Background Checks for Contract Employees, Quirky Question # 98

Posted by on June 10, 2009 · Leave a Comment 

Quirky Question # 98:

We hired another company (we’ll call it Company ABC) to provide our firm with contract employees.  Company ABC performs background checks on its employee pool, utilizing publicly available sources of information.

We typically use a third-party vendor to perform background checks on the employees we hire, but we do not do so for the contract employees provided to us by Company ABC.  A contract employee we hired through Company ABC recently stole our property.  It turns out the employee had multiple arrests for similar crimes, which were not revealed by Company ABC’s background check.  We are confident that this information would have been revealed had we used our normal third-party vendor.

We have decided that in the future, we would prefer to use our own third-party vendor to perform background checks on the contract employees provided to us by Company ABC.  Is there any reason we cannot do so?

[Readers: Quirky Question # 98 was posed to my colleagues in our Seattle office. Sarah Jung Evans was kind enough to provide the analysis below. If you would like to follow up with Sarah, don't hesitate to contact her at 206.903.2396, or via email at evans.sarah@dorsey.com. More information on Sarah's background is available at: http://www.dorsey.com/evans_sarah/. Regards, Roy]

Sarah’s Analysis:

This scenario is more common than you might think, often arising when a company like yours uses an agency to find temporary or permanent employees and the subsequent hires prove problematic, or even worse, criminally dishonest. In this situation, your company (and other similarly situated employers) need to ensure that it does not experience this business loss again. The question is how this goal can be accomplished without terminating your firm’s relationship with the hiring agency, which you have described as “Company ABC.”

You have two options. First, you can ensure that the contract with Company ABC contains terms requiring it to utilize a reputable third-party vendor to conduct appropriate background checks. The likely reason Company ABC is not doing so already is to avoid the costs associated with complying with the notification and other requirements of the Fair Credit Reporting Act (FRCA), which are triggered when one does not perform the background check internally.

Second, and the preferred option in my view, is for your company to take the reins on obtaining the records and screen the recommended employees yourself. Especially when you are hiring employees (whether temporary or permanent) who will have job responsibilities that you consider sensitive, conducting an appropriate background check can be crucial. For example, if the employees were going to be given access to customers’ credit card information, you will want to have complete confidence in the personal integrity of the employees you retain. Similarly, if you were hiring an engineer whom you planned to assign to a highly confidential software or hardware project, the disclosure of which would have great value to your competition, your company will want to ensure you are retaining honest and loyal individuals.

If your firm elects to screen the recommended employees (or use your standard vendor to do so), you will need to ensure that Company ABC, which is providing you the potential candidates, furnishes those prospective employees with the proper notices and authorizations for your company, or your vendor, to conduct the background check you deem necessary. After proper notice and authorization is provided to the potential hires, your company would be free to conduct systematic checks.

The main drawback to this second approach is the cost your firm will incur. The main benefit is that you will exercise substantially greater control of the screening process.

A standard credit check, often an important part of evaluating a candidate’s fitness for a position, implicates significant legal requirements to which you need to be attuned.

First, the Washington Fair Credit Reporting Act (WFCRA) prohibits an employer from obtaining a consumer report bearing on an employee’s creditworthiness unless the information is substantially job-related, or required by law. RCW § 19.182.020. If such information is substantially job-related, an employer may obtain it only after the reasons for the use of such information are disclosed to the employee in writing. Id.

Second, the FCRA imposes certain requirements related to “consumer reports,” a term that includes credit reports. Before obtaining a credit report, an employer must: (a) inform an applicant or employee in a written disclosure statement that a report may be obtained for employment purposes; and (b) obtain the individual’s written authorization to obtain the report. 15 U.S.C. 11681b(b)(2). The employer also is obligated to certify to the consumer reporting agency that it has complied with all disclosure requirements. 15 U.S.C. § 1681d(a)(2). It is not entirely clear whether a vendor relationship would be considered to meet the “for employment purposes” prong of this requirement. However, to be safe, we recommend that your company comply with both the FCRA and WFRCA.

Third, the WFCRA imposes additional requirements. For current employees, the disclosure must notify the employee that the consumer report may be used for employment purposes. RCW § 19.182.020(2)(b). A statement to this effect contained in an employee manual will suffice. Id.

Fourth, both the FCRA and the WFCRA require certain disclosures before taking an adverse employment action, if such action is based in whole or in part on the information contained in the consumer report. The FCRA requires that after the report is completed, but before taking any adverse action, an employer must provide the individual with: (a) an unedited copy of the report; and (b) a copy of “A Summary of Your Rights Under the Fair Credit Reporting Act.” 15 U.S.C. § 1691d(a)(1).

