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Key Considerations in Requiring Background Checks for Club Employees and Club Members

There are many good reasons for private membership clubs to conduct background checks on applicants for employment as well as on applicants for membership. In the case of employees, background checks may even be legally required in certain circumstances: For instance, industry-specific laws require background checks for employees in dangerous or sensitive positions such as security guards or caregivers. However, even if there is no legal obligation to do so, background checks of employees may be advantageous by helping to evaluate the accuracy of an applicant or employee’s credentials; minimize the risk of workplace violence; and reduce exposure to litigation (such as negligent hiring claims).  

Private clubs may also desire to conduct background checks on members or member candidates so as to select members who meet the club’s specified standards; increase the likelihood that members will hold/embody the club’s core values; ensure candidates’ creditworthiness; protect club members and staff from exposure to individuals with dangerous or fraudulent criminal pasts; and avoid any bad publicity resulting from being associated with members with negative legal or public histories. 

In a 2017 pulse survey conducted by McMahon Group and the National Club Association (NCA), 67% of the 370 club executives polled indicated their club conducted background checks on staff, and about 30% of the same respondents indicated their club conducted background checks on prospective members. Ultimately, the decision whether to screen employees or members is a business one for individual club management to make in light of their association’s particular circumstances and culture. However, if background checks are conducted on either employees or members, club management must be wary of violating the numerous state and federal laws that might be implicated. This article describes some of these restrictions and other potential sources of liability below.  

The Fair Credit Reporting Act  

The federal Fair Credit Reporting Act (FCRA) regulates the accuracy, fairness and privacy of information in “consumer reports”; parties are prohibited from obtaining a consumer report relating to an individual except for certain purposes, and only if certain steps are followed. A consumer report is broadly defined, and generally includes any communication of any information by a consumer reporting agency bearing on an individual’s “credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living” that is used or expected to be used as a factor in evaluating the individual’s eligibility for employment purposes, or another purpose authorized by the FCRA. The FCRA is not limited to credit reporting—it extends to criminal and civil records, civil lawsuits, reference checks and other information obtained by a consumer reporting agency as part of an overall background check.  

Background Checks for Employees & Employee Applicants 

The FCRA expressly authorizes businesses to obtain and use consumer reports for employment purposes, but employers must comply with strict disclosure and consent requirements.1 Clubs risk civil and statutory penalties for failing to comply with these procedural requirements.  

Requirements Prior to Procuring a Consumer Report for Employment Purposes  

Before obtaining a consumer report, employers must provide the applicant or employee with a written “clear and conspicuous disclosure” that a consumer report “may be obtained for employment purposes” in a document that consists solely of the disclosure. Employers must also obtain the individuals’ written authorization to obtain the consumer report. The notice and authorization may be on the same page, but nothing else should appear on the disclosure form.2   

Requirements After Procuring a Consumer Report for Employment Purposes  

Pre-Adverse Action Requirements. Before an employer may take an adverse action based partially or completely on information in a consumer report, it must provide additional disclosures to the employee.3 The employee must be provided a copy of the report in question, and a notice of their FCRA rights. In addition, the FCRA requires that a reasonable amount of time elapse between the pre-adverse action notice and the employer actually taking the adverse action. The purpose of this provision is to allow the employee to discuss the report with the employer or otherwise respond before any adverse action is taken. Therefore, the employer must allow a reasonable time for such a discussion to take place. Exactly how much time is required is not specified: One court found five days may be insufficient due to the Labor Day holiday occurring in the five-day period.4 Another found that fourteen days (10 business days) did not violate the FCRA.5 

Courts have also clarified what constitutes an adverse action in this context. Most courts have found that an adverse action does not occur until the decision is carried out, communicated or actually takes effect.6 However, when a decision goes “beyond a mere internal decision” before the pre-adverse action notice is provided, and the individual is not provided an opportunity to dispute the information, employers may face liability.7 For example, in Obabueki v. IBM Corp., 145 F. Supp. 2d 371, 391-2 (S.D.N.Y. 2001), the court ruled an internal decision to withdraw an offer of employment was not an adverse action because the plaintiff “did not suffer any adverse effect until his offer of conditional employment was withdrawn” five days later. The court explained that the FCRA “expressly allows for the formation of an intent to take adverse action before complying with the [notice requirements].”   

