HR Feature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . by Becky Miller

Background Screening Could Save Your Business

Your company hires two new employees on the same day. Both applicants are intelligent, experienced and friendly. One turns out to be the best hire you’ve ever made and implements several innovations that increase profits dramatically. The other becomes a nightmare, stealing from you and assaulting a customer, costing your company a total of $1.2 million through losses, administrative costs and, finally, a lawsuit.

How can you tell the difference between a dangerous hire and a dream employee? The answer may surprise you. It’s not better interviewing or better security–it’s pre-employment background screening.

Many background-screening companies exist. In researching this article, Futon Life talked with the four largest and most successful screening companies: ChoicePoint, USIS, First Advantage and Kroll.

Background screening is the process of checking an applicant’s legal, employment and educational history, with the applicant’s permission, in order to find anything that might cause a company problems later. The screening process is strictly regulated by the
government’s Fair Credit Reporting Act, which protects the rights of the applicants being screened as well as the rights of the employer to screen them.

Why Screen?

Pre-employment screening can have one of the largest returns on investment of any procedure a company can implement. Screening directly impacts a company’s bottom line in several ways: decreasing employee theft, increasing retention (which decreases hiring costs) and preventing litigation.

“The question is, how much does it cost a company to hire a criminal?” asked
Brian McMurray, Director of Marketing at USIS. “Maybe nothing–but maybe the
entire business.”

Screening helps in fighting employee theft. The 2001 National Retail Security Survey reports that, “Among the four sources of inventory shrinkage, retailers attributed 45.9 percent of their company's losses to employee theft, 30.8 percent to shoplifting, 17.5 percent to administrative error and 5.9 percent to vendor fraud.” If a company can avoid hiring applicants with a propensity for stealing, it can cut inventory shrinkage considerably and possibly even save the business. According to the U.S. Chamber of Commerce, employee theft causes 30 percent of all business failures.

Screening applicants in order to find the most desirable employees increases retention rates, which directly decreases hiring costs. “It costs a company one-third of a new hire's annual salary to replace an employee,” estimates the US Department of Labor. “Using a wage rate of only $7 an hour, it costs a company $4,350 for each departing employee.”

One of the most compelling reasons to check an applicant’s background is the common law doctrine of negligent hiring and negligent retention. “Implementing screening is important no matter the size of the company because of negligent hiring laws,” said Michael Rosen, Executive Vice President of Kroll Background America, Inc. “The law is blind to whether you have one employee or one million.”

“An employer is liable for the acts of its employees or agents where it knew or should have known about that employee’s background,” explained Rosen. Courts hold an employer responsible to complete a reasonable search into applicants’ pasts to find any indicators that a person would be prone to similar dangerous behavior in the future. Negligent hiring means a company hired someone who had a criminal record that could have been found with a simple search. If the employer did not make a due diligence effort to look into the applicant’s past, the employer is responsible for any further criminal acts that person commits, in situations that are a direct result of employment.

Negligent retention occurs when a company finds out or should have found out about criminal actions by an employee and does not fire that person, keeping him or her in a situation where he or she could hurt others.

Juries almost always side against the employer in negligent hiring cases. Employers lose 79 percent of all negligent hiring suits, and the average jury award in employment law cases continues to be in excess of $1.6 million (Public Personnel Management, USA Today, Nov. 21, 2003). For example, a furniture company was found liable for $2.5 million for the negligent hiring and retention of a delivery man who attacked a female customer in her home (Tallahassee Furniture Co., Inc. v. Harrison).

What about companies that have great retention rates and have known many of their employees for years? “Nobody is immune” to hiring people with criminal records, said Dave Wirta, Executive Vice President of Sales and Marketing at First Advantage. “Statistically speaking, every company has a risk of hiring a substance abuser or criminal.” About two to 18 percent of criminal record searches turn up criminal histories. This means, Wirta said, “If you hire 100 people, you can easily ascertain what your risk is. Two to 18 will have records. Even if you know your employees, you don’t know their particular histories.”

Small businesses are most susceptible to losses from bad apples in the employee barrel. “People with drug or criminal backgrounds often look for small companies because it’s easier to hide your background there,” said Lisa Wells, Director of Sales and Market Development for ChoicePoint’s WorkPlace Solutions.

Wirta concurs. “Many companies, particularly large corporations, are screening, so if you don’t, you are at risk of hiring those people who can’t get hired at companies that do screen.”

Rosen calls this “negative migration.” “If manufacturing plant XYZ does not screen, and everyone knows it, people who can’t get hired at a place that does screen will migrate there,” Rosen said. “They will also tell their buddies with [criminal] convictions to work there.”

Also, a $1,000 theft will affect a small company much more than it will a big corporation.

Components of a Screening Program

Here are the most common procedures involved in a pre-employment background check. The first three–identity verification, national criminal check and county criminal check–are recommended by most screening companies and constitute due diligence in the eyes of most courts.

A search into a person’s past often starts with verifying identity. Usually this is accomplished by checking that a person’s Social Security Number is valid and does, indeed, belong to him or her.

A good second step in the screening process is to run a national criminal check. There is no single, comprehensive national database of criminal records. However, there are some very good databases available from the private sector that contain criminal records from various states, state agencies, county courthouses, sex offender registries and other sources. USIS, ChoicePoint and First Advantage maintain proprietary databases containing nationwide criminal information. Kroll offers a search of another screening company’s database. None of the databases is exhaustive, but each does give a broad check across multiple sources. USIS and First Advantage offer a further service by re-verifying all derogatory records from their database with the original record source before giving that information to the employer.

