NEW YORK (CNNfn) - It started with a nasty letter and a legal threat.
Bruce Tennenbaum, owner of Arizona Pest Control, a $1 million company founded in 1947, got a customer complaint which alleged an employee left a verbally abusive letter on his front door.
The customer threatened to sue. Tennenbaum ran for the phone book.
"I called a handwriting analyst and gave her the note to verify it wasn't my employee," he said. "Then she asked for my handwriting sample and my partner's. She pinned our personalities exactly and she pinned all of my employees too. It was amazing."
That was two years ago. These days, Tennenbaum considers handwriting analysis the most valuable weapon in his arsenal of pre-employment screening tools. In fact, it's his only tool.
"I have tried every interview process, every application procedure, everything I could find to help me find employees with the organizational skills I need," he said. "Nothing else worked. I wouldn't hire anybody without their recommendation."
American Pest Control is part of a growing number of companies worldwide that are pulling out all the stops to ensure prospective employees won't waste their time or money.
Over the last 10 years, basic reference checks have given way to a host of new testing mechanisms that help employers better assess the personalities and aptitude of new recruits.
The goal, of course, is to minimize turnover and step up productivity -- all of which, theoretically at least, should lead to a healthier corporate environment.
"This is an exploding industry," said Craig Leonard, marketing specialist at Factual Data Corp., a background checking firm in Loveland, Colo. "A good program will entirely pay for itself."
Leonard said the bulk of his company's clients report a 25 percent drop in turnover in the first two years.
Considering the toll turnover takes on the bottom line, that's no small accomplishment.
The Employers Resource Association estimates said the cost of replacing employees ranges from $6,000 to $11,000 per hire, depending on their industry and rank.
Leonard estimates 40 percent to 50 percent of Fortune 1,000 companies have "serious background checking" programs in place. Smaller companies are just beginning to appreciate the cost-benefit relationship, he said.
Many companies that utilize pre-employment screening tools use a combination of testing methods. Some stick with basic drug testing and credit checks.
Others, including Key Tronic Corp. (KTCC), a computer parts manufacturer in Spokane, Wash., run extensive background checks on all employees to whom offers have been made. (The offers are contingent upon a clean report.)
Using a third party professional, the company verifies all education information provided, and checks out the applicant's employment history, criminal record and motor vehicle reports.
Everything is done with the written consent of the applicant, said Ken Clement, director of Key Tronic's human resources department.
"We could be bringing on someone that was convicted of embezzlement and while it's not something we would flatly exclude someone for, it's something we need to be aware of," he said.
The most common cause for a rescinded offer at Key Tronic? False claims of a college education, Clement said.
"We catch quite a few," he said. "When you confront them, they look like a deer in headlights. No one has bothered to check their backgrounds before."
Key Tronic pays roughly $90 per background check, about average for the industry.
"It's worth it," Clement said. "We are looking for honest and trustworthy people."
The vast majority of companies that conduct background checks do it to enhance workplace stability. Some, though, implement programs as a preemptive strike.
"This is a trend that employers are very interested in because they want to stay away from negligent hiring suits," said Bill Hart, president of the Employers Resource Association. "There are legal ramifications [to bringing on employees with red flags], but the prime motivator for most employers is to make an informed hiring decision."
Companies that fail to check backgrounds and bring on employees with a violent criminal record put existing employees at risk. If an existing employee is injured or harmed because of it, they're opening themselves up to negligent hiring suits.
"Negligent hiring is a new and growing area of tort law," said Ann Kiernan, a long-time employment law attorney in New Brunswick, N.J. "The law says there's a duty on the part of the employer to hire in a non-negligent fashion and if you breach that contract there are damages."
All of that spills over into liability and defamation claims. Companies now have to contend with the possible of defamation lawsuits if they provide a bad or misleading reference on a former employee seeking a new job.
"Most companies only verify salary and titles these days," Kiernan said. "They are worried that if [an ex-employee] doesn't get a new job they'll claim they've been defamed in a suit."
That leaves managers charged with hiring in a tight spot. On the one hand, the law limits what they can ask and how much background information they can use in their hiring decision. On the other, it holds them responsible for the well-being of existing staffers.
"For managers on the line every day trying to run a business, it can be very frustrating," she said.
Digging up the dirt
Depending on how thorough companies choose to be, background checks can pull up information on everything from court and criminal records and workers' compensation claims, to motor vehicle records, bankruptcy and medical history. Much of the information is public record.
The disbursement of confidential data, however, is governed by strict state and federal guidelines, which have established rules on who can request the information and how it can be used. The Employee Polygraph Protection Act, for example, forbids most private employers from using so-called lie detector tests as pre-employment screening tools or on existing employers.
Prospective employees also have the right to refuse a handwriting analysis test without repercussion. Moreover, the legal system restricts employers from using information on prior arrests, workers' compensation and medical records as the sole basis for hiring decisions.
That constitutes discrimination in the eyes of the Equal Employment Opportunities Commission.
But even companies that play by the rules could be putting themselves at risk, said EEOC spokesman Michael Widomski.
"There's nothing in the law itself that specifically states that doing such searches is, in and of itself, illegal," he said. "But I would caution [employers] that it may come back to bite them."
He noted some kinds of testing have recently been the subject of discrimination claims with the EEOC.
"Some people feel that by conducting financial background checks, for example, the test could have a disparate impact on some minority groups," Widomski said. "You have to be careful with those types of things. The best advice is if it has nothing to do with the job itself, then don't ask."
The EEOC receives about 80,000 discrimination charges against employers each year. Roughly 8 percent of those involve hiring practices.
(Click here for FTC guidance on how employers should handle background checks)
"It's getting to the point where it's hard for employers to find the right people because there are so many limitations on what they are allowed to ask," said Mark Hopper, president of Handwriting Research Corp. in Phoenix. "They are left with hunches, gut feelings and a resume."
Recent amendments to the Fair Credit Reporting Act also require consumer reporting agencies, or CRAs, to obtain written permission from the individual before digging into their past -- a law that originally pertained only to credit checking.
That law, according to Leonard of Factual Data, was sorely needed.
"There are at least 1,000 people still working out of their garage who call themselves background checkers," he said. "People were breaking the law to get private information. There were so many violations."
Reputable companies, he said, abide by the law.
"We are not private investigators," he said. "We are not trying to be sneaky. We are trying to ensure our clients are hiring the right people for the job."
Experts say the best way for companies to guard against discrimination claims is to have in place a "clear, concise and consistent" policy for hiring and firing practices.
Not everyone, however, believes employers have the right to perform background checks and testing. Drug tests, in particular, rattle the National Employee Rights Institute.
"We think random drug testing is inappropriate, particularly in areas that are not safety jobs," said Paul Tobias, chairman of the group. "For an engineer on a train, perhaps it's appropriate. But for most of us, why should we submit to a drug test? They are humiliating, offensive and intrusive."
When there's no suspicion of drug use to begin with, he noted, it's an invasion of privacy.
Telling the truth
As resumes go, it may be true that most people presents themselves in the best possible light.
But with background checking on the rise, those charged with hiring new recruits say you may want to think twice before sending in an application that does not accurately reflect your education, salary and experience.
"If they are going to falsify information on their application, there's no telling what they'll do once they get on board," Clement of Key Tronic said.
Hart, of the Employers Resource Association, added the use of elaborate screening tools in corporate America is only expected to climb.
"The most important decision companies make is who they hire," he said. "Employers make them not by gut feeling anymore, but by using tools that predict success."