Liability Releases for Background Checks Are Unlawful

For years, employers have written what they consider to be straightforward forms. With so little guidance, many employers have chosen to include a liability waiver as part of the disclosure, releasing the employer from liability for any incorrect information it may receive from the background check vendor and waiving the applicant's right to sue the employer for decisions made as a result of the background check information. Many employers thought this was a relatively safe practice; there was little, if any, litigation on the Stand Alone Disclosure rule, and no courts had definitively ruled on the permissibility of including the release.

Additionally, because of the FCRA's damages scheme, the only meaningful way for plaintiffs to succeed in litigating a Stand Alone Disclosure claim is to prove a willful violation. And the Supreme Court has previously held that the test for willfulness requires, in part, guidance from the Courts of Appeals warning employers away from taking a particular action. With very little administrative guidance and no appellate court decisions, many employers felt they could enjoy at least some insulation from liability as a result of their good-faith disclosure drafting efforts.

Enter the U.S. Court of Appeals for the Ninth Circuit, which issued the first appellate court decision on the Stand-Alone Disclosure rule in January 2017.

Syed Sets Precedent

The case, Syed v. M-I LLC, is a putative class action in California, where the district court twice dismissed the plaintiff's claim that inclusion of a liability release in the defendant's FCRA disclosure was a willful violation. On appeal, not only did the Ninth Circuit find that the plaintiff stated a claim, but it found, as a matter of law, that the defendant committed a willful violation by including such a release.

This holding is precedential. Syed represents the first appellate decision on the Stand Alone Disclosure rule, and many courts will consider it to be dispositive in light of the Supreme Court's test. Indeed, the case has already been cited several times not just for its holding on willfulness, but for its contribution to the ongoing discussion of standing following the Supreme Court's 2016 Spokeo decision as well. Going forward, at a minimum, employers using disclosures with liability releases can expect to face class actions because of the content of their disclosures.

How Employers Can Mitigate Risk

In the aftermath of Syed, employers need to be vigilant about language used on their background check disclosure forms. The Ninth Circuit's ruling has finally set some guidance for employers, but it highlights the need for basic HR forms. In an ideal world, the government would provide a template it considers to be compliant, but this seems an unlikely prospect in the near future. The onus, therefore, remains on employers to heighten their attention to the FCRA's requirements and related litigation. Presently, the best thing employers can do to avoid potentially catastrophic damages is to be aware that including a liability release could subject them to significant penalties, and then to take the simple step of having a legal expert review their forms for protection.

Employers that use third-party vendors that take over the background-check process for potential employees have to be especially vigilant, as they sometimes delegate their disclosure obligations to those vendors. This is a risky practice that could expose employers to liability. Employers should maintain control over the process to the full extent possible, which may mean writing the form that's sent to potential employees themselves, and including an indemnification provision in their contract with a third-party service provider.

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Sarah Riskin is a labor and employment attorney with Nilan Johnson Lewis in Minneapolis .

Employers in all industries perform background checks as a part of their pre-employment screening process, sometimes performing such checks post-employment, as well. The federal Fair Credit Reporting Act (FCRA) requires employers to first inform applicants and employees about the intent to obtain and use a background check to make employment-related decisions before the employers are permitted to actually get the background check. The FCRA also requires employers to obtain the employee's or applicant's permission before procuring the background check. But what the law does not do is provide employers with a template disclosure or any concrete guidance on what the disclosure should say. Rather, the law simply forbids employers from including anything beyond “solely the disclosure” and authorization in the form used to inform individuals about the employer's intent to obtain a background check.

Catastrophic Risks

It may seem like a simple issue, but the risk of violating this provision — dubbed the “Stand Alone Disclosure” rule — can be catastrophic. Because of the way the statute's damages scheme is written, a mere violation of the provision may be negligible. However, if a violation is found to be “willful,” it can subject the company to damages up to $1000, and considering how many of these cases are brought as class actions, it's easy to see how a seemingly innocuous form can result in bet-the-company litigation.

For years, employers have written what they consider to be straightforward forms. With so little guidance, many employers have chosen to include a liability waiver as part of the disclosure, releasing the employer from liability for any incorrect information it may receive from the background check vendor and waiving the applicant's right to sue the employer for decisions made as a result of the background check information. Many employers thought this was a relatively safe practice; there was little, if any, litigation on the Stand Alone Disclosure rule, and no courts had definitively ruled on the permissibility of including the release.

Additionally, because of the FCRA's damages scheme, the only meaningful way for plaintiffs to succeed in litigating a Stand Alone Disclosure claim is to prove a willful violation. And the Supreme Court has previously held that the test for willfulness requires, in part, guidance from the Courts of Appeals warning employers away from taking a particular action. With very little administrative guidance and no appellate court decisions, many employers felt they could enjoy at least some insulation from liability as a result of their good-faith disclosure drafting efforts.

Enter the U.S. Court of Appeals for the Ninth Circuit, which issued the first appellate court decision on the Stand-Alone Disclosure rule in January 2017.

Syed Sets Precedent

The case, Syed v. M-I LLC, is a putative class action in California, where the district court twice dismissed the plaintiff's claim that inclusion of a liability release in the defendant's FCRA disclosure was a willful violation. On appeal, not only did the Ninth Circuit find that the plaintiff stated a claim, but it found, as a matter of law, that the defendant committed a willful violation by including such a release.

This holding is precedential. Syed represents the first appellate decision on the Stand Alone Disclosure rule, and many courts will consider it to be dispositive in light of the Supreme Court's test. Indeed, the case has already been cited several times not just for its holding on willfulness, but for its contribution to the ongoing discussion of standing following the Supreme Court's 2016 Spokeo decision as well. Going forward, at a minimum, employers using disclosures with liability releases can expect to face class actions because of the content of their disclosures.

How Employers Can Mitigate Risk

In the aftermath of Syed, employers need to be vigilant about language used on their background check disclosure forms. The Ninth Circuit's ruling has finally set some guidance for employers, but it highlights the need for basic HR forms. In an ideal world, the government would provide a template it considers to be compliant, but this seems an unlikely prospect in the near future. The onus, therefore, remains on employers to heighten their attention to the FCRA's requirements and related litigation. Presently, the best thing employers can do to avoid potentially catastrophic damages is to be aware that including a liability release could subject them to significant penalties, and then to take the simple step of having a legal expert review their forms for protection.

Employers that use third-party vendors that take over the background-check process for potential employees have to be especially vigilant, as they sometimes delegate their disclosure obligations to those vendors. This is a risky practice that could expose employers to liability. Employers should maintain control over the process to the full extent possible, which may mean writing the form that's sent to potential employees themselves, and including an indemnification provision in their contract with a third-party service provider.

*****
Sarah Riskin is a labor and employment attorney with Nilan Johnson Lewis in Minneapolis .