The Perils of Pre-Employment Background Investigations

An employer is permitted by law to conduct a background investigation on any perspective employee (we’ll call them the “candidate”) and it has become almost standard practice now for employers to do so. However, please proceed with caution – the world of pre-employment background investigations is fraught with litigation, fines and regulation for non-compliance, for employers and the providers of these reports alike.

I’d like to share some thoughts on the process. I am not an attorney and the following information is not legal advice, just my thoughts and observations gained from 17 years of experience:

  1. All Pre-Employment Background Investigations are governed by the Fair Credit Reporting Act (FCRA). A third-party, or outside screening agency that conducts pre-employment background investigations for an employer (such as Artus Group), is known as a Consumer Reporting Agency (CRA). The report provided by the outside screening agency is an Investigative Consumer Report (ICR, or for the purposes of this article, “investigative report”).
  1. No employer can ever commission an investigative report without the signed authorization of the candidate. Ever. Don’t even think about it.
  1. The authorization form provided to the candidate is very specific. Ours is currently nine pages long, so if your current form is a three-pager, you need to take counsel, and quickly. The authorization form, among other things:
  • Must advise the candidate of his or her rights under the FCRA, which are extensive.
  • Must provide state specific rights for candidates from California, New York, Maine, Massachusetts, New Jersey and Washington.
  • May or may not inquire whether the candidate has been convicted of a crime, depending on jurisdiction.
  • Must offer candidates from California, Minnesota and Oklahoma the opportunity to request a copy of the investigative report, as entitled to them by law in those states.
  1. The FCRA strictly regulates what the CRA can and cannot report, and to complicate matters further, those restrictions are state specific. Generally (except in California, for example, but we’ll get to that) adverse public records (with the exception of criminal convictions) may only be reported by the CRA for up to seven years prior to the report date, ten years for bankruptcies. This is significant when you consider the dilemma faced by CRAs when severely adverse information pre-dating seven years is identified but cannot be reported. Think domestic violence restraining orders, civil fraud litigation, tax liens, licensing discipline etc. But the FCRA mandates that that information cannot be reported, and if so, violators are fined and regulated. The broad exception (other than California) is that if the candidate is expected to earn more than $75,000 per annum, there is no restriction on date reporting, which means that all historical records can be reported. This, quite rightly, was designed to allow a much deeper background check on senior executives.
  1. If the employer decides not to hire the candidate based on information in the investigative report provided by the CRA, called an “Adverse Hiring Decision”, the employer MUST provide the candidate a copy of the report and must adhere to the FCRA’s strict Adverse Hiring Procedure. Violating employers are fined and regulated and, very often, sued by the candidate. See my friend and Connecticut Employment Law Blogger Dan Schwartz’s column on this very matter at http://www.ctemploymentlawblog.com/2014/11/articles/background-check-settlements-still-costing-employers-big-dollars/
  1. In California, not only is the reporting of all adverse records restricted to seven years, regardless of income, the CRA must mail a copy of the investigative report to the candidate within three days of its completion.
  1. Many facets of the FCRA remain vague however, and one wonders if that is deliberate in certain instances. In Connecticut, for example, a credit history report may only be included as a component in a pre-employment background investigation if the candidate has fiduciary responsibilities or supervisory responsibilities. However, Connecticut has failed to date to provide an accurate definition of either.
  1. In some states, the employer may only consider a criminal record if the nature of the conviction is applicable to the nature job the candidate would be doing. Hmmm, think about that for a moment.

Clients often ask if it’s worth doing a background check on an applicant. I provide the following thoughts:

  1. Yes
  2. Yes
  3. Yes

Some thoughts on why:

  1. Example: If a company with three hundred employees hires a rotten egg, that person will not affect the operation as much as if a small company with three employees hires the same person. I believe it is critical for small businesses to conduct background investigations, even more so than for larger companies.
  1. Example: A company employs a salesman with two DUI’s on his record. He takes a client out for a Christmas lunch and has too many drinks. On his way home he hits and kills a pedestrian. Will his employer be sued if it knew about his DUI history? Probably.
  1. See my Case Study https://connecticutpiblog.com/2015/01/12/case-study-background-check/. This was a very real case and our client is STILL paying the price.

My Opinion: If you conduct pre-employment background checks, regularly take counsel to ensure you are in compliance. Make sure your authorization forms are up to date, since the laws in each state change regularly. Ensure you follow the correct procedures if you decide to make an Adverse Hiring Decision as a result of the investigative report, and understand that your CRA is restricted as to what it can and cannot report. There are certainly perils in pre-employment background investigations, but they can be avoided through solid understanding of the FCRA.

