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Conducting Employee Background Checks – Why Do It and What the Law Allows

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Conducting Employee Background Checks – Why Do It and What the Law Allows

By Caron_Beesley, Contributor
Published: December 7, 2011 Updated: April 30, 2012

Making the right hiring decisions for your company is critical to your business success. But getting it right isn’t easy.

We all know the negative consequences of making the wrong hire – it can lower your team’s morale, hinder productivity, and even impact customer relations. But did you know that the cost of replacing an experienced worker who doesn’t work out can cost 50 percent or more of that individual’s salary, and these costs go up if the employee has specialized skills such as nursing (Source: AARP).

There are many things you can do to ensure you make informed decisions and hire quality employees and one of them is to use background checks.

Reasons to Conduct a Background Check

A pre-employment background check can not only save you money in the long run, it can also protect your business. How? If your employees come into direct contact with your customers (for example, in a care capacity) and cause harm to a customer, your business can be liable if that employee has a criminal record. A background check can also provide insight into an individual’s behavior, character, and integrity.

Which Types of Background Checks Can and Should You Conduct

There are several background checks that you can consider as you build a profile of a future employee. Not all of them, however, are appropriate or even possible for every company. For example, how you may employ the information gleaned during a criminal background check when making hiring decisions varies from state to state. Furthermore, any check on an individual’s credit score or military service requires consent.

To read more about the types of checks you can and cannot conduct, refer to SBA’s Guide to Employee Background Checks.

As a general rule of thumb, it’s worth considering the following background screening: credit checks (see more on why below), drug tests, past employers, criminal background (check with a lawyer first to see what your state permits), and driving records (sometimes necessary if the job demands this skill).  If your employees work with children or in other care positions, it may also be worth checking the sex offender registry.  Some states may require it.

Should You Run a Credit Check on Potential Employees?

Used by 60 percent of employers when making hiring decisions, a credit check (which only shows history, not a score) can be a good indicator not only of an individual’s fiscal aptitude but also overall integrity. If a job description stipulates that an employee will have access to sensitive financial or customer information, many employers rely on a credit check for that extra security.

Despite the popularity of credit checks, the use of this information to judge character is increasingly being considered poor practice and unfair, thanks to difficult economic times which may blot the credit history of an otherwise fiscally responsible individual. Because of this, many states and equal opportunity organizations are challenging the availability of credit information.  In most states, however, it remains a fair and legal practice (Hawaii and Washington ban it).

Here’s what the law allows: according to the Fair Credit Reporting Act, federal law allows using credit information for employment purposes. But there are some caveats:

  1. You must get the job seeker’s written consent.
  2. If you decide not to hire a person based on this information, you are required to let the candidate know the source used for the check. (In truth most employers don’t give a reason for not hiring an individual to avoid this sort of legal wrangling.)

So, should you run a credit check? Your best strategy might be to limit credit checks to positions for which a job seeker’s credit history has relevance, and be sure to gain the applicant’s consent to run this check and an opportunity to explain any red flags.

Stay Within the Law by Working with a Screening Firm

Many private screening firms will offer complete background checks while helping you stay compliant with the law, although you should concentrate only on checks that pertain to the job at hand unless you need to know every little detail about your next employee and have the budget to pay the costs.

Do Your Own Detective Work

While an outsourced screening firm can help you comply with the law and run the checks your business needs, there are still some basic checks that shouldn’t be ignored that you can do yourself:

  • Verify What’s on the Resume – Call colleges and universities to verify the degree earned and ask previous employers to confirm the applicant’s work history (not a reference just a yes/no confirmation of tenure).
  • Use the Web –You’re not looking for dirt on this one, but a quick web search can actually help you round-out the profile of your future hire, their interests, achievements, and even mitigate information that a formal background check has revealed.

Related Resources

About the Author:

Caron Beesley


Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley


I'd like to assist parents in placing a message on their background reports to explain certain charges, or at least point them in the right direction to do so. How would I go about that? For instance a Simple Battery charge resulting from self defense. The is integral for seeking employment to assist them in being reunited with their children. Thanks, LaDonna
It is fundamental to conduct employee background checks for ensuring the success of your business. As an employer, you are responsible to conduct credit checks, drug tests, criminal record checks, driving background checks, amongst other things to make sure the most responsible man for the job is hired. So it is essential that you do all the lawful services available to you as an employer to be safe.
It is surprising just how few employers are doing their proper due diligence when it comes to running online background check reports. Our firm specializes in providing tenant screening and pre-employment background checks. We have learned from many of our clients that prior to utilizing our services, they were only obtaining in-state data for criminal as well as relevaant civil court records such as judgments, evictions, and bankruptcy filings, etc. It is really amazing how much information is contained in a high quality background check report. Employers should be careful not to waste their time with doing a background check on a potential employee unless they have a very comprehensive method of obtaining nationwide data on their job applicants. Another major issue is getting data that is updated. Many services that provide background checks do not make the proper investment and they sell old information that is not current. The reason this happens it that old data costs a lot less money, and this significantly adds to the profitabilty in the short term. However, over the long term clients will learn that they did not receive quality reporting. Sometimes, employers and landlords have to learn the hard way, which is really too bad, because a comprehensive report usually doesn't cost that much more.
Is it legal for a company to pass on the costs of running a background check to the possible employee, before the company hires that person?
Can you provide verification or citation for the following statement: "The U.S. Small Business Administration estimates that for every dollar invested in employment screening, employers see a return on investment ranging from five to 16 dollars. Background checks improve productivity, reduce absenteeism, lower turnover, and most importantly, decrease employer liability for potential criminal acts committed by their employees." I see it is used in many articles and websites, but none cite that statistic and I can find nothing on SBA's website. Thank you.
Well, the EEOC just threw a wrench into this equation by voting 4-1 in favor. Here are some article quotes: "But this week, the Equal Employment Opportunity Commission updated its policy on criminal background checks to make it harder for employers to use such checks systematically to disqualify applicants with criminal records. The commission, which adopted the new policy in a 4-to-1 vote on Wednesday, said that while employers have a legal right to consider someone's criminal record when making a hiring decision, "National data supports a finding that criminal record exclusions have a disparate impact based on race and national origin."
As the owner of any business establishment you are looking for a highly competitive and reliable employees, so for me it is really necessary for you to check on the background of your employees prior to hiring them in your company. On the other hand, I read an interesting article recently. It says there that most hard-working Americans need financial assistance now and then. This is why payday loans are an essential product that people need when there is an emergency situation. Unfortunately, a pastor in New Jersey is so against payday lending that he has asked that an anti-payday loan campaign be started. He does not realize that he will be cutting off a number of people from getting help when they are in emergency situations. To find out more, go to: Payday Loan

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