide the individual with a copy of any criminal records in its possession, whether those records were obtained through a CORI request or from an independent source. An employer who fails to provide this information is subject to civil and criminal penalties.

New Requirements

The legislation imposes retention limits and recordkeeping requirements on employers that obtain CORI records from the newly created state agency responsible for the CORI system. Employers may not maintain CORI records for more than seven years after an employee’s last date of employment or after the date of the final decision not to hire an applicant. Employers must retain an applicant’s signed acknowledgement form for a period of one year from the date of any CORI request. Employers must also document specific details about the dissemination of any CORI records in a dissemination log and must maintain the log for a period of one year following the disclosure of any CORI record. The dissemination log is subject to audit by the Commonwealth. Any person who unlawfully disseminates CORI records is subject to criminal and civil penalties.

The legislation also requires any employer that annually conducts five or more criminal background investigations to establish and maintain a written criminal records policy. In addition, these employers must: (1) notify any applicant who is the subject of an investigation of the potential for an adverse decision based on the criminal records; (2) provide a copy of the criminal records and the policy to the applicant; and (3) provide information concerning the process for correcting a criminal record. These requirements apply even if an employer obtains the criminal background data from an independent source rather than through a CORI request.

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Implications for Employers in Massachusetts

Employers should revise applications to eliminate any questions regarding criminal history well in advance of November 4, 2010. Although the remaining provisions are not effective until February 6, 2012, employers should not wait until the last minute to implement policies and procedures that comply with the new procedural and recordkeeping requirements. Early action will help to ensure that your workplace is in compliance before the effective date of the legislation.

Carie Torrence is an Associate in Littler Mendelson’s Boston office. If you would like further information, please contact your Littler attorney at 1.888.Littler, [email protected], or Ms. Torrence at [email protected].



On August 10, Illinois enacted a new state law called the “Employee Credit Privacy Act” that will take effect January 1, 2011. This new Illinois law will prohibit coveredemployers from using an individual’s credit history or credit report in decision-making (including hiring or recruiting) as to covered jobs, positions and areas of responsibility. Any prudent employer with employees in Illinois should: (1) evaluate whether it is exempt from the new Employee Credit Privacy Act; and (2) if not exempt, identify which jobs and positions within its organization are and are not covered by the Act’s prohibitions.

What Does the Employee Credit Privacy Act Prohibit?

The Act generally prohibits employers from making any employment decision (e.g., to hire or recruit, discharge, or modify compensation) based upon an individual’s credit report or credit history. The Act also prohibits employers from obtaining a credit report regarding an applicant or employee, and from asking an applicant or employee about the individual’s credit history. The term credit report is generally defi ned as any credit information provided by a consumer reporting agency (e.g., a background check vendor). Credit history is defi ned broadly as “an individual’s past borrowing and repaying behavior, including paying bills on time and managing debt and other fi nancial obligations.” The Act also prohibits retaliation or discrimination because a person “has . . . or was about to . . .” fi le a complaint under the Act, assist or participate in an investigation or other action concerning a violation, or oppose a violation of the Act.

Which Employers Are Covered

The law broadly defi nes the term employer as “an individual or entity” that “permits one or more individuals to work” or “accepts applications for employment.” Also covered is any “agent of an employer.” The law then expressly excludes fi ve

In This Issue:

August 2010

Illinois recently enacted a new state law, the Employee Credit Privacy Act, that will prohibit covered employers from using an individual’s credit history or credit report in decision-making (including hiring and recruiting). Illinois employers need to determine prior to January 1, 2011 whether the new law applies to them and whether any specific jobs may be excluded from the ban on using credit information.

New Illinois Law Puts Credit Reports and Credit History Off Limits for Most Employers and Most Positions

By Philip L. Gordon and Jeffrey Kauffman

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business categories from the term “employer.” Thus, all employing entities in Illinois, and their agents, will be covered unlessexpressly excluded. The exclusions are:

Any bank or financial holding company, bank, savings bank, savings and loan association, credit union, trust company, or any • subsidiary or affiliate of same;

Any authorized insurance or surety business, and those who act on behalf of a company engaged in the insurance or surety • business;

Any state law enforcement or investigative units, such as the executive inspector general, state police, and departments of • corrections, juvenile justice, and natural resources;

Any state or local government agency that requires use of an employee or applicant credit history or credit report; and•

Any entity defined as a “debt collector” by federal or state statute.•

What Positions Are Excluded from Coverage

For those employers not excluded altogether, there are exceptions in the Act for several types of positions. The statute defines the “position exclusion” in a convoluted manner. Specifically, covered employers are not “prevented” from “an inquiry” or “an employment action” that would be prohibited, when “satisfactory credit history” is an “established bona fide occupational requirement of a particular position or a particular group of an employer’s employees.” Establishing that the position or group has that “bona fide occupational requirement” requires the employer to show that “at least one” of the seven following circumstances is present:

The employer is required by law to obtain bonding or other security for the individual in the position;•

Unsupervised access to cash or marketable assets valued over $2,500;•

Signatory power over business assets of $100 or more per transaction;•

Managerial positions that involve setting the direction or control of the business;•

The job involves access to personal or confidential information, financial information, trade secrets, or state or national security • information;

The position meets criteria under any state or federal regulations that are designed to establish when credit history can be a • bona fide occupational qualification; and/or

The individual’s credit history is required by or exempt under federal or state law.•

These criteria seem broad enough to cover senior executives, in-house attorneys, human resources professionals, most finance department and information technology employees, and managers with money-handling responsibilities at or above the levels specified. In other words, such positions should clearly involve one or more of the factors necessary to show a bona fide occupational requirement for having a satisfactory credit history. The outcome for other positions is less clear. The application of the Act’s criteria in close cases may raise interpretation issues that courts will need to decide if suit is filed alleging a violation of the Act.

What Are the Remedies for Violations?

Persons injured by a violation of the Act can sue in state circuit court for injunctive relief and/or damages, plus costs and reasonable attorneys’ fees if they prevail.

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What This Means for Employers in Illinois

Illinois is now the fourth state — following Hawaii, Oregon, and Washington — to enact restrictions on the use of credit history in employment decisions. Nearly one dozen other states have similar legislation pending. Because these laws and bills establish varying standards for the permissible use of credit history in employment decisions, Illinois employers with multi-state operations will need to follow and track this incipient legislative trend and, as more such laws are enacted, may be required to vary their use of credit history in employment decisions on a state-by-state basis. With respect to the new Employee Credit Report Act in Illinois, each employer will need to conduct an analysis to determine whether it is covered by the Act and, if so, the categories of its Illinois workforce for whom a “satisfactory credit history” exists as a “bona fide occupational qualification” as demonstrated by the presence of one or more of the criteria specified in the statute. Covered employers lawfully may only obtain and consider credit history and credit report information as to those positions.

Philip L. Gordon is a Shareholder in Littler Mendelson’s Denver office and the Chair of Littler’s Privacy and Data Protection Group. Jeffrey Kauffman is Of Counsel in Littler Mendelson’s Chicago office. If you would like further information, please contact your Littler attorney at 1.888.Littler, [email protected], Mr. Gordon at [email protected], or Mr. Kauffman at [email protected].