Final-Adverse Action Requirements. After an employer takes adverse action with respect to an applicant based in whole or in part on any information contained in a consumer report, the employer must provide oral, written or electronic notice of the adverse action to the applicant that provides the following:  

  1.    The name, address and telephone number of the consumer reporting agency (including a toll-free telephone number established by the agency if the agency compiles and maintains files on consumers on a nationwide basis) that furnished the report to the person;  
  1.    A statement that the applicant has a right to obtain a free copy of the report from the agency or any agency that compiles and maintains files on consumers on a nationwide basis within 60 days of the notice of adverse action;  
  1.    A statement that the consumer reporting agency did not make the decision to take the adverse action and is unable to provide the consumer the specific reasons why the adverse action was taken; and  
  1.    A statement that the consumer has the right to dispute the accuracy or completeness of any information in a consumer report.8 

Background Checks for Members & Member Applicants 

Although there does not appear to be any court decisions that directly considered the question, a plain reading of the FCRA indicates that most private membership clubs may be authorized to obtain and use consumer reports for purposes of evaluating the eligibility of members or member applicants for club membership.9 Based on the FCRA’s application to background checks for reasons other than “employment purposes,” it appears that clubs that choose to conduct such checks on members need only provide a member with a Final Adverse Action Notice to comply with the FCRA if/when the club decides to take an adverse action against a member on the basis of information contained in a report.10 

Clubs should nonetheless seek authorization from members to obtain such reports so as to avoid any invasion of privacy claims or other violations of state law. At the time such request for authorization is presented, clubs can also inform the member/applicant that the costs associated with obtaining the report will be included in their membership or application fees.  

Additional Considerations 

In addition to the requirements under the federal FCRA, employee and member background checks may implicate several other sources of potential liability, as detailed below.  

EEOC ConcernsThe use of criminal history in hiring decisions may risk liability under the Equal Employment Opportunity Commission’s (EEOC) guidelines. For example, an employer who adopts a blanket policy of excluding all applicants with an arrest record could face disparate impact liability under federal nondiscrimination law if (a) such policy or practice disproportionately affects a protected class; and (b) the employer cannot show that the policy or practice is “job related and consistent with business necessity.”    

Note, “bona fide private membership club[s]” are afforded an exemption from the anti-discrimination provisions of the Civil Rights Act. However, managers of private membership clubs should be wary of relying on this exemption. First, whether a club even qualifies for the exemption is often difficult to predict in advance with any certainty. The courts and the EEOC apply restrictive standards in determining whether clubs qualify as “bona fide private membership club[s]” exempt from federal employment laws and whether an establishment is truly a “private club or establishment” exempt from requirements for public accommodations. Furthermore, the “private club” exemption only applies to organizations that are tax-exempt under section 501(c) of the Internal Revenue Code. Many clubs learn only at the point of litigation that they do not qualify under these various standards for eligibility.11 Secondly, even if the “private club” exemptions apply, other state and/or municipal laws may provide protections that are identical to, or more extensive, than those provided under the Civil Rights Act. Similarly, such laws may provide protection for private club employees or club members that the federal Civil Rights Act does not, and many of these laws contain no comparable “private club” exemptions.  

State Law Equivalents of FCRA. While compliance with the FCRA may appear straightforward, employers should be aware that dozens of states have passed their own versions of the FCRA. A number of these state laws provide greater protection for applicants and employees than the FCRA does. For example, in California, even employers that conduct background investigations entirely in-house (i.e., without using a Consumer Reporting Agency) are subject to limited notice and disclosure requirements. In addition, some states have their own laws which, while appearing to be substantially similar (or even identical) to the FCRA, may require separate standalone disclosure forms.12 

Additional State Law Requirements (“Ban the Box”). Background checks in many states must comply with additional timing requirements and restrictions on the types of information that may be obtained. For example, any background check in California is subject to various state and local laws that restrict the type of criminal background information that can be obtained and the timing for doing so. Under California’s “Ban the Box” law, employers may not ask about criminal history information until after a conditional offer of employment has been made. Even then, the information that can be obtained is limited; for example, under California Labor Code sections 432.7 and 432.8, certain criminal information, including information concerning arrests that did not lead to conviction, expunged and juvenile convictions, and certain misdemeanor offenses relating to marijuana, are prohibited. 

Because many state and local jurisdictions have enacted FCRA-like and Ban the Box legislation that directly regulate employer (and potentially member) background checks, employers are advised to consult with qualified legal counsel to confirm that their policies, procedures and forms are legally compliant with all sources of law applicable to your jurisdiction.  

Thomas Lenz and Jonathan Judge are partners and Ryan L. Kilpatrick is an associate at Atkinson, Andelson, Loya, Ruud & Romo. They can be reached at [email protected], [email protected], and [email protected].