Magazine

The Trouble with Background Checks


Employee screening has become a big business, but not always an accurate one

Theodore Pendergrass was shocked in November, 2006, when the Walgreens (WAG) pharmacy chain rejected his application for a store supervisor job. The company told him a background-screening firm called ChoicePoint (CPS) reported that a past employer had accused him of "cash register fraud and theft of merchandise" totaling $7,313. "I wanted to cry," Pendergrass says. The $4 billion business of background screening is booming. Companies large and small are sorting mostly mid- and lower-level job applicants based on information compiled by ChoicePoint, its major rivals, and hundreds of smaller competitors. Some employers have grown more vigilant about hiring since the September 11 terrorist attacks. Others like the efficiency of outsourcing tasks once handled by in-house human resources departments or bosses who simply picked up the phone themselves. Whatever their motives, employers are becoming more dependent on mass-produced background reports that rely heavily on anonymous, and sometimes inaccurate or unfair, sources.

Pendergrass' difficulties stemmed from a previous job at Rite Aid (RAD). By late 2005, when he was 25 years old, he had reached the first rung of management as a shift supervisor in a Rite Aid store in Philadelphia. His bosses trusted him to oversee cashiers, bank deposits, and merchandise deliveries. Then, in January, 2006, a store official accused him of stealing goods and underpaying for DVDs. He denied the accusations, but the official said police were waiting outside to arrest him if he did not confess. Pendergrass wrote a statement but wouldn't admit to theft. He was soon fired anyway.

Later, at a hearing for unemployment compensation, Pendergrass was vindicated. A state labor referee ruled that Rite Aid had not proved its allegations and awarded him nearly $1,000 in benefits. But Rite Aid had already submitted its theft report to a database used by more than 70 retailers and run by ChoicePoint, the largest screening firm for corporate employers in the U.S. Based in a leafy Atlanta suburb, ChoicePoint says it checks applicants for more than half of the country's 100 biggest companies, including Bank of America (BAC), UnitedHealth Group (UNH), and United Parcel Service (UPS). Because of Pendergrass' tainted ChoicePoint file, retailers CVS Caremark (CVS) and Target (TGT) also rejected him for jobs.

Pendergrass, now 27, makes lattes at a Starbucks (SBUX) in Philadelphia. The coffee chain doesn't use a screening firm for entry-level hires. Pendergrass earns $17,000 a year, or 30% less than he did at Rite Aid, and fears his career has been derailed. "I worked hard in that store, and none of this stuff was true," he says. "I would be locked up somewhere if I stole $7,000."

Rite Aid declines to comment. A ChoicePoint spokeswoman says the company's background report merely conveyed information provided by a former employer.

FAT PROFITS

Background screening has become a highly profitable corner of the HR world. At the screening division of First Advantage (FADV), based in Poway, Calif., profits soared 47% last year, to $29 million; revenue grew 20%, to $233 million. HireRight (HIRE), based in Irvine, Calif., reported that earnings jumped 44%, to $9 million, last year on revenues of $69 million. To grab a piece of this growing market, Reed Elsevier Group (RUK), the Anglo-Dutch information provider, agreed to acquire ChoicePoint for $4.1 billion in February—at a 50% premium to its stock price.

Industry surveys show why Reed Elsevier was eager to expand its screening business. In a 2004 study by the Society for Human Resource Management, 96% of personnel executives said their companies conduct background checks on job candidates, up from 51% in 1996. Two-thirds of larger companies say they outsource screening, and many now vet current employees in addition to applicants.

Screening often goes far beyond the familiar checking of public criminal records. For $60 to $80 per applicant, ChoicePoint and its rivals assemble digital dossiers of educational degrees and credit histories as well as interviews with friends, past bosses, and colleagues. Call-center workers wearing headsets inquire about work habits, personal character, and drug or alcohol problems. Just by dint of their heft and permanence, the proprietary data caches they compile can seem authoritative, even though the information sometimes contains errors, innuendos, or outright falsehoods.