The Fair and Accurate Credit Transactions Act of 2003 (FACTA) is best known for allowing consumers to annually request and obtain one free credit report from each of the nationwide consumer credit reporting companies (Equifax, Experian and TransUnion), as well as for creating new compliance obligations designed to reduce identity theft. However, the FACTA also amended the Fair Credit Reporting Act (FCRA) to, among other things, require federal agencies to implement new rules designed to increase the “accuracy” and “integrity” of information that “furnishers” provide to consumer reporting agencies.1 Consistent with this directive, on July 1, 2009, the Federal Trade Commission (FTC) and several other federal agencies (including the Federal Reserve Board and the Federal Deposit Insurance Corporation) issued a joint Final Rule that imposes additional regulatory requirements on businesses, including employers, that provide consumer information to consumer reporting agencies.2 The fi nal rule is effective July 1, 2010.

Although a “furnisher” typically is a bank or credit card company that provides credit-related information about a customer (consumer) to one of the three major credit bureaus, there are situations where an employer will be a furnisher within the meaning of the FCRA. Recently, the FTC determined that certain companies, such as TALX (a reference checking provider), are consumer reporting agencies under the FCRA. As a result, employers that provide payroll and other employee-related information to consumer reporting agencies in connection with outsourced services, such as unemployment processing and reference checking, will be considered “furnishers” within the meaning of the FCRA and, therefore, subject to applicable federal and comparable state law regulations. In addition, employers that outsource these functions to consumer reporting agencies must comply with the new Final Rule, which requires an employer to implement and maintain policies and procedures designed to ensure the accuracy and integrity of information provided to these agencies. An employer also must investigate a “direct dispute” from a current or former employee regarding the accuracy or completeness of information the employer provided to the consumer reporting agency.

In This Issue:

June 2010

Employers should take measures to comply with new regulations implementing the Fair Credit Reporting Act concerning the obligations employers have as “furnishers” of employment history and other information. The effective date of the new regulations is July 1, 2010.

The Deadline is Fast Approaching: Effective July 1, 2010, Employers Have New Compliance Obligations Under the Federal Fair Credit Reporting Act

By Rod M. Fliegel and Jennifer L. Mora

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Employees Are Now Permitted to Submit a “Direct Dispute” to Employers

Under the FCRA, employers that furnish information to consumer reporting agencies already are required to investigate indirect employee disputes, i.e., disputes the current or former employee presents directly to the consumer reporting agency to relay to the employer. In addition, if the employer discovers that inaccurate or incomplete information about an employee was furnished to a consumer reporting agency, the employer has an affirmative duty to provide any recipient with complete and accurate information.

The Final Rule expands on the FCRA and now permits “direct disputes” to the employer and allows an employee to challenge the accuracy or completeness of information contained in a consumer report by contacting his or her current or prior employer. It further requires employers to conduct a reasonable investigation to determine the validity of the employee’s dispute. The Final Rule describes the types of relationships that trigger a furnisher’s obligation to investigate a “direct dispute,” which mostly apply to credit accounts or debts. However, the Final Rule requires an individual or entity to investigate a dispute if it relates to “any other information contained in a consumer report regarding an account or other relationship with the furnisher that bears on the consumer’s creditworthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living.” Information that employers furnish to consumer reporting agencies, such as TALX, usually consists of information about the employee’s work or work history, such as the employee’s current or former position, compensation, dates of employment, and the reason the employment relationship ended. This type of information appears to come squarely within the ambit of the Final Rule. As a result, if a current or former employee disputes any of this type of information, the employer must conduct an investigation.

The employee must provide the employer with sufficient information to prove that he or she has or had an employment relationship with the employer, an explanation for the employee’s belief that the information is inaccurate or incomplete, and supporting documentation regarding the dispute, if any. Upon receiving the notice, the employer must conduct a reasonable investigation, which means at a minimum reviewing the submitted information and determining the validity of the employee’s dispute. The employer must complete the investigation and report back to the employee within 30 days of receiving notice of the dispute (with a possible extra 15 days if the employee provides new information). If the employer determines that the employee information reported was inaccurate, the furnisher must also promptly notify each consumer reporting agency that received the information and provide any correction necessary to make the information accurate.

The Final Rule does not require an employer to investigate all disputes that a current or former employee submits. For example, if the employee only disputes identifying information in his or her file (e.g., name, Social Security number, date of birth, address, or telephone number) or the identity of past or present employers, the employer is not required to conduct an investigation. In addition, an investigation is not required if the employee does not provide sufficient information to allow the employer to investigate. Under these circumstances, the Final Rule considers the dispute to be “frivolous or irrelevant,” and the employer has five business days from reaching this determination to provide the employee with written notification that the dispute will not be investigated. The notice must inform the employee of the reason for the employer’s determination that the dispute is frivolous or irrelevant and, therefore, will not be investigated, and should include a description of the type of information necessary to proceed with the investigation, if any.

Employers Must Establish Policies and Procedures to Ensure the Accuracy and Integrity of Employee Information it Furnishes to Consumer Reporting Agencies

The Final Rule requires employers that furnish information to consumer reporting agencies to establish and implement reasonable written policies and procedures to ensure the accuracy and integrity of information reported about its employees. In developing policies and procedures, employers must consider the Final Rule’s accuracy and integrity guidelines, although not all of them must be implemented in the employer’s policies. Rather, the Rule merely requires that an employer’s policies and procedures be

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appropriate to the nature, size, complexity and scope of its actual activities. (This aspect of the Final Rule implicitly acknowledges the difference between the exchange of information with a consumer reporting agency by a merchant or creditor, on the one hand, and an employer, on the other.) An audit requirement is not imposed expressly by the Final Rule, but employers must review their policies and procedures periodically and update them as necessary.

In formulating its policies and procedures, the employer should identify areas that potentially may compromise the accuracy or integrity of reported information, evaluate the effectiveness of existing policies and procedures, and evaluate the effectiveness of how information is provided to consumer reporting agencies, making changes as necessary. If applicable, the policies and procedures should also describe the process the employer uses to report information about employees, its procedures for investigating disputes, the manner in which records will be maintained and staff will be trained, and mechanisms for maintaining internal controls, oversight, data integrity, and complying with applicable laws and regulations.

Implications for Employers

Employers should take measures to prepare for the effective date of the Final Rule by assessing whether, when and how they are exchanging employment history and other information with any consumer reporting agencies and developing and implementing the policies and procedures mandated by the Final Rule, including but not limited to procedures for timely complying with the notice-related obligations imposed by the Final Rule. Although these requirements are not especially onerous, they are very technical and employers may benefit from bringing together various resources from within the organization, including compliance personnel, human resources personnel, and information technology staff.

Rod M. Fliegel is a Shareholder in Littler Mendelson’s San Francisco office, and Jennifer L. Mora is an Associate in Littler Mendelson’s Phoenix office. If you would like further information, please contact your Littler attorney at 1.888.Littler, [email protected], Mr. Fliegel at [email protected], or Ms. More at [email protected].

1 Information is “accurate” when it is factually correct. 16 C.F.R. § 660.2(a). Information has “integrity” when it can be substantiated by business records and is presented to a consumer reporting agency in a form and manner that is designed to minimize the likelihood that the information may be incorrectly reflected in any report prepared by a consumer reporting agency. 16 C.F.R. § 660.(2)(e).2 16 C.F.R Part 660.


A S A P ®A Timely Analysis of Legal Developments

On March 29, 2010, Oregon Governor Ted Kulongoski signed into law Senate Bill 1045, making it an unlawful employment practice for most Oregon employers to use credit history in making hiring decisions or any decisions affecting current employees. The law becomes effective July 1, 2010, and gives Oregon employees the right to fi le an administrative complaint or a private lawsuit for alleged violations. Employees who prevail in court may recover lost wages and attorneys’ fees.

