Employment Background Checks:
A Guide for Small Business Owners

1. Introduction
2. Background Check Primer: Know the Terminology
3. Employment Background Checks and Federal Law, the FCRA
4. What Can an Employer Find Out? What Is Off Limits?
5. Should I Hire an Outside Screening Company?
6. Background Checks: Not Just for Applicants
7. The Employer’s Obligations under the FCRA
8. Proper Disposal of Employment Reports
9. Workplace Investigations: New Rules for Employers
10. Special Rules for California Employers
11. Employer Checklist and Tips
12. Resources

1. Introduction

Small business owners and large corporations alike know the value of good employees. But unlike large corporations, small business owners are often unable to absorb the risks and liability that may come from bad hiring decisions.

More and more, employers big and small feel the need to know about the background of prospective, even current, employees. For small business owners the question of how to find the best employees without violating privacy rights and other laws can be confusing.

This guide is intended to acquaint small business owners with basic information about screening applicants and current employees.

2. Background Check Primer: Know the Terminology

Like most issues today, the subject of employment background checks has its own language. Many terms have different meanings, depending on where the words appear. And terms sometimes come into the language through common usage, but are not recognized as technical terms or terms you will find defined in the laws we discuss in this fact sheet.

When an employer performs what he or she calls a background check or an employment screening, this may or may not be subject to the two laws we discuss here:

Federal Fair Credit Reporting Act (FCRA), 15 USC §§1681 et seq.
California Investigative Consumer Reporting Agencies Act (ICRAA), Civil Code §1786 et seq.
Whether you are researching this topic for the first time or are a seasoned employer, it helps to know the language.

Consumer Report This is the term used in the federal FCRA for any “written, oral, or other communication,” in other words, a report made about a person by a consumer reporting agency that bears on the person’s “credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living.” This includes credit reports and investigative consumer reports (also sometimes called “interview” reports) made, among other things, for the employment purposes of hiring, promotion, reassignment, or retention.


Investigative Consumer Report Under the federal FCRA this means a report about a consumer’s character, general reputation, personal characteristics, or mode of living in which information is obtained through interviews with neighbors, friends, or associates. Under California’s Investigative Consumer Reporting Agencies Act, or ICRAA, an investigative consumer report is a report in which the same types of information are obtained through any means. The term in California excludes credit reports.

3. Employment Background Checks and Federal Law, the FCRA

The federal Fair Credit Reporting Act (FCRA) sets the national standard for employers who want to find out more about an applicant or current employee. Sometimes mistaken for the credit reporting law, the FCRA covers much more than credit reports. It is enforced by the Federal Trade Commission (FTC), www.ftc.gov.

The FCRA covers “consumer reports.” In addition to credit worthiness information, it covers information about a person’s “character, general reputation, personal characteristics, and mode of living.” This is the type of information you as an employer usually want to know before making important decisions about an applicant or employee. Thus, whether a credit check is included or not, an employment background check is a type of “consumer report” that is covered by the FCRA.

Be aware: For an employment background check to qualify as a “consumer report” under the FCRA, it must be prepared by a third-party consumer reporting agency. For more on consumer reporting agencies and when an employment background check is subject to the FCRA, see sections 3, 4, and 7 of this guide.

Why is a law needed?

The purpose of the FCRA is to assure that reports used to make important decisions such as those related to a person’s employment are accurate. Privacy is also a factor in protecting a consumer’s rights. The law limits who has legitimate access to employment background checks. For the individual who is the subject of a background check as well as the employer, such safeguards are essential. For example, a report that erroneously shows a criminal conviction can wreck a career and at the same time rob a business of a valuable member of the workforce.

I only have a few employees. Does the FCRA apply to me?

Yes. The FCRA makes no distinctions between a small business owner and a large corporation. If the information you seek on an applicant or current employee meets the definition of a consumer report and the information is compiled by a consumer reporting agency, the FCRA applies no matter how many employees you have.

4. What Can an Employer Find Out? What Is Off Limits?

What is a background check?

“Background check” is a common term used to describe any one or a combination of reports collected about individuals for employment purposes. The technical term used by the FCRA for a collection of such data is a “consumer report,” defined as “…any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living….”. (15 USC §1681a(d)(1))

If you are a California employer, the technical term for a background check is an “investigative consumer report,” which includes information about a person’s “character, general reputation, personal characteristics,” but does not include information about creditworthiness. For more on California law, see section 10.

Is a background check required?

Neither the FCRA nor the California ICRAA requires employers to conduct background checks. These laws merely set the standards that apply if and when a background check is conducted. The focus of both the FCRA and the ICRAA is not to help employers dig into an applicant’s past, but rather to assure the information obtained is accurate and up to date. Without these standards, erroneous information may follow an individual for a lifetime.

For certain jobs, specific laws make a background check mandatory rather than discretionary. Often the laws that require a background check are limited to a check of criminal records. Examples of jobs that require a criminal background check are those in the trucking industry and many jobs that involve contact with children, the elderly, and disabled persons. Such industry-specific background checks are beyond the scope of this fact sheet.

Immigration laws also call for employers to verify a person’s eligibility for employment. This requires a form called an Employment Authorization Document (EAD), sometimes referred to as an I-9 check. For more on this process and an employer’s obligations, visit the web site for the Bureau of Citizenship and Immigration Services, formerly the Immigration and Naturalization Service and now a part of the Department of Homeland Security. Go to www.bcis.gov/graphics/,
www.bcis.gov/graphics/howdoi/EEV, and www.bcis.gov/graphics/howdoi/faqeev.htm.

What can I learn from a background check?

Depending on the focus of your business, here are just some of the things background checks can include:

Credit history Past employment Professional licenses
Criminal records Education Workers’ comp
Driving records References Medical history

As a minimum, most employers want to check with a former employer. This type of background check is typically called a reference check. And employers usually want to be assured that the person about to be hired has no criminal record. For