"You won't believe what people tell you," says Mary Beth Gotshall, who has done interviews since 1999 at Employment Background Investigations, a midsize firm in Owings Mills, Md. She and colleagues have collected comments from a father who said he would never rehire his son because he had missed so much work at a family business. Another former boss accused an applicant of stealing and demanded Employment Background help find him. (The firm declined.) "We put everything in there," Gotshall says while juggling employment checks for retailer Ikea, a Pittsburgh medical clinic, and a Texas engineering firm. Her boss, Richard Kurland, chief executive of Employment Background, says the company goes to great lengths to be accurate. "We have a huge responsibility to mankind," he adds.

But Lester Rosen, a veteran in the industry and president of Employment Screening Resources in Novato, Calif., says: "Essentially, it's the Wild, Wild West. It's an unregulated industry with easy money and not a huge emphasis on compliance or on hiring quality people" to do the screening.

Theron Carter, a 61-year-old unemployed truck driver in Middleville, Mich., is waiting for his name to be cleared in a database used widely in the transportation business. In May, 2006, a U.S. Labor Dept. administrative law judge ruled that Carter was wrongly terminated by Marten Transport (MRTN) for making legitimate complaints about the safety of his 18-wheel truck. He had hauled loads for the Mondovi (Wis.) company for only two weeks before being fired in June, 2005. The judge awarded him more than $31,000 in damages and back pay and ordered Marten Transport to delete "any unfavorable work record information" in a report compiled by USIS, a large screening company in Falls Church, Va. Once an arm of the federal Office of Personnel Management, USIS was privatized in 1996. It still screens government workers and runs an employment-history database used by 2,500 transport companies called Drive-A-Check, or DAC.

Despite his legal victory, Carter's DAC report still says Marten Transport dismissed him for "excessive complaints" and a "company policy violation." "No one will hire me," says Carter, who withdrew $50,000 from retirement savings to support his wife and himself. Trucking company J.B. Hunt Transport Services (JBHT) "told me I had excessive complaints and wouldn't hire me. I told them I won my case." Hunt declines to comment.

Marten Transport has appealed the Labor Dept. ruling. A company attorney, Stephen DiTullio, says it would be "fraudulent" for the carrier to remove the reference to excessive grievances from Carter's DAC file. "That was an accurate portrayal of what led to his termination," DiTullio says. Marten Transport has addressed Carter's safety concerns, he adds.

John Griffith, 47, won a similar Labor Dept. ruling in October, 2003, against his former employer, Atlantic Inland Carrier. The administrative law judge ruled that the company wrongly fired Griffith in December, 2001, for complaining about the safety of his truck and ordered Atlantic Inland to remove unfavorable information from his DAC record.

Someone at Atlantic Inland—it's not clear who—had told DAC that Griffith was terminated and not eligible to be rehired because of his grievances. The company eventually deleted that information in January, 2004—more than two years after it was posted. During that time, Griffith says, it was hard to find trucking work. The Aiken (S.C.) resident turned to lower-paying odd jobs, although he recently got back behind the wheel making deliveries for a nursery. "Truck drivers live and die by DAC," he says. "They can ruin a driver's career with a few clicks of their mouse."

LIVING IN FEAR

USIS declines to comment on any specific cases. Gripes about its database have made "DAC" a popular verb in the industry, with drivers lamenting they have "been DAC-ed." Responding to the anxiety surrounding the database, USIS officials have defended their methods on radio interview shows aimed at truckers. They argue that screening is legally required, generally accurate, and keeps bad drivers off the road.

But Kristen Turley, director of market development and communications at USIS' commercial-services unit in Tulsa, concedes that no system is immune to mistakes and misuse. "There is a chance somebody who holds a grudge will put negative information in the database," she says. "We are not trying to blackball drivers or ruin their chance to get a job." When a driver disputes a background report, USIS asks its sources for proof supporting negative comments, she says. USIS doesn't seek such evidence up front. "Ideally that would be a good solution," Turley says, but it could dissuade past employers from submitting information in the first place.

