How and When to Use Background Checks as a Small Business

For a small business, a single hiring mistake can disrupt the culture and drain resources. Background checks can safeguard against these problems by verifying a candidate’s history, thereby reducing risk to the business and helping leaders make informed hiring decisions.

This guide explores what background checks include and how to implement a responsible screening process that protects your company and complies with federal laws.

When are background checks required?

While certain sectors, such as healthcare and finance, are legally mandated to conduct screenings, many small businesses in other industries use background checks as a safeguard.

“When you consider the risks and resulting cost of hiring a ‘bad actor,’ the cost of background screens is relatively small,” explained Suzette Schilling, Chief Human Resources Officer at EBG Solutions. “Without [them], you are relying on the word of the candidate, and those with something to hide will be seeking employers who do not screen.”

Ella Rivkin, Founder and CEO of ERPS Group, suggests that background checks are advisable when a role involves "access to sensitive information, financial responsibilities, working with vulnerable populations, or handling company assets."

If you run a background check, the depth of the check should be based on the level of risk and responsibility associated with the role.

[Read more: How to Create and Execute a Performance Improvement Plan (PIP)]

What’s included in an employee background check? 

A background check is typically tailored to the specific requirements of the position. At a high level, these screenings serve to validate a candidate’s past and ensure they possess the qualifications they claimed during the interview process.

A standard professional screening includes several core components, such as: 

• Criminal history. Records from county, state, or federal jurisdictions are searched for felony and misdemeanor offenses.
• Employment verification. Previous job titles, dates of employment, and, in some cases, the candidate’s reasons for leaving are confirmed.
• Education verification. Degrees, diplomas, and certifications from listed institutions are validated.
• Identity verification. Searches can ensure the Social Security number and legal name align.

Beyond these basics, some roles may require more specialized inquiries, such as credit reports for financial positions or motor vehicle records for roles that involve driving. 

Because the scope of these searches can vary significantly by provider and the level of detail needed, small business owners should choose the components that correlate to the risks of the role. Keep in mind that the U.S. Equal Employment Opportunity Commission requires employers to apply their screening standards consistently across candidates to avoid discriminatory practices.

What laws apply to employment background checks?

The primary federal law governing the background check process is the Fair Credit Reporting Act (FCRA), which dictates how employers must obtain and use consumer reports. According to the U.S. Federal Trade Commission (FTC), businesses must provide applicants with a clear, standalone disclosure and obtain written authorization before conducting a check.

Rivkin emphasizes that small business owners must diligently follow these requirements.

“This includes getting written consent from the candidate before running a check, using a reputable screening provider, and ensuring the process is applied consistently to avoid discrimination claims,” said Rivkin. “It’s also important to be mindful of ‘ban the box’ laws in certain states and cities, which limit when and how criminal history can be considered.”

Where does background check data come from, and what’s reliable?

Background check data is compiled from sources that include government agencies, courthouses, and third-party providers. The specific information included in a report varies depending on the role, but commonly draws from sources such as criminal court records, employment and education databases, and, in some cases, financial or driving records.

While digital access has improved, many records still require manual searches at the local level to ensure accuracy. Public databases, for example, can be slow to update, meaning a report may show an arrest without a subsequent dismissal.

To ensure a fair and reliable screening process, employers should use reputable, FCRA-compliant providers and verify any red flags against primary sources before making a final hiring decision.

Types of background check reports

Selecting the right background check depends on the specific duties and risks associated with a given role. Rather than a one-size-fits-all approach, small businesses often combine different types of reports to build a comprehensive assessment of a candidate’s history and qualifications.

Common report types include:

• Criminal history checks. These search local, state, or federal databases for convictions and pending cases. They are essential for almost every role, particularly those involving public safety or access to sensitive property.
• Employment and education verification. These reports confirm whether a candidate actually held the titles and earned the degrees they listed on their resume. This is appropriate for any role where specific experience or academic credentials are a prerequisite.
• Credit reports. These provide insight into a candidate’s financial responsibility by showing their payment history and debts owed. These are typically reserved for roles involving significant financial authority or access to company funds.
• Motor vehicle records. This check reviews one’s driving history, including any accidents and violations. It is a necessity for any position that requires the candidate to operate a company vehicle or drive for business purposes.

Some employers conduct drug and alcohol screenings, depending on the role. However, Schilling noted that these should be considered separately from the standard background check process.

“There are evolving local, state, and federal regulations, procedures, and decision-making defenses that must apply in those cases,” she explained.

In general, aligning the depth of the background check with the role’s responsibilities can help you manage risk without overreaching into an applicant's personal history.

[Read more: How to Protect and Secure Customer Data]

How to run a compliant background check process

To ensure legal compliance and build a fair hiring culture, small businesses should follow this sequence of events.

Step 1: Secure written disclosure and consent.

Before initiating any search, federal law requires that you notify the candidate in a standalone document that a background check will be conducted. You must obtain the applicant’s written permission before contacting screening providers. This transparency ensures the candidate is aware of their rights from the start.

Step 2: Apply consistent criteria.

To avoid discrimination claims, define your screening parameters before you see the results. Determine which specific records, such as criminal history or professional certifications, are relevant to the job. Applying these criteria consistently across all applicants for the same role prevents bias and ensures the process remains objective.

Step 3: Navigate the adverse action process.

If a report reveals detrimental information that leads you to reject a candidate, you must follow the formal "adverse action" process required by the FCRA. This process begins with a pre-adverse action notice, providing the candidate with a copy of the report and a summary of their rights.

According to Rivkin, this step is vital because it allows the candidate "time to review and dispute any inaccuracies before a final decision is made." Only after this waiting period is over should you move forward with a final decision.

Step 4: Document and store results.

Maintain thorough records of your disclosure forms, consent hits, and any notices sent. Proper documentation proves that you followed a compliant path, and it can help protect you legally. Additionally, ensure all sensitive data is stored securely and destroyed according to federal disposal rules once it is no longer needed.

[Read more: A Guide to Employee Record Retention]

Do contractors/freelancers require background checks?

While contractors and freelancers are technically self-employed, screening them may be advisable for managing your operational risk. Businesses often conduct these checks when an independent worker has access to sensitive company data, financial systems, or direct interaction with customers.

Businesses, however, should tailor the check to the specific project. For instance, a freelancer handling public-facing social media may require less scrutiny than a contractor with administrative access to a secure database. Using background screenings with these considerations in mind helps ensure the process remains fair while protecting the company's integrity.

Why should I use a background check service?

Conducting background checks manually is often an administrative burden that carries significant legal risk. Most small businesses turn to third-party providers, as these services offer expertise and the specialized infrastructure needed to access disparate records quickly and securely.

The primary advantage of using a professional service is they are well versed with the FCRA and state laws and can provide reports that comply with both. When selecting a provider, look for the following characteristics:

• FCRA compliance. The provider should handle the necessary disclosures and adverse action notices to help keep your business legally protected.
• Accuracy and verification. A reliable service goes beyond "raw" data, often using human researchers to verify information.
• Integration and ease of use. The software platform should be intuitive for both the employer and the applicant to navigate.
• Turnaround time. Look for providers that balance speed with thoroughness; you can typically expect results within one to three business days.

Whether you use a third-party service or handle background checks yourself, remember that consistency and transparency about the use of these screenings is critical for building candidate trust and remaining legally compliant.

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