These days every new employee brings a possible threat to your business, including theft, sexual harassment, physical violence, identity theft, fraud and drug use. The potential for ruinous legal actions is higher today than ever before. That’s why a background check before you hire an applicant could save your business.

It’s essential that background checks be conducted within the maze of laws designed primarily to protect job applicants. “The use of background checks is governed by a multitude of federal, state and even local laws and regulations,” says labor law attorney David Roth at Fisher Phillips, Denver, Colo.

“For example,” says Roth, “the Fair Credit Reporting Act (FCRA) requires advance notice to the applicant that a background check will be made, and the applicant must provide written consent for the procedure. Further, it requires that the employer provide a copy of the report to the applicant before and after taking any adverse action.”

The FCRA, along with other laws and regulations, makes it advisable to consult with an attorney experienced in labor law before adopting a policy of making pre-employment background checks.

“Some laws actually require employers to conduct background checks,” says Roth. “For instance, background checks are usually required for applicants who will be working with children, the elderly or the disabled.”

Despite the need for adherence to applicable laws, many employers say that the positive benefits of background checks far outweigh the inconveniences.

Benefits of background checks

“A comprehensive background check, including criminal convictions, civil filings, credit history (where permissible) and social media, will reduce the number of people hired with a history of violent, anti-social or otherwise undesirable behavior,” says labor attorney Todd Wulffson, managing partner at Carothers, DiSante & Freudenberger LLP., Irvine, Calif. “This will likely reduce the risk of hiring persons who may harm the company, its employees or customers.”

Wulffson also points out that a comprehensive background check reduces the risk of “negligent hiring” cases against the employer by precluding applicants who, if they commit any bad act in the workplace, provide an easy argument that they should never have been hired because of their history.

“Another benefit,” he says, “is that eliminating applicants through various types of background checks reduces the pool of applicants, thus simplifying the interviewing process.”

Attorney Roth adds that there are other benefits of pre-employment background checks. A clean background check may:

• indicate that an applicant is trustworthy, reliable and responsible.
• help predict job performance.
• discourage applications by individuals who are trying to hide something.
• increase an employer’s ability to provide a safe workplace by decreasing instances of workplace violence.
• increase an employer’s ability to minimize theft-related losses as a result of employee dishonesty.
• increase an employer’s ability to avoid negative publicity if an employee’s actions or history become public.

Advantages and disadvantages

The cost for conducting background checks has dropped sharply in recent years. A limited background check in a single state can cost as little as $25. Still, it’s a cost that must be factored into the hiring process. “There is no way to avoid the cost, time and manpower necessary to request and review a background check,” says Roth.
Wulffson agrees. “Background checks can be expensive—either because one has to retain a company to do the searches or because employee hours are directed to background checks instead of more productive company business.”

“Another factor to be considered when deciding whether to use background checks,” says Roth, “is the potential that the information in the background check report is incorrect, which may improperly disqualify a good candidate or, conversely, permit the hiring of an undesirable candidate.”

Wulffson adds that pre-employment background checks cannot always indicate whether an individual with a problematic past has since reformed and become qualified for the job. There is also the potential of negatively affecting the morale of employees, because they may feel that a policy of conducting background checks invades their privacy.

“Also,” says Wulffson, “if a company does comprehensive background checks, particularly if it does them early in the application process, it can develop a reputation as a company that invades the privacy of its applicants/employees and is, therefore, an undesirable place to work. This poor reputation can prevent otherwise strong candidates from applying. This is especially true among millennials; the culture of the company is very important to members of Generation Y.”

Keep in mind, too, that improperly conducted checks could potentially violate federal, state or local laws, and monetary penalties for noncompliance with those laws can be significant. These laws and regulations may be complex and difficult to follow and may require the assistance of legal counsel.

“If the background check process eliminates a great deal of applicants,” says Wulffson, “most of whom are of the same race, the federal Equal Employment Opportunity Commission, a state agency or an enterprising plaintiff’s attorney may claim that the company used the background check as a means to discriminate in the hiring process.

“Also, if the company does a background check before legally compliant notice and consent has occurred, and someone other than the employer does the check, the company may have violated federal law. The Fair Credit Reporting Act, or state equivalents, which carry penalties on their own, may be used as the basis for an invasion-of-privacy or failure-to-hire case.”

Remember, too, that background check information, especially if taken from social media sites, may not always paint an accurate portrait of an individual, and decisions based on social media may be more susceptible to claims of discrimination.

“Keep in mind,” says Wulffson, “that the employer does not need the applicant’s consent to review publicly available information about the applicant—which can include criminal records, civil filings and social media sites.

“However, if the employer does not apply the same level of scrutiny to all applicants or learns personal information about the applicant that cannot be used to make a hiring decision (such as religious affiliation, sexual orientation, cultural or national origin identity, marital status, disability status, etc.), the company risks a lawsuit for invasion of privacy or discrimination if the applicant is not hired.”

Justifying risks and expenses

Obviously, there is risk and expense involved in the use of pre-employment background checks. Still, increasing numbers of small business owners are looking to them as a first line of defense against the potential problems introduced each time a new employee is hired.

For a small business owner who is considering the use of background checks, Wulffson says: “Any background check should involve a cost/benefit analysis, and this requires a full understanding of the actual costs and risks. This will usually require consultation with competent employment counsel or an experienced human resources professional.

“Our advice for an overall best practice is that the benefits of a standard background check—i.e., a criminal records check and verifying employment/references—outweigh the burdens. Checking these two areas is not expensive, and the risk to the employer for not doing such a minimal and reasonable check is simply too high.

“Credit checks should only be done where legally permissible and relevant to the position. Civil records checks, such as finding cases where the applicant was a plaintiff or a defendant in a past lawsuit, should only be performed for executives or other high-profile positions.

“Finally, social media checks should only be done when social media skills are relevant to the job or the position will be high-profile with the company. Although applicants must be told up-front what background checks are to be done, the checks must be done only after an employment offer has been made, but before employment begins. This provides a system that is legally compliant, as fair as possible to the applicants and protective of the employer’s interests.”

William J. Lynott writes extensively on business-related topics.