After taking adverse action based, even partially, on information in the report, the employer must orally or in writing: (1) give notice of the adverse action to the person; (2) provide the name, address and telephone number of the consumer reporting agency making the report; (3) state that the consumer reporting agency did not take the adverse action and is unable to give specific reasons for the action; and (4) provide notice of the person’s right to obtain a free copy of the consumer report from the consumer reporting agency within sixty days and the right to dispute the accuracy of any information in the report. 15 U.S.C. § 1681m(a).

The WFCRA requires the employer to provide to the employee written notice of the adverse action, plus: (1) the name, address and telephone number of the consumer reporting agency; (2) a description of the consumer’s rights under the Washington Act; and (3) a reasonable opportunity to respond to any information in the report that is disputed by the employee. RCW § 19.182.020(2)(c); RCW 19.182.110(2).

With regard to a criminal background check, you should keep in mind that such checks can be found to violate Title VII due to the disparate impact they have on minorities. To minimize the risk of such a claim, you must be able to show a business necessity to justify the exclusion of an applicant on the basis of prior criminal convictions.

Generally, an employer cannot use a prior felony as an absolute bar to employment in all situations, and a blanket policy of excluding all applicants with conviction records is likely to constitute unlawful discrimination. Such pre-employment inquiries should be accompanied by a statement that convictions will not disqualify the applicant automatically, and that you will consider the particular circumstances of each case when deciding whether employment of that particular person for the particular job is manifestly inconsistent with the safe and efficient operations of the employer.

Despite the seemingly onerous requirements associated with both the FCRA and the WFCRA, by conducting careful background checks either directly or using your own vendor, your company will gain greater control over the hiring process for your independent contractors/temporary employees. This should enable your firm to avoid the repetition of the problems you recently experienced when relying on another company to evaluate the backgrounds of these individuals. Finally, as your company becomes more familiar with the FCRA and the WFCRA, and your company works with these statutory schemes more routinely, you likely will find that compliance with these statutes is less burdensome than you might anticipate.

Filed under Background Checks, Fair Credit Reporting Act, Washington Questions · Tagged with

SSI Disability and the ADA, Quirky Question # 97

Posted by on June 8, 2009 · Leave a Comment 

Quirky Question # 97:
 
One of our employees became disabled.  He successfully applied for Social Security benefits on the ground that he was permanently disabled from working.  The EEOC now has filed an action against our company, contending that we discriminated against our former employee on the basis of his disability.  If our employee is “permanently disabled from working,” how can EEOC sue our company for a violation of the Americans With Disabilities Act?  If our ex-employee cannot work due to his disability, how can the EEOC argue that he could continue to work for us with a reasonable accommodation?  This makes no sense.

Roy’s Analysis:
 
I agree with you that the fact pattern you described does not make sense.  If your former employee persuaded the Social Security Administration that he is “permanently disabled” and consequently is unable to work at all, it is difficult to understand how he can argue simultaneously that he could continue working with your company if your company provided him a reasonable accommodation.. On their face, these two positions are fundamentally inconsistent.  
The problem with this context, however, is that, at least theoretically, your former employee is not the one “argu[ing] simultaneously that he could continue working with your company . . ..”  Your employee is not contending that he is a victim of discrimination; the EEOC is advancing that contention on his behalf.  And, many courts, including the U.S. Supreme Court, have drawn clear distinctions between the individual employee and the EEOC.  For example, as early as 1970, the United States Supreme Court held in General Telephone Co. of the Northwest v. EEOC, 446 U.S. 318 (1970), that “the EEOC is not merely a proxy for the victims of discrimination.”  Likewise, in EEOC v. Waffle House, Inc., 534 U.S. 279 (2002), the nation’s high court stated, “The EEOC does not stand in the employee’s shoes.”    
Given the fact that the EEOC is the plaintiff, rather than your former employee, the defense of judicial estoppel is not available to you.  The “judicial estoppel” defense is essentially the concept that a party who prevails on one ground in a lawsuit may not repudiate that ground in another lawsuit.  As courts have noted, the concept of judicial estoppel is designed to prevent manipulation of the judicial system by litigants who seek to prevail twice, on opposite legal theories.  See, e.g., Levinson v. U.S., 969 F.2d 260, 265-66 (7th Cir. 1992).  But, the judicial estoppel theory is an equitable theory, requiring consideration of multiple variables, including, for example, whether the plaintiff is the same party, or as here, different. 