The federal Fair Credit Reporting Act covers background screeners, but it hasn't been aggressively enforced. The law says screeners must use "reasonable procedures" to ensure "maximum possible accuracy." It also requires employers to give a copy of background reports to rejected applicants. An applicant can dispute the information, but the Federal Trade Commission has said employers must wait only five business days before hiring someone else, meaning that objections frequently become moot. Lately the agency has focused more on identity theft than on screening, Rebecca Kuehn, assistant director for privacy and identity protection, says.

ChoicePoint has run into trouble because of how it has disseminated personal data. A 1997 spin-off from credit bureau Equifax (EFX), the company stumbled in 2004, when it offered a $40 software package at Sam's Club (WMT) stores that allowed small businesses to obtain personal information on applicants. The company dropped the product after privacy advocates pointed out that it wasn't verifying whether users had a business license and a legitimate purpose for searching, as opposed to snooping on a neighbor or old boyfriend.

Then, in 2005, it came to light that ChoicePoint had given identity thieves pretending to be small business clients seeking background checks access to people's addresses, Social Security numbers, and dates of birth. ChoicePoint agreed in 2006 to pay a $10 million civil penalty to the FTC and $5 million more to compensate 160,000 consumers whose information had been compromised.

LURING CONSUMERS

Today, ChoicePoint bills itself as the gold standard in screening. "The big issue for us is making sure we're doing things as accurately as possible," says Bill Whitford, a senior vice-president. The company conducts 10 million background checks annually and estimates it has about 20% of the U.S. market. "The number of complaints vs. transactions is very low," says Katherine Bryant, vice-president for consumer advocacy. The FTC has logged 695 complaints against ChoicePoint since 2005, some of which related to the identity-theft episode. USIS had the second-highest total, with 89.

ChoicePoint now is trying to draw consumers as clients. It sells a preemployment self-check to people who want a preview of what an employer would learn about them. These reports cost from $24.95 to as much as $75, depending on how customized they are. Savvy consumers can save themselves some money: Under federal law, individuals are entitled to a copy of any background report compiled by a screening company for a minimal fee, generally $10 or less.

Along with price, screening firms compete on speed. HRPLUS, in Evergreen, Colo., offers five reference interviews within 72 hours. At Employment Background Investigations, a whiteboard hanging on a cubicle wall recently celebrated the clearing of 1,025 applicants in one week by a group of about two dozen screeners, a company record.

Screening firms say their services are vital. In many industries, they argue, employers don't seek prosecution of minor infractions but are willing to report them to employment databases. USIS says its retail records have identified more than 30,000 applicants with histories of theft in just the past few years. All theft reports are re-verified with the employer that submitted them before being shared with an inquiring company, USIS says. But mistakes occur, and once a worker is flagged, it can be nearly impossible to work again in retail.

Two screening companies got it wrong in the case of Ingrid Morales. In 2001, Morales, then 26, was fired after only a month as a makeup artist at a Saks Fifth Avenue (SKS) store in Boca Raton, Fla. Saks cited a report supplied by a retail database, now owned by USIS, and a smaller Florida screening firm, Merchants Security Exchange. The screeners said she had been terminated from a Burdines department store in 1995 for "unauthorized taking of merchandise" valued in the hundreds of dollars. Morales denied the theft allegations. But it wasn't until she sued Burdines and the screening firms in federal court later in 2001 that the information was corrected. USIS deleted the negative reference, and Merchants Security changed her file so that it noted merely a company "policy violation" in connection with her use of an employee-discount card.

A judge dismissed her suit in 2003, ruling that she had not been defamed by Burdines, a part of what is now Macy's, and that the screening firms hadn't violated the law. A spokesman for MAF Background Screening, previously known as Merchants Security, says that "mistakes do happen" and that the Morales case illustrates why applicants should review their background reports. USIS and Macy's decline to comment.

Morales, now 33 and the mother of three children, says that her firing and inability to find work again at store cosmetics counters put her family in a financial bind for several years. Her husband's construction business has since taken off, and she helps manage it from home. But she's still bitter about the background report. "It ruined my whole career, and I felt very humiliated," she says. "They can put whatever they want in your file, and you can't get work."


Steve Ballmer, Power Forward
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