Background Check Vendors Reckon With Increased Job Bias Scrutiny

Third-party employee screening companies are finding themselves more in the litigation fray in California for blocking job seekers with criminal records thanks to a growing advocacy and legal movement that’s pushing to hold them accountable alongside employers.

A group of background check companies—DISA Global Solutions Inc., the Health and Safety Council, and the North American Background Screening Consortium—and three oil refinery businesses are accused of using a rating system that screens out otherwise qualified candidates solely based on their previous convictions that have no adverse relationship with the jobs they applied for.

The complaint filed Aug. 8 in Los Angeles Superior Court claimed that the defendants violated California’s Fair Employment and Housing Act and Fair Chance Act’s prohibition against employers inquiring about an applicant’s criminal history until after a conditional offer of employment has been made to them.

Litigation—some of which resulted in millions of dollars in settlements with companies like DHL Supply Chain, Macy’s Inc., and Target Corp.—has historically accused employers of running afoul of a broad range of state fair-chance hiring laws that curtail the use of job applicants’ criminal histories during the hiring process.

Now it’s the third-party administrators that find themselves the focus of lawsuits over practices that disproportionately impact job applicants or employees from protected groups, advocates and employment law attorneys say.

“It’s an important movement to ensure that people with records are able to participate in our economy,” said Beth Avery, a senior staff attorney at the National Employment Law Project, a worker-side attorney and advocacy group.

Contractors performing human resource functions for employers should be held responsible for bias “if we’re going to have any chance of effectively enforcing them,” she said. “Otherwise, there’s just going to be this huge loophole for them to be insulated from liability.”

While employers will remain on the hook for liability, they must be vigilant when delegating HR functions to party vendors to avoid consequential legal trouble, said Arthur Gaus, a partner at Kaufman Dolowich LLP.

“You can’t just hand off the work to them,” he said. “Make sure there’s open communication.”

The move to impose liability on background check service providers is fueled by concerns that their systems sometimes contain errors and outdated or incomplete information about someone’s criminal history, advocates and worker-side lawyers said.

A study published in February by Criminology found that the growing issue of background check errors and false employment reports is partially attributed to lax regulation within the industry.

Ruling Provides Fodder

The lawsuit against the trio of background checkers—filed by nonprofit organizations Legal Aid at Work and Root & Rebound—came months after the California Civil Rights Department brought a first-of-its-kind complaint accusing Ralphs Grocery Co. of violating the state’s Fair Chance Act by asking job candidates about their conviction history.

The attorneys behind it are banking on the state Supreme Court’s 2023 decision in Raines v. U.S. HealthWorks Medical Group that FEHA allows workers to sue third-party agents for discriminatory actions performed on behalf of employers. The ruling gave the plaintiff’s bar more of a legal basis to start pursuing such agents in court, legal observers said.

“It cleared one of the gates that have been in existence” for lawsuits, said Joshua Kim, national director of litigation for economic opportunity at Root & Rebound.

The 2018 law, an amendment to FEHA, requires specific procedures for considering an applicant’s criminal history after a conditional job offer and limits convictions that employers can consider disqualifying to those with a direct relationship with job responsibilities.

“We are aware of this fundamental problem with background checks and want to see how defendants can justify the use of background checks” that don’t involve an individualized assessment of an applicant’s qualifications, history, and circumstances, Kim said.

Individualized assessment of applicants aligns with the US Equal Employment Opportunity Commission’s guidance on the limitations on using arrest and conviction records in employment decisions, as well as the policy goals behind many state and local second-chance hiring laws.

Representatives for the background check companies didn’t respond to requests for comment.

While Raines exposes third-party vendors to a host of workplace bias litigation, the state high court’s interpretation of FEHA stopped short of addressing what employment and human resource conduct from these service providers would be severe enough to give rise to a statutory claim. This uncertainty promises to invite litigation that will test the boundaries of the law, attorneys said.

“The central question is, ‘How far does it go?’” said Walter M. Stella of Cozen O’Connor PC. “Are we talking about a narrow set of circumstances where employers delegated some of their traditional employer decision-making responsibilities?”

“That’s really where we’re going to see a lot of litigation,” he said.

Cultural, Legal Shifts

As case law concerning the scope of FEHA and FCA liability for California’s third-party vendors further develops, there’s been a growing bipartisan and cultural movement nationwide toward removing employment barriers for people with criminal backgrounds—a historically untapped pool of job candidates.

Restrictive hiring policies and related stigma against hiring formerly incarcerated people have cost the country at least $78 billion in lost gross domestic product, a study by the US Chamber of Commerce found.

Ban-the-box laws prohibiting public and private employers from inquiring about job seekers’ criminal histories on the initial job application have been adopted in 17 states and the District of Columbia, as well as 21 cities and counties, according to a Bloomberg Law analysis.

Some states like California and New York have gone further by passing the Clean Slate Act, which aims to automatically seal or expunge a person’s criminal records for certain crimes at some point after their prison term.

Meanwhile, California lawmakers last year rejected a proposal that would have banned most private employers from considering an applicant or worker’s criminal conviction history in employment decisions, regardless of how the information was obtained.

Compliance Approach

As attempts by workers and advocates to impose liability on third-party vendors gain popularity, how these agents and their employer-clients do business in California will ultimately change, attorneys said.

Stella of Cozen O’Connor said that both parties will engage in more pre-contract discussions about who will be on the hook for certain legal claims, and third-party vendors may push for contracts that indemnify them for any FEHA liability.

“That has to be answered on the front end,” he said.

Employers that outsource employment and human resource tasks are sometimes unaware of certain actions that service provider agents have taken during the job application process, including direct communication with job candidates, attorneys said.

The changing legal landscape requires employers to be more vigilant when delegating certain decision-making authority to mitigate liability risks that a third-party vendor may trigger, Stella said.

“Exerting some control over this would be important for the employer because it may be held liable for decisions made” on its behalf, he said.

The case is Roe v. DISA Global Sols., Inc., Cal. Super. Ct., No. 24STCV20158, lawsuit filed 8/8/24.