Guide to Background Check Regulations for Small Businesses


Why do businesses expend the time, effort, and cost to perform background checks on their employees? Fifty-two percent do so to reduce their legal liability for negligent hiring, 49% wish to guarantee a safe workspace for their employees, and 35% want to prevent criminal activity. ( SHRM ).

Background checks can be necessary for small businesses, considering that the risks and expense involved in a bad hiring decision can be particular damaging. However, it is important that your business maintain compliance with any applicable regulations concerning employee screening. These regulations are intended to help businesses create a safe work environment while also preventing discriminatory hiring practices and invasions of employee privacy.

Risks to Small Businesses

Businesses with fewer than 50 employees are slightly less likely than larger employers to hire someone with a criminal record (4% versus 5%). They are also less likely to encounter false information on a resume, negative personal references, and negative credit history when hiring. However, small businesses are more likely to have employees with violations on their driving history or a history of workers compensation claims.

Bad hiring decisions can have a significant impact on small businesses. The average cost of a bad hiring decision can equal up to 30% of the employee’s annual earnings . In circumstances where a negligent hiring suit goes to trial, 79% of employers have lost the case. The settlement costs of a negligent hiring case averages nearly $1 million, but have cost as much as $40 million ( patdolen.com ).

Important Regulations

Your small business can perform background checks in-house through public records searches; hire a third-party provider to complete the check ; or purchase employee screening software that searches online databases for information about a potential employee. No matter which method you choose, make sure you are aware of how each of the following regulations applies:

  • The Fair Credit Reporting Act applies to background checks ordered through third-party agencies. You must provide an appropriate reason for ordering the report, obtain permission from the applicant, and certify that you will comply with the law on how you use the information you receive.
  • The Americans with Disabilities Act bars employers from requesting an applicant’s private medical records. Nor can the employer base their hiring on information found in a workers’ compensation claim, which is public record. Employers may only ask whether the applicant is able to perform the job with or without reasonable accommodation.

Your state may have its own laws regarding how employers may use background, credit, and criminal record checks. Consult your lawyer about the labor codes and fair employment guidelines in your state. These may limit what information you can solicit in a background check and use for hiring decisions.

Background checks, as part of your hiring process, can help you protect your small business from criminal activity, fraudulent job applicants, and negligent hires. Some states and industries may require you to screen employees working in particular positions. Be sure that your business follows all applicable laws and regulations that dictate how you can use the information found in an employee background check.

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About the Author

Megan Webb-Morgan is a business blogger who writes about small businesses and startups for B2B lead generation company Resource Nation . You can follow Resource Nation on Facebook and Twitter !

Author: HiringThing

HiringThing is easy to use, intuitive online recruiting software that makes it easy to post jobs online, manage applicants and hire great employees.