One of your long-term employees has been short-listed for a new position in the company. The new position comes with increased responsibility, including access to sensitive information and cash. You’ll need to run criminal and financial background checks, since the employee started working for the company before checks were introduced for incoming employees.

Employers who find themselves in this situation should tread carefully, say they experts. Charging ahead without knowing the rules about background checks can open you up to a lawsuit.

Fair Credit Reporting Act

The Fair Credit Reporting Act (FCRA) is a federal law that applies to employers when they are doing both financial checks and criminal background checks, says Devora Lindeman, a New York employment lawyer and partner at Greenwald Doherty LLP.  And while the FCRA applies in all 50 states, some states also have their own state laws, she adds, so it’s not always just a simple matter of complying with one law.

“Under the federal law you‘ve got to have the employee’s express permission in writing to do a background check through what’s called a third party agency,” says Lindeman. He or she must sign two forms, a consent form and a disclosure form (although these can be combined in one document as long as the requirements of both are included).

“An employer who didn’t do a background check on hire isn’t going to have those forms on file,” says Lindeman, adding that it’s possible to have new employees sign forms that are drafted in such a way that they request permission for any other checks during employment, as well as the initial background checks.

Disclosure and Permission

Before undertaking background checks on an employee from whom you do not have permission:

1. Advise the employee that you would like to do a background criminal and/or financial check
2. Obtain signed consent and disclosure forms from the employee
3. Keep the forms on file

Results: Now What?

The results from a criminal and financial check can bring up a host of issues for an employer if the subject of the check doesn’t come out squeaky clean. But employers would be wise to proceed with caution if they are taking action based on the results.

“Employers who receive background check results with negative information need to advise the person, and I know a lot of employers try to fudge this step because they really don’t want to tell the person,” says Lindeman. “But under the law you’re required to give the employee or applicant a copy of the background check and advise them of the decision you are about to make,” she says.

The employee must be given a reasonable amount of time to respond to the results of the check, to refute the results or to explain them. “There’s nothing under the Fair Credit Reporting Act that requires an employer to either accept the explanation or change their mind just because the employee says ‘that’s not me’,” says Lindeman. “All you’re required to do is give a reasonable amount of time, usually five business days, for the employee to go through the form and get back to you.”

Taking Action

An employer can choose to terminate or not promote an employee based on results of the criminal or financial check, but the information uncovered needs to be reasonably related to the job, explains Lindeman.  If the employee is found to have financial problems, the employer could decide to not promote them to a position in which they will be in control of large amounts of money, for example.

The criminal background check has been found by the EEOC to disproportionally adversely impact minorities, women and people of color, says Lindeman, and so employers must go through an analysis before deciding to take any employment action based on its results.

Whatever action you take based on results found in background checks should stem from a valid reason and should not be seen as discriminatory.

“At will employment means that employers can let employees go for a good reason, a bad reason, or no reason at all,” says Lindeman. “They just can't let at will employees go for a discriminatory reason.”

To avoid an accusation of discrimination, make sure the background check shows something that would reasonably preclude the employee from the particular job under consideration. The employment action based on it needs to make sense.

“There’s a difference between what’s within the letter of the law and what’s prudent,” says Lindeman.  “A termination that makes no sense to an employee is likely to result in a lawsuit.”