Class-action settlements result from hiring decisions

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By Carol Lundberg
Dolan Newswires

In October, Kmart Corp. was hit with a class-action lawsuit alleging that the company is running afoul of the Fair Credit Reporting Act. The suit claims that the way it runs background checks on prospective employees is not allowed.

Employers are increasingly accepting only electronic applications from job seekers. At the same time, two recent multimillion-dollar settlements involving employers who were accused of misusing credit reports, and using their results to exclude some applicants, have employers wondering if they have any exposure to similar class actions.

Debra McCulloch, of Bush Seyferth & Paige PLLC in Troy, Mich., has large- and mid-size employer clients who use electronic online job application programs.

She’s not sure how successful the plaintiff in the Kmart case, Pitt v. K-Mart Corp., filed Oct. 17, 2011, in the Eastern District of Virginia, will be.

In July the plaintiff, Eric Dante Pitt, applied online for a job at Kmart.

On the electronic application, there is a notice asking if the applicant would allow the company to do a credit and criminal background check. The applicant may click “accept” or “decline.”

On July 5, the company requested a pre-employment criminal record check from HireRight, a third-party company that conducts background checks.

A couple of days later, Pitt was offered a job, and was asked to come in and complete papers in person. He also was told that he couldn’t start until Kmart received the results of his criminal background check.

On July 27, he received a letter from HireRight, stating that Kmart would not hire him as a result of his criminal background check; included was a copy, which showed he had misdemeanor convictions in 2002. He also received a summary of rights.

Pitt claims that the disclosure notice in the company’s online application process is not compliant with FCRA, and that’s what cost him the chance to get the job. He said that the FCRA requires written permission for the disclosure.

While the FCRA does allow for credit and criminal background reports to be used in hiring, the plaintiff said that electronic authorization is not allowed under the E-Sign Act. That act only allows for electronic “signatures” for consumers, and Pitt argues that job seekers are not consumers. So he should have provided authorization in writing.

Pitt is seeking damages in the amount of $100-$1,000 for each violation, and punitive damages and attorney fees.

“Think of how many employers have adopted e-applications,” McCulloch said. “There are some major class actions out there.”

‘Disparate impact’

In April, Vitran Express Inc., a transport company, paid $2.6 million to settle class-action claims in Ohio. In that case, plaintiff Thomas Hall said that when he applied for a job with Vitran Express, the company had ordered criminal background report from a third-party consumer-reporting agency.

Hall said he didn’t authorize that report.

The company got a report of someone with a similar name who had 27 felony convictions, and excluded Hall from consideration for the job.

In March, FirstGroup PLC agreed to pay $5.9 million to settle two class actions in which plaintiffs claimed credit reports were misused in hiring decisions.

The number of settlements will only get bigger if the E-Sign issue is not resolved, said Gary Chamberlin, of Miller, Johnson, Snell & Cummiskey PLC in Grand Rapids.

“Employers are increasingly using online applications,” he said. “In 10 years, there may be no more paper applications. Even the small businesses in 10-20 years will be online only.”

Employers are not providing stand-alone credit report authorizations in their online applications, and sometimes they aren’t properly handling the results of the reports, he said.

“If you make a negative employment decision, you have to circle back with the employee and tell them that you’ve made the decision as a result of the report,” Chamberlin said.

In Pitt, McCulloch said it’s possible the employer looked too far back into Pitt’s past, and that the misdemeanors may not be relevant to the job he was seeking.

“There is a lot of concern lately on the [Equal Employment Opportunity Commission] that these background checks may have disparate impact on protected classes of workers,” she said.

The EEOC met in October to discuss the use of credit histories as employment selection criteria. The commission noted that high unemployment has “forced an increasing number of people to enter or re-enter the job market” and as a result, more workers are subjected to employment screening tools like credit checks. Those tools, the commission said, could unfairly exclude them from job opportunities.

Is a check even needed?

Representatives from the U.S. Chamber of Commerce and other business communities defend the use of credit histories as lawful, and “predictive in certain situations of reliability.”

In September, the EEOC released comments regarding the Peace Corps’ pre-employment inquiry of criminal records and arrest records, which the commission said may disproportionately exclude Hispanics and African-Americans from employment.

The commission stressed that its policy on conviction records requires employers to consider the nature of the offenses, the time that has passed since, and the nature of the job held or sought.

“I tell my clients that you have to be careful,” McCulloch said. “They have to be careful not to automatically exclude people for certain checks. They have to ask if the position requires the employer to run the background check at all.”

McCulloch said that she thinks one of two things will happen: either the Federal Trade Commission, which enforces FCRA, will issue more guidance; or Congress is going to have to clean up the 10-year-old E-Sign legislation.

She advises clients to look at their written instructions to make sure that it’s clear what the credit report will be used for, and what it will entail.

“You have to make it clear if it’s a credit check or a criminal background check. And you have to make it clear what will be done with the results,” McCulloch said. “You have to get the authorization to retain that information.”

Kurt Graham, senior attorney at Clark Hill PLC’s Grand Rapids office, said his advice to employers might sound counterintuitive, but he gives it anyway.

“I tell them that you have to add some paper back into the application process,” he said. “You can get an online application and ask someone to upload a resume online. And you can base your decision to call someone in for an interview based on that.

“But if you want to get the authorization for the background check, you can either ask someone to download and print it and send it back in, or you can get it when someone comes in for the interview.”

The FCRA makes it clear that notice must be in writing, he said, and the E-Sign Act allows for some exceptions. But until the courts or Congress clarify whether job applicants can simply click a mouse to authorize a credit check, he advices his employers to “[j]ust do that in-person, on paper, to be safe.”