Seventy-three percent of people entering prison nationwide committed their offenses in their counties of residence, according to The Prisoner's Antecedents Study. Therefore, the most important part of a background check is conducting a county criminal search. County courthouses have the most accurate, up-to-date information on criminal matters. Most screening companies contract with local court researchers who look up the records by hand.

When someone has a history to hide, he or she will often list past addresses incorrectly, preventing a potential employer from finding county criminal records. The address and employment information found in the header of a person’s credit report can help confirm counties of residence.

In addition to the three mentioned above, other screening channels are available to employers as well. These searches are more job-specific.

Especially for retailers, it is vital to know if an applicant has a history of theft. Both ChoicePoint and USIS offer proprietary databases that contain information about shoplifting and employee theft incidents. These are both contributory databases in which member retailers submit incident information and in return can screen their applicants against the database.

“Most shoplifting and employee theft incidents are never reported to law enforcement agencies,” said McMurray. “This means that checking a person’s county criminal record will not uncover this type of information. Eighty-five percent of records in the USIS theft database can’t be found elsewhere.”

Checking an applicant’s motor vehicle report (also called a driving record) is vitally important for any position that involves driving. A company is responsible for everything its employees do while operating a company vehicle. Checking an applicant’s MVR shows a potential employer if that applicant has a history of safe driving and may also affect the company’s auto insurance rates. Adding a driver with a bad record to a company policy can drastically increase rates. Rosen suggested that checking MVRs is also a good idea on people who would be driving warehouse equipment, such as forklifts.

A full credit report can be requested on an applicant when that person would be in contact with money or financial information if hired. For example, running personal credit reports might be a good idea for people applying for positions like cashier, accountant or financial officer.

Sex offender registry searches are very important when a company has employees who will be alone with customers, such as service personnel or delivery drivers, or will have access to children or the elderly. In the case of Doe v. MCLO, an employee with a criminal record sexually assaulted a child. $1.75 million was awarded for negligent hiring and retention.

Checking an applicant’s employment history and references can show whether or not the information on the application is truthful, and thus, if the applicant is someone who can be trusted. Sometimes managers are afraid to talk with potential employers about a former employee’s performance, for fear of a discrimination or libel lawsuit. Checking references through a background screening company saves administration time and often brings up more information, as managers tend to feel more comfortable talking about a former employee’s history with a third party.

Drug testing can prevent accidents, lower the number of work comp claims and reduce healthcare costs, as well as contribute directly to a safer workplace for everyone. The
US Department of Labor lists some imposing statistics concerning drug abuse and its effects on business: “Drug use in the workplace costs employers $75 billion to $100 billion annually in lost time, accidents, health care and workers’ compensation costs. Sixty-five percent of all accidents on the job are directly related to drugs or alcohol. Substance abusers are absent three times more often and use sixteen times as many health care benefits.”

Education and professional license verifications can also be good searches to run on applicants for positions requiring specialized skills or certain education levels.

Beginning a Screening Program

When beginning a background-screening program, start by assessing your current hiring practices, and then decide what you want to do in the future. What types of searches do you want to run on all your employees? Which job descriptions merit task-specific searches? What kind of screening will you do on members of management? Come up with a timeline for implementing your screening program. Begin by talking with your legal counsel about what regulations apply to your industry. Get in touch with several different screening vendors and find out which one is the right fit for your company.

Several screening companies offer small-business-specific screening solutions: ChoicePoint’s ScreenNow, USIS’s ANNOWA, and First Advantage’s ApplicantScreen. All three are web-based portals designed to make set-up and implementation of a screening program simple for small to mid-sized companies.

One of the first steps toward developing a screening program is creating a written policy that explains how searches will be conducted for which positions and how the results will be handled. For example, if a company finds a misdemeanor in an applicant’s past, will the applicant still be considered for employment? What if a felony is discovered?

Also, the criminal record report should be considered in light of the position’s responsibilities. “If a person had a bankruptcy, and he is operating a lathe in a shop, it’s not as big a deal as if he is managing the books,” Wirta said.

The written policy must be strictly adhered to. “If you implement a program consistently, you avoid discrimination litigation,” Rosen said.

Applicant Rights

Before a company can screen an applicant, that person must give consent. The applicant must sign a clear statement, which can be part of an application form, permitting the company to look into his or her past. This statement should also give the applicant a chance to disclose any criminal history. McMurray suggested having an applicant sign an “evergreen release,” which gives the employer permission to perform further searches later, such as when an employee is being considered for a promotion or when a job description changes.

All screening programs must be in compliance with the Fair Credit Reporting Act (FCRA), which governs consumer reporting agencies such as background screening companies. The FCRA ensures that background checks are being performed for permissible purposes, such as pre-employment screening, that the applicant knows if derogatory information has been reported on him or her and that the applicant has a chance to contest such information. For more information about the FCRA, go to www.ftc.gov/os/statutes/fcra.htm.

After screening has been implemented, prominently displayed signs that declare you screen and/or drug test potential employees will go a long way toward warding off undesirable applicants.

Cost

A typical background check will cost somewhere between $23-$35 per person screened. That does not include a drug test, which will run an additional $20-40. Risk Management Magazine recently ran a story with a detailed cost/benefit analysis of background screening. The article is currently available here.

A few hundred dollars per year is well spent on screening in comparison to losing company profits through theft, damage or litigation.

FL

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