View the FCRA at http://www.consumer.ftc.gov/sites/default/files/articles/pdf/pdf-0111-fair-credit-reporting-act.pdf

Welcome to my Blog

I have so much to tell you, and so many resources to share.

In my 17 years as a private investigator, I have conducted thousands of investigations for approximately 140 different law firms, dozens of corporations, hedge funds, private equity firms and individuals. I’ve learned, and seen, so much. That’s why I started this blog. My goal is to provide a central source of information and resources for individuals and businesses, to share my experiences, and to help guide you through the investigative process.

I started Artus Group in 2004 and it has become the largest PI firm in Connecticut. But we are also a global firm now and if we can’t help you, I’m always happy to point you in the direction of those specialists or experts that can.

On the left hand side of this page you will find links to various resources for Connecticut public record information. These resources are all readily available, but I feel Connecticut has been lacking a central source for all this information. Please let me know if you have other resources you feel would add value for our visitors.

Below that is a feed to my Twitter account. I invite you to follow me, and I will Tweet whenever I post a new blog article or resource. To the right you will see the categories under which this blog will focus. I’ve always found value in sharing case studies as I believe in sharing our experiences of some of the more interesting cases we experience.

But more importantly, I want to share new information on changes in legislation, investigative resources, investigations in the news, information on specific areas of investigation that might help you in your investigation, and indeed, whether you need to hire a private investigator at all.

So, welcome to the Connecticut Private Investigator Blog – let’s investigate together.

Case Study: Surveillance

Mobile field surveillance consistently identifies theft, fraud, insurance fraud and domestic infidelities. Here are two of my favorites:

Surveillance Case Study 1:

A 64-year old female claimed she was paralyzed on her left side during a medical procedure and sued for $2.5 million. Continued surveillance revealed she rarely left her home and when she did, she shuffled along very slowly, with assistance, using a walking frame as she did so. One Saturday morning she joined her family in a visit to the local supermarket. Her daughter and granddaughter assisted her as she slowly edged her way from the car to the store. An Artus Group investigator entered the store to observe her activities. Nothing new – she continued along slowly as her daughter provided support. The daughter left her alone and went to another aisle, leaving the subject alone in the freezer aisle.

The subject then made an amazing recovery and Artus Group investigators obtained video as she opened a freezer door with her left hand, held the door open with her left leg, and leaned into the freezer with her left hand. She lifted and examined several items inside the freezer with her left hand and finally selected an item for her shopping cart.

This amazing recovery was seemingly short-lived: as she exited the store her paralysis returned and she was videotaped as she slowly shuffled back to the car with the assistance of her walking frame and doting family. The subsequent settlement negotiation had a slightly different outcome than she might have expected.

Surveillance Case Study 2:

A very wealthy client with a pre-nuptial agreement suspected her younger husband was having an affair with a woman from Philadelphia. Her husband, a former athlete, told his wife he was leaving for an amateur men’s basketball tournament in Denver. Of interest, we learned that his connecting flight was through Philly, with only a 45 minute layover. We suspected that the subject would either meet his girlfriend at the gate for the second leg, or he would exit Philadelphia airport and claim that he had missed the connection and would have to stay overnight. Or, maybe he was telling the truth and there was no girlfriend at all? This, as do all airport surveillances due to logistics, size and sheer volume of people, provided a very difficult scenario.

Artus Group booked one investigator on the flight to Philly; one at the gate in Philly to meet the subject; one at the Philly baggage claim; and one outside circling the arrivals level in his car. Two additional investigators were scheduled to pick up the subject as he arrived in Denver – again, one at baggage reclaim and one circling in his car (as you know, it is impossible now to remain parked in place immediately outside arrivals at any major airport). In a bizarre twist, our subject almost missed his flight to Philly, but as he rushed to the gate, the Artus Group investigator boarded just behind him (our investigator booked a seat near the front so he could be sure of exiting the plane before our subject – this is a critical component of aircraft surveillance).

As they landed in Philadelphia, the Artus Group investigator fell immediately behind the subject and then gave our Philly investigator “the nod” at the gate to provide the subject’s identity. The exterior investigators were alerted, but ultimately were not required. Our Philly investigator followed the subject to the gate for his pre-booked flight to Denver. There, the subject looked around expectantly, but as if from a scene in “Wuthering Heights”, his girlfriend arrived in full flight and they embraced and kissed at the gate. All was caught on video.

