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New Year's Housekeeping: Ninth Circuit Court Ruling Highlights Importance of Reviewing Applicant Background-Check Procedures

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With all the recent focus on the new administration, employers may have overlooked a January 20, 2017, decision from the Ninth Circuit Court of Appeals involving background-check procedures for job applicants. But the court's decision in Syed v. M-I, LLC, No. 14-17186 (9th Cir. Jan. 20, 2017) highlights that applicant background-check requirements are a highly technical area, ripe for potential class-action litigation.

The plaintiff (Syed), a California resident, applied for a position with a Texas-based manufacturer, M-I, LLC. As part of M-I's standard application procedures, it conducted applicant background checks through a third-party vendor and provided applicants with a form to review and sign before it obtained those background checks (the "Release"). The Release informed applicants that their consumer reports (a term that can include credit history, criminal history, driving history, and employment history) could be collected and used as a basis for employment decisions. The Release also authorized M-I to procure the consumer report. But in addition, the Release stated that by signing the form, applicants were waiving their rights to sue M-I, the background-check vendor, and their agents for violations of the Fair Credit Reporting Act (the "FCRA"). Notably, it was the background-check vendor that prepared the Release form, not M-I.

Later, Syed obtained and reviewed a copy of his personnel file. Based on what he found there, he filed a putative class action in federal court on behalf of himself and any other person whose consumer report had been obtained by M-I after receiving the Release, and sought statutory damages under the FCRA of $100 to $1,000 per violation, punitive damages, attorney fees, and costs.

So what, according to Syed, did M-I do (or fail to do) here?  The FCRA contains specific requirements for employers that obtain and use consumer reports for employment purposes. Specifically, before an employer can obtain a consumer report, the employer must:  (1) disclose to the applicant that it may obtain an applicant's consumer report for employment purposes (the "Disclosure"); and (2) obtain the applicant's written authorization to obtain the consumer report. The Disclosure must be "clear and conspicuous," "in writing," and "in a document that consists solely of the disclosure."  Syed claimed that because the Release included a liability waiver in addition to the Disclosure, the document did not consist "solely of the disclosure."  Put another way, while the Disclosure contained all the information required by the FCRA, Syed alleged that the Disclosure violated the FCRA because, with the liability waiver, the Disclosure contained too much information. The trial court dismissed Syed's complaint, twice, for failure to state a claim and lack of standing. Syed appealed.

The Ninth Circuit reversed the trial court's decision, holding that the "solely of the disclosure" language prohibits employers from including a liability waiver on the same document as a FCRA Disclosure. This was significant because trial courts in the Ninth Circuit and elsewhere have been split on this issue for years, but before Syed, neither the Supreme Court nor any federal circuit court had addressed it. Even more surprising, given the uncertainty of the law before Syed, the Ninth Circuit also found that M-I's violation was "willful" under the FCRA, subjecting it to presumed statutory damages of $100 to $1,000 per violation, punitive damages, and attorney fees and costs. And the court reached this conclusion even though the Release had been prepared by a vendor, a consumer reporting agency, which M-I relied on to prepare the form and collect the reports.

While reviewing forms may seem about as exciting as organizing a sock drawer, now is a good time for a little New Year's housekeeping while you wait for further word from the federal agencies on the "sexier" issues of overtime, health insurance, union rules, federal contractor requirements, etc. Syed is an important reminder for employers to review their background-check vendors, forms, and procedures, keeping in mind that there is also a patchwork of state and local ordinances in Washington, Oregon, California, and elsewhere that either "ban the box" or otherwise restrict the use of criminal or credit history in employment decisions. If you would like some help in navigating these issues, please contact a member of our Employment Law and Labor Relations team.