A recent instructive case that explored these issues is EEOC v. Autozone, Inc., No. 07-1154 (C.D. Ill. February 23, 2009).  In Autozone, the EEOC sued the defendant, alleging that it had violated the ADA in connection with its treatment of John Sheperd, a former Autozone employee.  Sheperd has ceased working for Autozone due to depression, myofascial pain, degenerative discs of the spine, and other problems.  The Social Security Administration (SSA) awarded Shepherd disability defendants, finding that his “sub-optimally controlled depression” impaired his “overall functioning . . . and effectively render[ed] him disabled.” 
As the District Court found, “the EEOC is not merely an alter-ego of the individual employee, and it is not barred by prior acgtions or statements of those individuals in any other context.”  Further, picking up on the analyses of he Supreme Court and other lower federal appellate courts, the court found that “the EEOC’s interest in pursuing perpetrators of discrimination is much broader than simply obtaining relief for the victim of that discrimination.  Narrowing that interest by placing on it the same boundaries that limit individual litigants would be ill advised.”  Finally, the District Court concluded that the concern for manipulation of the judicial system did not apply given that the EEOC was not a litigant in the administrative proceedings before the SSA.   In sum, the court held that the EEOC was not a proxy for Shepherd and that its interest in pursuing relief on Shepherd’s behalf  “is a public interest in eliminating discrimination, and that interest is not as narrow as is Shepherd’s interest.”   

As you can see, the fact that your former employee successfully persuaded the SSA that he was entitled to receive full SSI disability benefits will not preclude the EEOC from pursuing a disability discrimination against your company.  Having made that observation, your company still should be able to exploit the statements made by your former employee in connection with his efforts to to persuade the SSA that he was completely disabled.  You still will have a compelling argument to make to the factfinder, whether judge or jury, that the position advanced by the EEOC is hopelessly inconsistent with the position advanced by your ex-employee before the SSA.  When your former employee is called to testify regarding the nature, scope and effect of his disability, your counsel should be able to conduct an effective cross-examination.     

Lastly, one issue that merits careful examination for your company is the standard for determining a disability under the ADA (especially in light of recent legislative changes to the statute) as compared to the SSI standard for determining disability.  To the extent that these standards differ, you should be prepared to explain why the same result is warranted under both statutory schemes, regardless of who is pursuing the claims on behalf of your former employee.  Good luck! 

 

When the EEOC sued in connection with Autozone’s treatment of Shepherd, the defendant company asserted the judicial estoppel defense, pointing to the inconsistency in the position advanced by Shepherd before the SSA and the position advanced by the EEOC in its lawsuit.  As you might have guessed from the analysis above, the federal District Court rejected the defendant’s arguments with respect to the judicial estoppel defense. 

 

Filed under Americans With Disabilities Act, Disability Under the Social Security Administration, Judicial Estoppel · Tagged with

Restrictive Covenants Tied to Compensation, Quirky Question # 96

Posted by on June 2, 2009 · Leave a Comment 

Quirky Question # 96:
 
Our company is considering requiring our existing and future employees to sign non-competition agreements.  To make the agreements more palatable to our employees, we are considering linking the obligations imposed on the employees to an obligation on the company to compensate the employees if they cannot find suitable alternative non-competitive employment.  We are planning to cap the company’s obligation at one year of the employee’s base pay.

Our feeling is that if we want to waive the non-compete for certain employees, as well as our payment obligations, we’ll be able to do so.  Moreover, we are planning to insist that the employees provide us monthly written reports of their efforts to find other jobs, detailing precisely what was done in the preceding month to find employment.  To the extent the employees fail to submit such a report in a particular month, or submit a report that in our discretion is inadequate, the company will be relieved of its obligation to provide the compensation.  Frankly, we feel this will provide us sufficient flexibility to withhold payment.  Make sense?

Roy’s Analysis:

Your question implicates a number of different issues.  As a prefatory matter, I’ll start with one of my primary mantras – employment law is often state-dependent.  Therefore, the first issue you need to evaluate is where your employees are employed and the law of these states regarding post-employment restrictive covenants.  (A related issue, not addressed here, is how the courts in the jurisdictions where your employees work analyze contractual choice of law provisions, i.e., the contract terms defining which state’s law will govern if a dispute arises between the employer and employee.)   

If, for example, your employees work in California or North Dakota, your non-competition agreements will be unenforceable, except in extremely limited circumstances.  Both the legislatures and courts in these jurisdictions have repudiated non-competition agreements.  In short, when crafting your company’s non-competition agreements, you need to be acutely aware of the relevant state law. 