Our Philly investigator followed the subject and his companion onto the flight to Denver and sat in his pre-booked seat, again towards the front. Upon arrival at the gate, he repeated the “nod” to our Denver associates, who took it from there. The subject and his girlfriend were observed and videotaped as they rented a car and drove to a hotel, where they checked in, all caught on video. An undercover agent in the hotel lobby even videotaped as the subject made a phone call to his wife in Connecticut. He could be heard telling her that he had checked in and was just about to leave with the guys for practice.

This surveillance included seven investigators, immense planning and, to be honest, some luck. But the results became a huge component in providing our client with peace of mind, and some significant leverage in their pre-nup settlement.

Case Study: Due Diligence

Artus Group was assigned a due diligence investigation on a young U.S. software company, which was in its final stages of a $50 million private equity investment deal with commissions and bonuses presumably already calculated. The client expected a “rubber-stamp” due diligence investigation, however, certain adverse information gradually came to light.

The client was pushing for a final report as the date of the investment deal approached, but Artus Group investigators had an intuitive feeling, even though the public record and media was not necessarily adverse. The problem stemmed from the subject’s very common name – similar to ‘Robert Jones’, for example – and disseminating the thousands of possible public records was an enormous task. Of greater concern, however, was that Artus Group believed the subject’s father, of the same name, was an Australian metals mogul who had been convicted for bribing an Australian senator with prostitutes and money. Linking the father to the son (and if so, determining its possible relevance) was a daunting task, with a fast-approaching deadline.

Artus Group reviewed thousands of documents in an attempt to establish a link between the father and son. Finally, investigators identified a 1998 filing submitted to the Securities and Exchange Commission (SEC), which listed an address for the father, that the son was known to have used between 1997 and 2001. Further inquiries revealed the father was a major private angel investor in his son’s US company, and the connection quickly caused the deal to unravel.

What became of this client? They must have been delighted, of course. This was not the case. The deal fell through, commissions and bonuses were lost, and both lead analysts were fired for their roles in letting the deal get so far and failing to adequately conduct their own due diligence.

Remember: An Artus Group due diligence is not a ‘rubber stamp’. Be prepared for all possible outcomes.

Case Study: Background Check

A pre-employment background investigation could have saved a client hundreds of thousands of dollars. The client hired a Vice President of Operations solely based on references. Twelve months after the employee was hired, he was offered an equity position in the company, which he accepted through a signed agreement. Later that month he was involved in an accident at a work site on company time, which went unobserved. He was granted a workers’ compensation leave, where he remained for over a year. He was receiving a six figure income and still had an equity stake in the company. The client became embroiled in costly litigation regarding this matter and spent tens of thousands of dollars in legal fees as a result.

The client requested a background investigation for the purposes of conducting the litigation. The background investigation of the employee revealed a Federal criminal record for attempted fraud, a previous workers’ compensation claim, one Federal bankruptcy and eighteen civil lawsuits related to non-payment of debt and contract disputes, three of which were related to former employers. The client remains in litigation which has cost the company significant resources, time and money. This would have been avoided if the client had conducted a pre-employment background investigation prior to hiring the individual.

Case Study: Computer Forensics

An attorney client represented a female who was convinced that her ex-husband knew way too much about her private life and schedule, even after a year of being divorced. Electronic debugging identified no eavesdropping devices at the female’s house. Further analysis of her laptop, however, revealed her husband had secretly placed a logging software onto her laptop before he left, which had sent ‘printscreen’ snap-shots of the client’s computer screen to a Gmail account every two minutes for over a year. The husband then simply accessed the email account to view every email, every website visited, every chat thread and every Skype window the client had viewed for over a year. As a result of the investigation, the client was able to change computers, upgrade her computer and personal security, and get on with her life, in what remains one of the worst invasions of privacy Artus Group has seen.

Case Study: IP Investigations

A client learned that pirated software was being sold in the US though a company in Rhode Island which was registered as a Delaware corporation. The client requested an investigation be conducted to identify the source. The only evidence provided to Artus Group was an old invoice for a software purchase, which revealed a Rhode Island fax number at the top of the document. The investigation revealed the fax number was in fact forwarded to an electronic hub line in Las Vegas, which then automatically transmitted the fax in the form of an email to an email account. Artus Group discovered the billing address for the fax line was associated with a company in London, which was determined to be the registered agent on record with the Delaware Secretary of State for the Rhode Island company.

Undercover contact through the email address revealed the source was a company in Croatia, which was also the parent company of the London business which paid the Las Vegas fax line invoice. The investigation revealed the identity of the manufacturer and the client proceeded with international litigation to cease and desist operation and distribution of the counterfeit software.