How to Handle Red Flags In Employee Background Checks

Key takeaways

• A serious background check red flag triggers a mandatory 5-step legal process that protects both your company and the candidate’s rights
• You must conduct an individualized assessment rather than applying blanket exclusion policies, which are illegal and expose you to discrimination lawsuits
• All background check information is strictly confidential; sharing results externally violates privacy laws and creates major legal liability
• Only job-relevant findings should influence hiring decisions—irrelevant red flags cannot legally disqualify candidates
• Proper documentation and adherence to adverse action procedures are essential for legal compliance and lawsuit prevention

When a significant issue appears on a background check—such as a relevant criminal conviction or falsified credentials—it triggers a mandatory legal process. This is not a moment for subjective judgment; it is a time for a disciplined, step-by-step approach that ensures fairness, compliance, and a defensible hiring decision. This guide provides a clear playbook for leaders to navigate this high-stakes situation.

The 5-step process for handling a serious red flag

This legally-mandated process must be followed without deviation whenever a background check finding might lead you to reject a candidate. Failure to comply has resulted in significant lawsuits against companies.

The process exists because red flags on background checks don’t always tell the complete story. A systematic approach ensures you make decisions based on facts, not assumptions, while protecting your organization from costly legal challenges.

Step 1: Internal triage and risk assessment

Verify the nature of the flag—is it a significant discrepancy in employment history, a falsified degree, or a criminal conviction? Background check problems can range from minor clerical errors to serious misrepresentations that fundamentally alter a candidate’s qualifications.

The critical question: Does this specific issue directly impact the candidate’s ability to perform the core duties of this role? A history of financial crime is highly relevant for a CFO but may not be for a software developer. Consider whether the finding creates genuine workplace safety concerns, affects the candidate’s ability to fulfill essential job functions, or poses regulatory compliance risks specific to your industry. Understanding the essential types of pre-employment background checks can help you evaluate which findings are truly relevant to your specific role.

Step 2: Initiate the pre-adverse action process

Once you determine the flag is severe and relevant, you must formally notify the candidate. This is the first step in the legally required “adverse action” process under laws like the Fair Credit Reporting Act (FCRA).

Send the candidate a written pre-adverse action notice informing them that you are considering not moving forward based on the report’s findings. This notification serves as their first opportunity to understand what happens after a background check reveals concerning information. A well-designed pre-employment screening process should have clear protocols for handling this phase.

Required documents to include:

• A complete copy of the background check report
• The standardized “Summary of Your Rights” under the FCRA

These documents enable the candidate to understand exactly what information was discovered and their legal options for response.

Step 3: Allow time for a candidate response

You must wait a “reasonable amount of time” before making a final decision—typically interpreted as at least five business days. This waiting period is not optional; it’s a legal requirement designed to prevent hasty decisions based on incomplete information.

During this period, the candidate has the right to dispute any inaccuracies with the screening company or provide you with additional context and explanation regarding the findings. They may present evidence of rehabilitation, explain the circumstances surrounding the incident, or correct factual errors in the report.

Step 4: Conduct an individualized assessment and make a final decision

Evaluate the original red flag alongside any explanation or evidence the candidate has provided. Consider the nature and severity of the issue, how recently it occurred, and whether the candidate has demonstrated positive changes since then. For candidates with criminal records, factors like rehabilitation efforts, employment stability, and character references become crucial considerations.

Critical legal requirements:

• No blanket policies like “we never hire anyone with a criminal record”
• Must conduct an individualized assessment weighing the nature of the offense, when it occurred, and its relevance to the job
• Ban-the-box legislation in many jurisdictions specifically prohibits automatic disqualification based on criminal history
• Document your decision thoroughly for compliance and legal defense

Step 5: Issue the final adverse action notice with a clear reason

If you decide to withdraw the offer officially, complete the legal process by sending a final notification that details your reasoning.

The written notice must legally state that the decision was based, in whole or in part, on the information in the background check report and specify the reasons for the rejection. Vague language like “failed to meet our standards” is insufficient—you must clearly identify which findings influenced your decision.

Required elements in the final notice:

1. Name and contact information of the background check company
2. Statement that the screening company did not make the hiring decision
3. Specific reasons for the rejection based on background check findings

Key considerations for leaders

Beyond the formal process for serious flags, leaders must enforce these critical principles to manage risk effectively.

Confidentiality is legally mandated

Background check results are strictly confidential and legally protected. Sharing a candidate’s information, especially a criminal record, with other employers, community members, or any unauthorized third party is a severe breach of privacy laws. Doing so will expose your company to major lawsuits, regulatory fines, and severe reputational damage.

Internally, access to background check results must be restricted to only the essential personnel involved in the hiring decision on a strict need-to-know basis. HR professionals, hiring managers, and senior leadership directly involved in the decision may access this information, but it should never be shared casually or stored in unsecured systems. Companies with strong candidate assessment solutions typically have robust data protection protocols in place.

Not every flag requires the formal process

A minor issue, like a clerical error or an irrelevant finding that does not impact your decision to hire, does not require you to initiate the formal adverse action process. The full 5-step process is reserved only for issues that could cost the candidate the job. However, any discrepancy in the background check should still be documented and addressed appropriately, even if it doesn’t trigger the formal adverse action procedures. The importance of pre-employment screening in modern hiring lies in its ability to distinguish between minor inconsistencies and serious red flags.

Minor issues that typically don’t require adverse action:

• Small date discrepancies in employment history
• Typos in educational institution names
• Irrelevant traffic violations for non-driving positions
• Credit issues for roles not involving financial responsibility

Handling background check red flags is a fundamental component of your company’s risk management strategy. It is not an optional HR task but a legal necessity that demands a disciplined, documented, and fair process. A bad background check doesn’t automatically disqualify a candidate, but it does require careful analysis within a compliant framework.

Organizations that invest in comprehensive background checks and verification services often find they can navigate these complex situations more effectively while maintaining legal compliance. This systematic approach helps avoid costly recruitment mistakes that can drain your bottom line through bad hires, legal challenges, or damaged reputation.

As a leader, your responsibility is to ensure this playbook is followed without fail. Doing so protects your business from bad hires, ensures compliance, and insulates you from costly, reputation-damaging lawsuits while maintaining your organization’s commitment to fair and ethical hiring practices.