My second observation is a question – Why do you feel your company needs to offer your employees a year’s compensation in connection with the non-compete you are asking your employees to execute?  Assuming your employees are not located in a state like California, North Dakota or other jurisdictions that reject non-competes, you do not need to link your non-competition agreements to post-termination compensation.  If you have supported your restrictive covenants with adequate consideration, and the agreements can otherwise withstand judicial scrutiny, you don’t need to offer continued compensation to make the restrictive covenants enforceable.  Non-competition agreements can withstand scrutiny if they are based on a legitimate corporate interest and are substantively, temporally and geographically reasonable.   
The third issue you need to assess is one I alluded to above – Are your post-employment restrictive covenants are supported by adequate consideration?  You mentioned that you plan to require your “existing” and “future” employees to execute the new non-competes.  While a job offer generally will constitute sufficient consideration for your new employees, continued employment may or may not constitute sufficient consideration for your existing employees.  Again, this issue is dependent on the law of the state in which your employees work.        

A separate question is whether your company’s offer of up to one year’s compensation in the event your former employee cannot find non-competitive employment would constitute adequate consideration.  I can’t offer a definitive opinion on that issue but I’m skeptical.  First, you state that as to some employees, your company may simply waive the non-compete to avoid making any payments.  If that practice is commonplace, your employees may well be able to argue that this contingent consideration is not adequate to support the non-compete.  Second, as you also noted, you intend to reserve the discretion to withhold the payments if, in your company’s opinion, your former employee has not made sufficient efforts to obtain alternative employment.  In a context where the employer has the sole discretion to determine whether payments must be made to the employee, a court may well conclude that no real consideration has been offered.   

Lastly, I am somewhat uneasy by the undercurrent of your question.  You observe that if the employees do not submit reports on a monthly basis, or submit reports that the company, in its discretion, does not deem adequate,  you will have “sufficient flexibility to withhold payment.”  I don’t want to read too much into your observation but it sounds as though your company may be considering offering this benefit without really planning to provide your ex-employees with the compensation promised to make the restrictive covenants “more palatable.”  If so, that would be a mistake. 

If you are going to enter a contract with your employees that includes restrictive covenants, and if you are going to offer substantial compensation to your employees to induce their agreement, your expectation should be that your company will fulfill its contractual obligations.  My admonition can be illustrated by a recent case from the Eighth Circuit Court of Appeals, Bannister v. Bemis Company, No.08-1634 (February 25, 2009).  The District Court (Judge Kyle from the District of Minnesota, applying Arkansas law due to a choice of law provision), granted summary judgment to the employee, awarding him $81,051 based on the defendant company’s breach of its monthly payment obligations, as set forth in the non-competition agreement.  Despite the de novo standard of review (that is, the appellate court did not defer to the lower court’s determination), the appellate court affirmed. 

In Bannister, the non-compete prevented the employee from working for a competitor for 18 months following the termination of employment.  If the employee was “unable to obtain employment consistent with his abilities and education solely because of the [non-compete] . . . [the non-compete would continue to bind the employee] only as long as Bemis, in its sole discretion made payments to him equal to his monthly base salary at the time of his termination.”  Bannister requested his employer to release him from the non-compete so he could obtain employment with a Bemis competitor, but Bemis rejected this request.  Approximately nine months later, Bemis terminated Bannister’s employment, offering a severance package and a release from the non-compete, except as to the competitor Bannister previously sought to join.  Bannister declined the company’s offer. 

Not long thereafter, Bannister requested Bemis to start paying his monthly salary pursuant to the company’s payment obligations set forth in the non-compete.  Bemis declined, pointing out that Bannister had been released to work for any company except for the one competitor Bannister previously had sought to join.  Bannister ultimately found employment with another company but there was a nine-month gap between the end of his job with Bemis and the commencement of his new employment.  Bannister then sought compensation under the non-competition agreement for the nine months in which he was not employed.  As the appellate court noted, “Because the [non-competition agreement] does not provide for a partial release, once Bannister provided the required documentation and sought payment from Bemis under the [agreement] . . . Bemis was obligated to pay Bannister his monthly salary.”   

The court also examined the issue of whether Bannister’s failure to submit monthly statements regarding his efforts to find alternative employment (like the obligation your company is considering) justified the company’s refusal to pay the compensation required in the contract.  Because Bannister had provided documentation regarding the job offer he had received from Bemis’s competitor, and because Bemis breached its obligations by refusing to pay the required funds, the court found that Bannister did not need to submit the monthly statements that otherwise would have been required.  As the court stated, “the failure of one party to perform its contractual obligations releases the other party from its obligations.  The party who first breaches a contract is no position to take advantage of a later breach by the other party.”  (Citations omitted.)  In sum, both the federal District Court and the Court of Appeals found that the employer was obligated to fulfill its obligation to pay its former employer his base salary as set forth in the non-compete agreement drafted by the company. 

If your company elects to include a payment obligation in your restrictive covenants (which, as discussed above, your firm does not need to do), be prepared to fulfill your obligations to your former employees.  Failure to do so would expose your company to risks of of litigation and liability. 

Filed under Non-Competition Agreements, Post-Employment Restrictive Covenants · Tagged with

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