There are a few exceptions to the new Oregon prohibition. Specifi cally, federally insured banks and credit unions, businesses required by law to consider employee credit history, and police and other public employers hiring for law enforcement and airport security. In addition, the law includes an exception for employers conducting credit checks for “substantially job-related reasons,” so long as those reasons are disclosed to the employee in writing.

Apply Exceptions CarefullyOregon employers should use caution in applying the “substantially job-related” exception, at least until there is guidance from the Oregon Bureau of Labor and Industries (BOLI) or the courts. Positions requiring access to company or customer fi nancial information will most likely qualify, but beyond that it is unclear how the exception will be applied. The law itself does not defi ne “substantially job-related,” and while BOLI is expected to promulgate rules defi ning the term, it will be a few months before that occurs.

In the meantime, Oregon employers should use credit checks only if one of the four statutory exceptions is met, and should use the “substantially job-related” exception only after carefully considering its application to the specifi c position in question, consulting with legal counsel, and disclosing the reasons for conducting the credit check to the applicant or employee in writing.

In This Issue:

March 2010

On March 29, 2010, Oregon Governor Ted Kulongoski signed into law Senate Bill 1045, making it an unlawful employment practice for most Oregon employers to use credit history in making hiring decisions or any decisions affecting current employees. The law becomes effective July 1, 2010, and gives Oregon employees the right to file an administrative complaint or a private lawsuit for alleged violations. Employees who prevail in court may recover lost wages and attorneys’ fees.

New Oregon Law Prohibits Credit Checks

By Howard Rubin and Jennifer A. Nelson

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ASAP® is published by Littler Mendelson in order to review the latest developments in employment law. ASAP® is designed to provide accurate and informative information and should not be considered legal advice.

A S A P ™ Littler Mendelson, P.C. • littler.com • 1.888.littler • [email protected] S A P ® Littler Mendelson, P.C. • littler.com • 1.888.littler • [email protected]

Oregon Is Not the First and Will Not Be the LastAbout 60% of U.S. employers conduct credit checks for prospective employees, according to the Society for Human Resource Management. While credit checks can be an effective hiring tool, Oregon is part of a growing national trend toward prohibiting this practice. Hawaii and Washington have recently passed such laws, and similar legislation is pending in Connecticut, Illinois, Indiana, Kansas, Maryland, Missouri, New Jersey, New York, Ohio, Oklahoma, South Carolina, Vermont, Wisconsin, as well as the U.S. House of Representatives. The Equal Employment Opportunity Commission (EEOC) has also made clear that an employer should be able to establish that credit history information is essential to the particular job in question, as the application of credit check policies can result in an arguably discriminatory disparate impact on certain protected classes.1

Given this trend, employers nationwide should revisit credit checking practices, and consider only using credit checks for those positions for which it is essential – even in those states where no law currently prohibits them. In those states where laws have already passed or legislation is pending, employers should seek the advice of counsel to ensure that forms and practice are in compliance with applicable law.

Howard Rubin is the Office Managing Attorney and Jennifer A. Nelson is an Associate in Littler Mendelson’s Portland office. If you would like further information, please contact your Littler attorney at 1.888.Littler, [email protected], Mr. Rubin at [email protected], or Ms. Nelson at [email protected].

1 See the EEOC website: http://www.eeoc.gov/laws/practices/inquiries_credit.cfm.



The Pennsylvania Human Relations Commission (PHRC) recently proposed Policy Guidance that would apply a rebuttable presumption of disparate impact discrimination when an employer rejects African American and Hispanic applicants from employment pursuant to a policy regarding prior criminal convictions.1 Under the Policy Guidance, when investigating complaints of unlawful disparate impact discrimination by African American and Hispanic complainants, the PHRC will assume that the complainant has established a prima facie case under Section 5 of the Pennsylvania Human Relations Act (PHRA). This permits a claim to proceed administratively without requiring the complainant to provide statistical evidence that the employer’s policy has a disparate impact on African Americans or Hispanics. The PHRC has taken this position in light of statistics that demonstrate African Americans and Hispanics are convicted at a rate disproportionately greater than their representation in the population nationally, with an even greater disparity in Pennsylvania.

The proposed Policy Guidance applies only to claims of disparate impact, not disparate treatment. Disparate impact occurs when a policy or practice that does not appear to be discriminatory on its face, nevertheless disproportionately and negatively affects a group of individuals based on a certain characteristic protected by equal employment laws, such as race. Disparate treatment occurs when an employer unlawfully considers a protected characteristic when making an employment decision, for example, when an employer rejects African American applicants who have a conviction record, but does not reject similarly situated Caucasian applicants. The PHRC will continue to use its standard policies and procedures for investigating claims of disparate treatment.

How Can an Employer Defend Itself from Such Claims?Under the Policy Guidance, an employer can rebut the presumption of disparate impact by using conviction data from a more limited geographical boundary than the entire Commonwealth of Pennsylvania, or by using conviction data for the specific crimes

In This Issue:

January 2010

The Pennsylvania Human Relations Commission recently proposed guidelines that will apply a presumption of disparate impact discrimination when an employer rejects African American and Hispanic applicants based on a prior criminal conviction.

Pennsylvania Issues Proposed Guidance On Employer Practice of Excluding Applicants from Employment Based on Criminal ConvictionsBy Jason E. Ruff

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being screened. An employer may also use “applicant pool” data to show that fewer African Americans and Hispanics applied for the position in question compared to other groups. However, the Policy Guidance notes that applicant pool data may have little persuasive effect on the PHRC because such data may exclude otherwise interested applicants who choose not to apply due to the existence of the policy. Further, the Policy Guidance does not prohibit employers from denying employment based on a criminal record where the employer is required or authorized to do so based on existing state or federal laws (e.g., laws regarding child care and nursing home positions). However, an employer cannot rebut the presumption of disparate impact by relying on evidence of diversity within its workplace (known as the “bottom-line defense”).

An employer may also defend against claims of disparate impact by presenting evidence that its policy or practice is required as a matter of business necessity. To demonstrate business necessity, an employer must show that the rejected applicant claiming disparate impact has been convicted of a crime as opposed to merely being arrested, and would pose an unacceptable level of risk in the workplace. In evaluating the employer’s claim that the applicant would create an unacceptable level of risk, the PHRC will consider the following factors:

The circumstances, number and seriousness of the applicant’s prior offenses;•

Whether the applicant’s prior conviction substantially relates to his or her suitability for the job, considering the duties and •responsibilities of the job and the relationship of those duties and responsibilities to the applicant’s prior criminal offenses;

The length of time elapsed since the conviction or release from prison, with a presumption against business necessity if there has •been seven or more years (excluding time spent incarcerated) between the applicant’s last offense and rejection from the job;

Evidence of the applicant’s rehabilitation, including satisfactory completion of parole or probation, maintenance of steady •employment,subsequenteducationortrainingandlettersofrecommendationfromemployersorparoleorprobationofficerswhohave worked with the applicant; and

The manner in which the employer solicited the applicant’s criminal history during the hiring process (• i.e., the Commission will look favorably upon an employer that has a hiring process that does not consider criminal history until the later stages of the hiring process, for example, after an interview or a conditional offer of employment has been made).

