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Two companies sucked into lawsuits along with background check firm

March 7, 2014

By Kristin Cifolelli, courtesy of SBAM Approved Partner ASE

Heads-up to employers: At the end of January a job candidate rejected by two employers filed a class action lawsuit against a background-checking vendor. Now he has sued the vendor’s two client employers who used the information provided by the vendor to reject him for employment. The plaintiff argued that the information obtained by the background-check vendor and delivered to the client employers ultimately disqualified the plaintiff from employment in either company. However the information as handled violated the Fair Credit Reporting Act and California law (Tsang v. LexisNexis Risk Solutions, Inc.).

In 2010, plaintiff Tsang worked for a big-box retail store in Northern California.  While employed at this store, he was accused of committing refund fraud.  He was questioned by a loss prevention officer and a district manager.  While he was being detained, the loss prevention officer demanded that he prepare and sign a statement admitting to the allegations of refund fraud. According to Tsang, he was told that if he didn’t cooperate and sign the admission statement, he would be turned over to the police for arrest and criminal prosecution.  Tsang stated that he felt he had no other options, so he signed a statement admitting guilt to the fraud allegation. He was released from detainment and his employment was terminated.  He was never criminally charged or convicted of retail fraud.

During his employment, the store used from, and provided information to, the “Esteem” database for criminal background checks.  LexisNexis Risk Solutions Inc. and First Advantage Background Services Corp. operate the “Esteem” retail theft contributory database. Esteem comprises information gathered from participating retail merchants, specifically their detention records for alleged incidents of shoplifting, fraud, and theft. The majority of the detention records in that database relate to alleged crimes that were never criminally prosecuted and for which no criminal conviction ever resulted.  The intent of the database is to enable participating retail merchants to exchange detention records relating to former employees and customers who have been accused of crimes, for the purpose of making hiring decisions.

At the time of Tsang’s detention, he was not informed that 1) his admission statement or any other documents that were prepared during the investigation were going to be submitted to the “Esteem” database, and 2) they could potentially affect his ability to get a job with future employers.

In June 2012, Tsang applied for a position at Dollar General as a store manager.  As part of the hiring process, Dollar General requested an Esteem consumer report on Tsang from LexisNexis.  The report Dollar General received contained information relating to his 2010 detention for alleged refund fraud and indicated that he had provided his employer with an “admission statement.” Dollar General informed Tsang that he failed his background check and was denied consideration for employment.

The basis for Tsang’s class action lawsuit is that reporting his fraud admission by the Esteem database violated the federal Fair Credit Reporting Act (FCRA). The FCRA prohibits consumer reporting agencies from preparing background reports where the same inquiry by a prospective employer would violate a state equal employment opportunity law or regulation. California Law prohibits public and private employers from seeking, or considering as a factor in employment, information concerning any “arrest or detention that did not result in a conviction.”

According to Tsang’s claim, the Esteem database never should have provided information to potential employers regarding the allegation of the retail fraud and his admission of guilt. Tsang’s class action lawsuit also represents others who sought employment in California and were subject to an Esteem report that contained details of allegations of crimes that did not result in a conviction. Tsang filed his suit against LexisNexis Risk Solutions, Dollar General and T.J. Maxx (which, like Dollar General, allegedly chose not hire him because of information obtained in the Esteem report).

Employers need to be very cautious about the type of information they obtain through criminal background checks and how they use it when making hiring decisions. Note that two potential employers were included in Tsang’s suit even though neither one gathered the information that LexisNexis did.

In 2012, the EEOC issued new enforcement guidelines regarding the use of criminal conviction and arrest records in employment decisions.  The EEOC has had a long-standing policy that employers who have blanket policies denying employment because of a criminal record are violating Title VII. The basis for this position is that using criminal background checks in hiring decisions has an adverse impact on minority applicants.

Instead, employers should make individualized hiring assessments of candidates with criminal records that are based on job-relatedness and a business necessity standard. (Note that the state of Michigan prohibits the use of misdemeanor arrest records in hiring and employment decisions.)

Employers should be aware that the EEOC is taking a very aggressive stance on background checking policies. These policies and hiring practices should be regularly reviewed and updated to ensure compliance with applicable laws.

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