Background Checks: The Work Comp Playbook For Employers

Many employers are eager to quickly fill gaps in their rosters. A study from the National Business Research Institute found that 43% of respondents felt pressured to fill positions as quickly as possible, and 75% of the demand to hire new employees comes from a need to replace workers who have left the company. However, rushing through the hiring process can lead to a bad hire, and the cost of a bad hire can be very expensive. How can you avoid this? One of the most effective methods for spotting a potential bad hire is the implementation of background checks.

The Cost of a Bad Hire

There are a number of factors that lead to a bad hire, and a number of negative effects that can come from a bad hire. According to the U.S. Department of Labor and Statistics, the average cost of a bad hire can be equivalent to 30% of the hire’s potential first-year earnings. cites costs of $7000 to replace a salaried employee, $10,000 to replace a mid-level employee, and $40,000 to replace an executive-level employee. Bad hires can also lead to an increase chance of employee lawsuits, which could have further financial consequences for your company.

The consequences of a bad hire are not limited to the financial. In the previously mentioned study from the National Business Research Institute, 66% of employers surveyed in 2012 said that they experienced negative consequences from bad hires. Of that 66%, 37% stated that the bad hire had a negative impact on employee morale, 18% felt that the bad hire negatively affected client relationships, and 10% attributed a decrease in sales to the bad hire.

Precautions to Take Before a Background Check

Before performing a background check, it is important that you know the limitations and comply with the Federal Trade Commission’s Fair Credit Reporting Act (FCRA). As states, you are required to have the prospective hire’s permission before running the check, and they must complete an authorization and a disclosure form. FCRA limits bankruptcies to 10 years and a number of other details (such as civil lawsuits, collection amounts, judgments, and tax liens) to 7 years. While criminal convictions do not have a federal limitation, many states have established their own limitations.

As stated by the United States Equal Employment Opportunity Commission (EEOC), it is illegal to background check information related to a candidate’s “race, national origin, color, sex, religion, disability, genetic information (including family medical history), or age (40 or older).” The United States Small Business Administration provides further limitations to background checks. Under the Americans with Disabilities Act, employers cannot request medical records or discriminate based on any prospective employee’s impairments. The Federal Bankruptcy Act prohibits against discriminating against employees applicants they have filed for bankruptcy, and the Family Educational Rights and Privacy Act establishes that educational records (which include transcripts, recommendations, and financial information) are confidential and cannot be released without the student’s consent.


 About Compass RMS

The risk management firm Risk Management, Inc. has specialized in workers’ compensation since 1996, creating the CWCP (Certified Workers’ Compensation Professional) program in 1999 and the P4 process in 2000. We launched our Compass Risk Management platform in 2008 and recently released version 4.0. For more information about our services, give us a call at (888) 519-6690 to speak with one of our consultants.