If the employer is able to demonstrate that it rejected the applicant due to business necessity, the applicant may still prevail on a disparate impact claim by showing that there was an alternative, less discriminatory policy or practice that the employer could have adoptedthatwouldhavesatisfieditsdemonstratedbusinessneeds.

The proposed Policy Guidance does not have the force of a statute or administrative regulation, has no binding force or effect, and may not be cited as binding legal authority for any Commission ruling or other adjudication. It is intended only to indicate the manner in which the Commission exercises its administrative discretion. However, employers should expect it to be used against them as yet another tool, even indirectly as persuasive authority, in claims of failure to hire due to race discrimination.

Pennsylvania already has a statute in force, the Pennsylvania Criminal History Record Information Act (PCHRIA), which generally prohibits employers from considering during the hiring process arrests which did not lead to a conviction.2 Under the PCHRIA, employers may consider felony and misdemeanor convictions only if “they relate to the applicant’s suitability for employment in the position for which he applied.” However, because that statute is not enforced by the Commission, the Commission felt that it was underutilized.

What Should Employers Be Doing NowThePHRCistentativelyscheduledtoconsiderthefinalPolicyGuidanceduringitsmonthlypublicmeetingonFebruary22,2010,afterwhichthePolicyGuidancemaybeimplementedinitscurrentorslightlymodifiedform.WhileitmightbeseveralmonthsbeforethePolicy

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Guidance is in force, Pennsylvania employers should consider auditing their hiring practices now to ensure that they would pass muster under the PHRC’s stated policy objectives regarding the consideration of criminal convictions in the hiring process.

Jason E. Ruff is an Associate in Littler Mendelson’s Philadelphia office. If you would like further information, please contact your Littler attorney at 1.888.Littler, [email protected], or Mr. Ruff at [email protected].

1 Policy Guidance Concerning the Disparate Impact Discrimination Implications of a Denial of Employment Based on a Criminal Record, 39 Pa.B. 6845,issuedNov.28,2009,available at http://sites.state.pa.us/PA_Exec/PHRC/crimguid.pdf.2 18 PA. CONS. STAT. § 9125; see also Cisco v. United Parcel Servs., Inc.,476A.2d1340,32Pa.Super.300(1984).



It has long been a public policy of the State of New York to prohibit “unfair discrimination against persons previously convicted of one or more criminal offenses.”1 To help facilitate the reintegration of convicted criminals into the workforce, the state enacted laws requiring employers to review the person’s background when making hiring decisions. The legislature recently concluded that employers are not suffi ciently aware of these laws and instead frequently impose “blanket barriers to employment based solely on criminal conviction records.”2 To ensure the public is well informed about the laws governing discrimination in employment based on a criminal record, effective February 1, 2009, employers will be required to provide notice in the following three ways:

Workplace PostingNew York and federal law already require employers to conspicuously post in their workplaces a host of different notices to employees. Employers must add to this list a copy of Article 23-A of the state Correction Law (“Article 23-A”) and any regulations promulgated pursuant to it.3

Article 23-A, which currently has no supporting regulations, sets forth the scope of New York’s prohibition of discrimination relating to the employment of persons previously convicted of one or more criminal offenses.

Article 23-A

Article 23-A bars employers from taking an “adverse employment action” against any applicant based on a prior criminal conviction unless: (a) there is a “direct relationship” between one or more of the criminal convictions and the specifi c employment sought or held by the individual; or (b) granting or continuing employment would involve an “unreasonable risk” to property or to the safety or welfare of specifi c individuals or the general public.4 In making this determination, employers must consider the following eight factors:

The state public policy encouraging the employment of persons previously convicted of 1. one or more criminal offenses;

he specifi c duties and responsibilities necessarily related to the employment sought or 2. held by the person;

he bearing, if any, the criminal offense(s) will have on the person’s fi tness or ability to 3. perform one or more such duties or responsibilities;

In This Issue:

December 2008

Beginning February 1, 2009, New York employers must add to their workplace postings and provide information to applicants and employees information regarding the state’s law and regulations limiting how criminal convictions may be considered in employment decisions.

NY Obligates Employers to Post and Disclose Laws Prohibiting Discrimination Based on Criminal ConvictionsBy David S. Warner and Anna Nesterova

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The amount of time that elapsed since the criminal offense(s);4.

The age of the person at the time of the criminal offense(s);5.

The seriousness of the criminal offense(s);6.

Any information produced by the person, or on his/her behalf, in regard to rehabilitation and good conduct; and7.

The legitimate interest of the employer in protecting property, and the safety and welfare of specific individuals or the general public.8.

Notice Upon Requesting an Investigative Consumer ReportThe second notice obligation will arise each time an employer requests an “investigative consumer report,” which is a report based in whole or in part on personal interviews, in connection with an offer of employment.5 Presently, N.Y. General Business Law section 380-c(b) requires employers to notify prospective employees that a background check report may be sought and, upon request, advise whether it has been sought. If it has been sought, the employer must provide the name and address of the third party from whom the report was requested and advise that the report may be copied or inspected by contacting that third party. Starting February 1, 2009, the employer must also provide a copy of Article 23-A.

Notice Upon Receiving a Report that Shows a Criminal RecordIn creating a third notice obligation, the legislature added a new subdivision (d) to N.Y. General Business Law § 380-g, which otherwise establishes certain requirements for background check providers when compiling data from public records. This new subdivision requires employers to provide the job applicant or employee with a printed or electronic copy of Article 23-A anytime the report it ordered from the background check provider contains any criminal conviction information.

Employer RecommendationsNew York has multiple laws regulating the extent to which employers may inquire about, and use, criminal conviction information. Employers with operations in New York should be mindful of these laws and be aware that they have been amended over the last few years. In addition to complying with the new notice and disclosure requirements, employers should ensure that their forms, policies and procedures comply with Article 23-A and the related provisions of the State Human Rights Law.6 As the State Division of Human Rights has recently expressed a heightened interest in enforcing these laws, and ensuring that employers follow the balancing process set forth in Article 23-A, the benefits to compliance are self-evident.

David S. Warner is a Shareholder and Anna Nesterova is an Associate in Littler Mendelson’s New York office. If you would like further information, please contact your Littler attorney at 1.888.Littler, [email protected], Mr. Warner at [email protected], or Ms. Nesterova at [email protected].

1 N.Y. Correction Law § 752.2 A10288 Memo to New York State Bill A10288A entitled, “An Act to amend the general business law and the labor law, in relation to the provision of criminal record conviction information in certain instances.”3 See soon-to-be-added N.Y. Labor Law § 201-f.4 This law currently applies only to applicants. Effective February 1, 2009, it will extend to employees, too.5 New York’s Fair Credit Reporting Act defines “investigative consumer report” as “a consumer report or portion thereof in which information on a consumer’s [or applicant’s] character, general reputation, personal characteristics, or mode of living is obtained through personal interviews with neighbors, friends, or associates of the consumer reported on or with others with whom he is acquainted or who may have knowledge concerning any such items of information.” N.Y. Gen. Bus. Law § 380-a(d).6 The State Human Rights Law prohibits discrimination in violation of Article 23-A and bars employers from inquiring about, or considering, any arrest or criminal accusation that was resolved in the individual’s favor. See N.Y. Exec. Law § 296(15)-(16).



In Starbucks v. Superior Court, the Court of Appeal for the Fourth District of California considered whether the plaintiffs were entitled to ask a jury to award millions of dollars against Starbucks for allegedly requiring job applicants to disclose prior convictions for misdemeanor marijuana-related offenses. At the trial court level, the judge had granted the named-plaintiffs’ motion to certify a class action for the benefi t of approximately 135,000 class members (unsuccessful job applicants). The trial court judge had also rejected Starbucks bid for “summary judgment,” i.e., to have the named-plaintiffs’ lawsuit thrown out of court without a trial.

On appeal, the Fourth District agreed with Starbucks, and in a strongly worded opinion, directed the trial court to enter judgment for Starbucks. The court’s opinion condemned the misuse of the class action process to pressure “payoffs by private business for alleged violations of law having no real relationship to a true public interest.” It also offered useful guidance on the legal effectiveness of disclaimers in employment applications.

BackgroundCalifornia Labor Code section 432.8, which was enacted during the 1970s in order to minimize the stigmatizing effect of minor marijuana offenses, prohibits employers from asking job applicants to disclose information regarding certain marijuana convictions that are more than two years old. The plaintiffs’ class action lawsuit accused Starbucks of violating section 432.8 by asking illegal questions on its employment application. Starbucks used the two-page employment application on a nationwide basis for store level positions. On the front side of the application, applicants were asked to disclose criminal convictions within the last seven years. The back side of the application included the following bolded text:

CALIFORNIA APPLICANTS ONLY: Applicant may omit any convictions for the possession of marijuana (except for convictions for the possessions

In This Issue:

December 2008

In Starbucks v. Superior Court, a California Court of Appeal dismisses a class action lawsuit seeking millions of dollars against Starbucks for allegedly violating California’s restriction on asking job applicants about prior marijuana-related convictions.

Starbucks Ruling is No “Pot of Gold” for Class Action PlaintiffsBy Rod. M. Fliegel and Blane M. Mall

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of marijuana on school grounds or possession of concentrated cannabis) that are more than two (2) years old, and any information concerning a referral to, and participation in, any pretrial or post trial diversion program.

This California disclaimer language was contained in a 346-word paragraph directly above the signature line, after several general disclaimers, and after disclaimers for two other states, Maryland and Massachusetts.

The named plaintiffs all applied for work and filled out the Starbucks employment application. None were hired. One answered the conviction “No,” one wrote, “I refuse to answer,” and one wrote, “it’s no one’s business.” None had a prior marijuana conviction.

The Trial Court’s DecisionThe trial court judge certified a class of all unsuccessful job applicants who had completed the employment application since June 2004, and who wanted a maximum of $200 in statutory damages. (Labor Code section 432.8 incorporates the remedies in section 432.7, which provides that: “In any case where a person violates this section ... the applicant may bring an action to recover from that person actual damages or two hundred dollars ($200), whichever is greater, plus costs, and reasonable attorneys’ fees.) In also rejecting Starbucks bid for “summary judgment,” the trial court held that a jury would have to decide whether the disclaimer would be effective to draw the attention of an average applicant based on its location, font size and placement in the employment application. According to the trial court judge, the plaintiffs’ deposition admissions that none of them had answered the marijuana-related conviction question affirmatively, nor did they have any marijuana-related conviction, did not defeat their standing to pursue mass penalties, because section 432.8 is violated merely by requiring job applicants to answer the question.

The Court of Appeal’s HoldingStarbucks filed a petition for a writ of mandate challenging the trial court’s order denying summary judgment and allowing the case to proceed to trial. Characterizing the case as a “paradigmatic example” of when writ review is justified before trial, the court of appeal explained that, without “an earlier appellate look,” corporate executives may be unfairly pressured to settle high-stakes litigation, rather than “bet their company that they are right.” “Enhancing the prospects for obtaining a settlement on a basis other than the merits,” the court declared, “is hardly a worth legislative objective. The civil justice system is not well-served by turning Starbucks into Daddy Warbucks.”

The court of appeal first considered, and rejected, Starbucks argument that the California disclaimer was lawful, and thus, no trial was needed. The court upheld the text of the California disclaimer itself, but was critical of its placement in a “veritable sea of boldface type” and in the midst of a “host of irrelevant provisions” relating to other jurisdictions. The court reasoned that the disclaimer did not necessarily pass the “clear and conspicuous” test, because a “reasonable Starbucks applicant” might not notice it on the backside of the application form. The court was also mindful of the public policy supporting section 432.8, suggesting that a remedy should be available to job applicants who are improperly forced to reveal stigmatizing private information or decline to respond with such information at a possible cost of a lost job opportunity.

The court of appeal, however, also considered, and agreed with, Starbucks argument that no trial was needed because the named-plaintiffs’ deposition admissions defeated their claims. The court disagreed with the trial court’s holding that Starbucks violated section 432.8 merely by asking the disputed conviction question. Instead, the court explained, section 432.8 only provides legal protection to aggrieved job applicants, i.e., job applicants with prior marijuana convictions. “[W]e decline,” the court stated, “to adopt an interpretation that would turn the statute into a veritable financial bonanza for litigants like plaintiffs who had no fear of stigmatizing marijuana convictions.” The court also expressed great reluctance to “create a whole new category of employment – professional job seekers, whose quest is to voluntarily find (and fill out) job applications which they know to be defective solely for the purpose of pursuing litigation.”

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Practical ImplicationsEmployers with operations in California are well-advised to review their employment applications and related pre-hire paperwork (for example, background check authorization forms) both for substantive compliance with applicable law and to ensure that all disclaimers can satisfy the “clear and conspicuous” standard. Regarding the latter, particular attention should be given to the placement of the disclaimer within the form, the font size, and the overall use of bold, italics and underlining. Employers should also review each important pre-hire form to ensure that, upon completing the form, the job applicant is required to indicate on the form that he or she has reviewed and understands the entire document.

Rod. M. Fliegel is a Shareholder and Blane M. Mall is an Associate in Littler Mendelson’s San Francisco office. If you would like further information, please contact your Littler attorney at 1.888.Littler, [email protected], Mr. Fliegel at [email protected], or Ms. Mall at [email protected].

The National Employment & Labor Law Firm™

1.888.littler www.littler.com [email protected]



New FTC Regulations On Proper Destruction of“Consumer Information”: Steps Employers Need to Take to Comply

By Philip L. Gordon and Cathy S. Beyda

As part of its comprehensive efforts to combatidentity theft, the Federal Trade Commission(FTC) has promulgated regulations effectiveJune 1, 2005 for the proper destruction of“consumer information.” While somecommentators have raised alarms by assertingthat these new regulations create the potentialfor significant employer liability, and evenclass action lawsuits, the relatively limitedscope of the regulations makes the practicalreality of such liability more remote than thealarmist commentators suggest.

Requirements and Implicationsof the Disposal RuleBecause the new FTC regulations are limited torequiring the proper disposal of “consumerinformation,” they have been referred to as “theDisposal Rule.” Consumer informationincludes (a) consumer reports and (b)information derived from consumer reports,provided that the information is individuallyidentifiable. As applied to the employmentcontext, “consumer information” wouldinclude not only a background check reportobtained from a consumer reporting agencybut also, for example, notes prepared by asupervisor or human resources manager basedupon information contained in the report.“Consumer information” encompassesinformation in both paper and electronic form.

The regulations require employers to takereasonable steps to prevent unauthorized useof, or access to, consumer information duringthe disposal process. While the regulations donot require any specific disposal methods, theregulations provide examples of the types ofdisposal processes that would be reasonable.Paper documents containing consumerinformation, for example, could be placed inlocked trash bins while awaiting disposal andthen shredded or burned.

“Disposal,” when applied to consumerinformation stored on electronic media,encompasses not only tossing hardware,floppy disks, and CDs into a dumpster, butalso the sale, donation and other transfer ofthe storage media. The regulations suggestthat it would be reasonable for an employer todevelop procedures to render electronicallystored consumer information irretrievablebefore disposal. Employees, for example,could be required to magnetically swipe disks,or scratch CDs, containing consumerinformation before disposing of them.Employers also could consider thereasonableness of having appropriately trainedpersonnel check all hard drives containingconsumer information before the computerscontaining those hard drives permanentlyleave the employer’s premises — whether fordonation to a school, for sale by a second-hand computer warehouse, or for incinerationby the municipal waste department.

While not specifically required by theregulations, the FTC suggests that businessesrelying on third parties for the disposal ofrecords containing consumer informationshould engage in due diligence beforeselecting, or continuing to use, a disposalcompany. Examples of “due diligence”contained in the regulations includeobtaining several references for the disposalcompany, requiring the company to producea certification by a trade association or otherthird party that has reviewed the disposalcompany’s information security policies, orreviewing an independent audit of thecompany’s disposal methods.

Although the regulations apply only to theprocess of destroying consumer information,compliance with the regulations is likely toinvolve the establishment of polices andprocedures governing the disposal of

in this issue:JUNE 2005

Effective June 1, 2005, thenew regulations requireemployers to take reasonablesteps to prevent unauthorizeduse of and access to con-sumer information duringdisposal of such information.

ASAP™A Littler Mendelson Time Sensitive Newsletter

Littler Mendelson is the largest law firmin the United States devoted exclusivelyto representing management in employ-ment and labor law matters.

information as well as appropriate employeetraining. It is important to note that neitherthe FCRA nor the new regulations createsdocument retention periods. Accordingly,employers must look elsewhere when decidinghow long to retain records containingconsumer information.

The state anti-discrimination statutes providesome guidance in this regard. Depending onthe state, these statutes often requireemployers to maintain records relating to thehiring process for 2 years or more. When aclaim of discrimination has been brought,however, most states require that relevantdocuments be retained until final dispositionof the claim.

Other state laws also should be considered.For example, in Oregon, employers arerequired to maintain records used indetermining a person’s qualifications foremployment, promotion, etc. for at least 60days after termination of the employment. Inaddition, the state statutes of limitationgoverning the time period in which a personmay bring an administrative or court claim fordiscriminatory failure to hire may be relevant,and commonly range from two to six years afterthe adverse employment action was taken.Developing an appropriate record retentionpolicy is essential. Because a variety of differentstatutes and issues must be considered whendoing so, however, employers are advised toconsult qualified employment counsel forassistance with this endeavor.

Potential Employer LiabilityThe FTC promulgated the new regulations inorder to enforce Section 216 of the FACT Act,which, in turn, amends the Fair CreditReporting Act (FCRA). The reader can find moreinformation regarding the impact of the Fact Acton employers in Littler’s ASAP, The FACT and How it Affects FCRA and EmploymentInvestigations (the Vail Letter), available athttp://www.littler.com/nwsltr/asap_01_FACT.html.

Because the new regulations are promulgatedunder the FCRA as amended by the FACT Act,employers who do not comply with theseregulations, and whose employees or jobapplicants ultimately are victimized by identitytheft as a result, could face a lawsuit seeking toenforce the remedies authorized by the FCRA.In the case of negligent violations, FCRAremedies are limited to actual damages and anaward of attorneys fees and costs. Willfulviolators may be subject to statutory damagesof up to $1,000 per violation or to an award of

actual damages, whichever is greater, and maybe required to pay a prevailing plaintiff’sattorney’s fees and costs.

ConclusionAll employers who possess or maintainconsumer information must begin to developreasonable measures to dispose of suchinformation in order to protect against theunauthorized access or use of the information.Careful consideration of an employer’s uniquecircumstances in developing a disposalprogram should help to reduce the potentialfor identity theft as well as to minimizepotential employer liability. Thus, while theneed for immediate action is clear, the recentalarm surrounding the new regulations clearlyis unwarranted.

Philip Gordon is a shareholder in LittlerMendelson’s Denver Office, and Cathy S. Beydais Special Counsel in Littler Mendelson’s San Jose Office. If you would like furtherinformation, please contact your Littlerattorney at 1.888.Littler, [email protected], or Mr. Gordon at [email protected], or Ms. Beyda at [email protected].



ASAP™ is published by Littler Mendelson in order to review the latest developments in employment law. ASAP™ is designed to provide accurate and informative information and should not be considered legal advice.

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TH E FACT A N D HO W IT AF F E C T S FCRA A N D
I N T H I S I S S U E EM P L O Y M E N T IN V E S T I G A T I O N S (T H E VA I L LE T T E R)
J A N U A R Y 2 0 0 4 The Fair and Accurate Credit Transactions Act of 2003 (“FACT”) Amends the Federal Fair Credit Reporting Act (“FCRA”) to Allow More Lati-tude for Employers Conducting Workplace Investigations.

By Rod M. Fliegel and Ronald D. Arena

On December 4, 2003, President Bush signed the Fair and Accurate Credit Transac-tions Act of 2003 (“FACT”). The final bill (H.R. 2622; H. Rept. 108-159) amends the federal Fair Credit Reporting Act (“FCRA”) in response to, among other things, the con-troversial Vail opinion letter from the Federal Trade Commission (“FTC”). The staff attorney who authored the Vail letter in 1999 reached the novel conclusion that the FCRA regulates workplace misconduct in-vestigations conducted by third parties, such as private investigators. Title VI of the FACT nullifies the Vail letter by excluding misconduct investigations from the FCRA’s more onerous provisions, including the need for the accused’s advance consent to inves-tigate. However, employers must be mindful of Title VI’s scope limitations as well as new obligations regarding medical informa-tion. Additionally, while the FACT removes the January 2004 “Sunset Clause” from Section 624 of the FCRA, which preempts certain state legislation, employers should become familiar with, and continue to moni-tor, the state laws where they do business. Employers will also want to review impend-ing FTC regulations interpreting the FACT and establishing effective dates for the vari-ous provisions in the legislation.

Question No. 1: Who sponsored the FACT? In April 2003, Reps. Peter Sessions (R-Texas) and Sheila Jackson Lee (D-Texas) introduced the Civil Rights and Em-ployee Investigation Clarification Act (H.R. 1543). (In 1999, Rep. Sessions had spon-sored a similar bill, the Fair Credit Reporting Amendments Act.) In July 2003, the House Financial Services Committee approved H.R. 2622, which incorporated H.R. 1543, by a 61-3 vote. Numerous amendments were voted down or with-drawn, including one allowing the accused

to demand a reinvestigation. The Senate passed its own version of the legislation, but committee members reconciled the two bills. The House approved the conference report on November 21 by a 379-49 vote; the Sen-ate gave unanimous approval the next day.

Question No. 2: How does Title VI nullify the Vail letter? The FCRA prohibits “con-sumer reporting agencies” from furnishing “consumer reports” for “employment pur-poses” unless the “consumer” is notified of and consents to disclosure of the report, and is furnished with a copy of the report if it results in an “adverse” personnel action (e.g., discipline, demotion, termination, etc.). Consumer reporting agencies include background check vendors and credit report-ing agencies, and in some circumstances, private investigators and even law firms. Consumer reports include “any communica-tion of information by a consumer reporting agency bearing on a consumer’s character, general reputation, personal characteristics, or mode of living.” “Investigative consumer reports” are a subset of consumer reports that trigger additional notices to the con-sumer. Investigative consumer reports are reports in which protected information is obtained “through personal interviews with neighbors, friends, or associates or others with whom the consumer is acquainted.” Title VI of the FACT excludes from the definition of consumer reports misconduct investigation reports and investigation re-ports into “compliance with Federal, State, or local laws and regulations, the rules of a self-regulatory organization, or any preexist-ing written policies of the employer.” As a result, employers no longer have to (1) no-tify the accused of the investigation, (2) seek consent from the accused, (3) provide the accused with a copy of the report, or (4) wait a “reasonable” amount of time between

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giving the accused a copy of the report and taking adverse action. Eliminating the first two requirements helps minimize the risk the accused will alter or destroy evidence, intimidate or influence witnesses, or other-wise impair the reliability of the investigation. Eliminating the third require-ment helps minimize the risk witnesses will refuse to participate in the investigation for fear of retribution.

Question No. 3: How are investigations still regulated? If adverse action is taken against the accused based at least in part upon a report that would otherwise be a consumer or investigative consumer report, the accused is entitled to a summary of the “nature and substance” of the report. Title VI does not prescribe the amount of infor-mation that must be disclosed, but permits exclusion of “the sources of the information acquired solely for use in preparing [the report],” e.g., the names of any witnesses. Title VI leaves open whether the summary must be in writing (presumably it does), and exactly how long after the adverse action is taken the summary must be provided to the subject of the report (presumably not too long). Title VI also restricts circulation of the report to “the employer or an agent of the employer,” and the exemption may be forfeit by making overbroad disclosures. (The report may be disclosed to government agencies and “as otherwise required by law.”) Because an employee who makes the initial allegation or complaint is not the “employer” or its “agent,” an important question is what he or she is entitled to know. Likewise unclear is whether author-ized disclosures include the board of directors, shareholders or “joint employers,” for example, a temporary agency that em-ploys the accused. Title VI does not restrict the disclosure of summaries of the report. Thus, such narrow and business-related disclosures may be permissible and in ac-cordance with procedures mandated by the anti-discrimination laws, such as Title VII of the Civil Rights Act of 1964.

Question No. 4: Is “reasonable suspicion” required by Title VI? No foundational requirements are imposed on employers for initiating investigations, for example, “rea-sonable suspicion” of misconduct or that

evidence may be destroyed, etc. (The FTC had recommended such a requirement in its testimony before Congress in connection with the amendments proposed in 1999.) Moreover, the breadth of the exemption appears to be very expansive. Title VI does not limit the types of “misconduct” investi-gations that are exempted (e.g., threats of serious harm or violence, abuse of con-trolled substances, the loss of more than $1,000 in cash or property, etc.). Title VI also extends to investigations into compli-ance with “any preexisting written policies” and may encompass financial audits, infor-mation technology audits, loss prevention audits, etc. On the other hand, the FACT’s text suggests at least some substantive ltations. For example, the suspected misconduct must “relate to employment,” and, the policies must predate the investiga-tion and be in writing. Moreover, the scope of Title VI arguably derives from the spe-cific objectives furthered by the legislation: eliminating the Vail letter as an obstacle to the use of neutral investigative resources.

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ASAP™ is published by Littler Mendelson in order to review the latest developments in employment law. ASAP™ is designed to provide accurate and informative information and should not be considered legal advice. ©2004 Littler Mendelson. All rights reserved.

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Question No. 5: Is Title VI limited to investigations of current employees? The legislative purpose of Title VI seems to presuppose an existing employment rela-tionship. However, the FACT refers to “consumers,” not to “employees” (e.g., the consumer is entitled to a summary of the investigation report). Therefore, it remains to be seen whether Title VI permits investi-gations of former employees. Such investigations are not uncommon, especially during or in connection with litigation. For example, Able Company is sued for fraud. The board of directors hires a third party to investigate the current and former officers. On the one hand, the investigation “relates to” the current and former officers’ em-ployment. On the other hand, by speaking to “adverse action,” the FACT appears to con-template an ongoing relationship. Thus, both interpretations find support in the text and structure of the legislation.

Question No. 6: How does the FACT regulate medical information? Title IV prohibits consumer reporting agencies from furnishing employment-related consumer reports containing medical information unless the information is “relevant to proc-

ess or effect the employment transaction,” and the consumer provides “specific written consent.” Title IV likely does not encom-pass the results of drug tests or pre-employment examinations, because such results usually come within the FCRA’s exception for “direct transactions” between the consumer and the reporting agency. On the other hand, Title IV may encompass some third party reports of workers’ com-pensation cases and claims for disability or medical benefits.

CONCLUSION

Thorough and impartial workplace investi-gations are becoming increasingly important, even indispensable, in today’s legal and business climate. Title VI of the FACT gives employers more latitude re-garding such investigations and is a timely and welcome development. Employers, however, must be mindful of Title VI’s scope limitations, particularly the restric-tions on disclosure of any investigation reports, as well as new obligations regarding medical information. Additionally, while the FACT removes the Sunset Clause from the FCRA, employers should become famil-iar with, and continue to monitor, the state laws where they do business. Employers should also review the impending regula-tions. Until these regulations are available from the FTC, employers may want to in-terpret the new legislation conservatively and with due regard for its intended pur-pose: nullifying the Vail letter.

Rod M. Fliegel is a shareholder and Ronald D. Arena is an associate in Littler Mendelson’s San Francisco office. Mr. Fliegel regularly counsels employers and background check companies about compliance with the state and federal fair credit reporting and related laws. If you would like further information, please contact your Littler attorney at 1.888.Littler, [email protected], Mr. Fliegel at [email protected], or Mr. Arena at [email protected].

T H E N A T I O N A L E M P L O Y M E N T & L A B O R L A W F I R M ™


mailto:[email protected]

mailto:[email protected]

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ASAP™ is published by Littler Mendelson in order to review the latest developments in employment law. ASAP™ is designed to provide accurate and informative information and should not be considered legal advice. ©2000 Littler Mendelson. All rights reserved.

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Using Consumer Reports: What Employers Need To Know

A s an employer, you may use consumer reports when you hire new employees

and when you evaluate employees for promotion, reassignment, and retention

— as long as you comply with the Fair Credit Reporting Act (FCRA). Sections 604, 606,

and 615 of the FCRA spell out your responsibilities when using consumer reports for

employment purposes.

• Youradvertisementforcashiersnets100applications.Youwantcreditreportsoneachapplicant.Youplantoeliminatethosewithpoorcredithistories.Whatareyourobligations?

• Youareconsideringanumberofyourlong-termemployeesformajorpromotions.Canyouchecktheircreditreportstoensurethatonlyfinanciallyresponsibleindividualsareconsidered?

• Ajobcandidatehasauthorizedyoutoobtainacreditreport.Theapplicanthasapoorcredithistory.Althoughthecredithistoryisconsideredanegativefactor,it’stheapplicant’slackofrelevantexperiencethat’smoreimportanttoyou.Youturndowntheapplication.Whatproceduresmustyoufollow?

Facts for Business Facts for Business

The FCRA is designed primarily to protect the privacy of consumer report information and to guarantee that the information supplied by consumer reporting agencies is as accurate as possible. Amendments to the FCRA — which went into effect September 30, 1997 — significantly increase the legal obligations of employers who use consumer reports. Congress expanded employer responsibilities because of concern that inaccurate or incomplete consumer reports could cause applicants to be denied jobs or cause employees to be denied promotions unjustly. The amendments ensure (1) that individuals are aware that consumer reports may be used for employment purposes and agree to such use, and (2) that individuals are notified promptly if information in a consumer report may result in a negative employment decision.

What is a Consumer Report?A consumer report contains information about your personal and credit characteristics, character, general reputation, and lifestyle. To be covered by the FCRA, a report must be prepared by a consumer reporting agency (CRA) — a business that assembles such reports for other businesses.

Employers often do background checks on applicants and get consumer reports during their employment. Some employers only want an applicant’s or employee’s credit payment records; others want driving records and criminal histories. For sensitive positions, it’s not unusual for employers to order investigative consumer reports — reports that include interviews with an applicant’s or employee’s friends, neighbors, and associates. All of these types of reports are consumer reports if they are obtained from a CRA.

Applicants are often asked to give references. Whether verifying such references is covered by the FCRA depends on who does the verification. A reference verified by the employer is not covered by the Act; a reference verified by an employment or reference checking agency (or

other CRA) is covered. Section 603(o) provides special procedures for reference checking; otherwise, checking references may constitute an investigative consumer report subject to additional FCRA requirements.

Key Provisions of the FCRA AmendmentsWritten Notice and Authorization.Before you can get a consumer report for employment purposes, you must notify the individual in writing— in a document consisting solely of this notice — that a report may be used. You also must get the person’swritten authorization before you ask a CRA for the report. (Special procedures apply to the trucking industry.)

Adverse Action Procedures.If you rely on a consumer report for an “adverse action” — denying a job application, reassigning or terminating an employee, or denying a promotion — be aware that:

Step 1: Before you take the adverse action, you must give the individual a pre-adverse action disclosure that includes a copy of the individual’s consumer report and a copy of “A Summary of Your Rights Under the Fair Credit Reporting Act” — a document prescribed by the Federal Trade Commission (FTC). The CRA that furnishes the individual’s report will give you the summary of consumer rights.

Step 2: After you’ve taken an adverse action, you must give the individual notice — orally, in writing, or electronically — that the action has been taken in an adverse action notice. It must include:

• the name, address, and phone number of the CRA that supplied the report;

• a statement that the CRA that supplied the report did not make the decision to take the adverse action and cannot give specific reasons for it; and

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• a notice of the individual’s right to dispute the accuracy or completeness of any information the agency furnished, and his or her right to an additional free consumer report from the agency upon request within 60 days.

Certifications to Consumer Reporting Agencies.Before giving you an individual’s consumer report, the CRA will require you to certify that you are in compliance with the FCRA and that you will not misuse any information in the report in violation of federal or state equal employment opportunity laws or regulations.

In 1998, Congress amended the FCRA to provide special procedures for mail, telephone, or electronic employment applications in the trucking industry. Employers do not need to make written disclosures and obtain written permission in the case of applicants who will be subject to state or federal regulation as truckers. Finally, no pre-adverse action disclosure or Section 615(a) disclosure is required. Instead, the employer must, within three days of the decision, provide an oral, written, or electronic adverse action disclosure consisting of: (1) a statement that an adverse action has been taken based on a consumer report; (2) the name, address, and telephone number of the CRA; (3) a statement that the CRA did not make the decision; and (4) a statement that the consumer may obtain a copy of the actual report from the employer if he or she provides identification.

In Practice...Youadvertisevacanciesforcashiersandreceive100applications.Youwantjustcreditreportsoneachapplicantbecauseyouplantoeliminatethosewithpoorcredithistories.Whatareyourobligations?

• You can get credit reports — one type of consumer report — if you notify each applicant in writing that a credit report may be requested and if you receive the applicant’s written consent. Before you

reject an applicant based on credit report information, you must make a pre-adverse action disclosure that includes a copy of the credit report and the summary of consumer rights under the FCRA. Once you’ve rejected an applicant, you must provide an adverse action notice if credit report information affected your decision.

Youareconsideringanumberofyourlong-termemployeesforamajorpromotion.Youwanttochecktheirconsumerreportstoensurethatonlyresponsibleindividualsareconsideredfortheposition.Whatareyourobligations?

• You cannot get consumer reports unless the employees have been notified that reports may be obtained and have given their written permission. If the employees gave you written permission in the past, you need only make sure that the employees receive or have received a “separate document” notice that reports may be obtained during the course of their employment — no more notice or permission is required. If your employees have not received notice and given you permission, you must notify the employees and get their written permission before you get their reports.

In each case where information in the report influences your decision to deny promotion, you must provide the employee with a pre-adverse action disclosure. The employee also must receive an adverse action notice once you have selected another individual for the job.

Ajobapplicantgivesyoutheokaytogetaconsumerreport.Althoughthecredithistoryispoorandthat’sanegativefactor,theapplicant’slackofrelevantexperiencecarriesmoreweightinyourdecisionnottohire.What’syourresponsibility?

• In any case where information in a consumer report is a factor in your decision — even

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FOR THE CONSUMER1-877-FTC-HELP

ftc.govFEDERAL TRADE COMMISSION

March 1999

Federal Trade CommissionBureau of Consumer Protection

Division of Consumer and Business Education

if the report information is not a major consideration — you must follow the procedures mandated by the FCRA. In this case, you would be required to provide the applicant a pre-adverse action disclosure before you reject his or her application. When you formally reject the applicant, you would be required to provide an adverse action notice.

Theapplicantsforasensitivefinancialpositionhaveauthorizedyoutoobtaincreditreports.Yourejectoneapplicant,whosecreditreportshowsadebtloadthatmaybetoohighfortheproposedsalary,eventhoughthereportshowsagoodrepaymenthistory.Youturndownanother,whosecreditreportshowsonlyonecreditaccount,becauseyouwantsomeonewhohasshownmorefinancialresponsibility.Areyouobligedtoprovideanynoticestotheseapplicants?

• Both applicants are entitled to a pre-adverse action disclosure and an adverse action notice. If any information in the credit report influences an adverse decision, the applicant is entitled to the notices — even when the information isn’t negative.

Non-complianceThere are legal consequences for employers who fail to get an applicant’s permission before requesting a consumer report or who fail to provide pre-adverse action disclosures and adverse action notices to unsuccessful job applicants. The FCRA allows individuals to sue employers for damages in federal court. A person

who successfully sues is entitled to recover court costs and reasonable legal fees. The law also allows individuals to seek punitive damages for deliberate violations. In addition, the Federal Trade Commission, other federal agencies, and the states may sue employers for noncompliance and obtain civil penalties.

For More InformationFor your copy of the FCRA, contact the FTC. The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint or to get free information on consumer issues, visit ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

Your Opportunity to CommentThe National Small Business Ombudsman and 10 Regional Fairness Boards collect comments from small businesses about federal compliance and enforcement activities. Each year, the Ombudsman evaluates the conduct of these activities and rates each agency’s responsiveness to small businesses. Small businesses can comment to the Ombudsman without fear of reprisal. To comment, call toll-free 1-888-REGFAIR (1-888-734-3247) or go to sba.gov/ombudsman.

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