FCRA lawsuits against employers on the rise
The name of the Fair Credit Reporting Act (FCRA) elicits visions of “what’s your credit score” commercials and retail counter credit card pitches. In spite of its name, the FCRA governs the manner in which employers conduct certain background checks and make related adverse employment decisions. As a result of the misnomer, many employers overlook their FCRA compliance obligations and unwittingly subject themselves to potential liability each time they request a third party to conduct an employee or applicant background check.
Class-action lawsuits for noncompliance with the FCRA have been on the rise and companies are paying substantial sums as a result. In 2018, Petco and Frito-Lay Inc. both agreed to FCRA settlements totaling $1.2M and $2.4M, respectively. In February 2019, a federal court approved a $2.3 million settlement in an action brought against Delta Airlines by applicants who alleged that Delta did not properly disclose and obtain authorization for pre-employment background checks. Considering the above, it is important that employers understand their FCRA obligations when using employee or applicant background checks.
When does the FCRA apply?
The FCRA applies to employers using background checks or consumer reports from consumer reporting agencies to make employment decisions, including but not limited to hiring, retention, promotion, or reassignment. A consumer reporting agency is any third party company that is in the business of compiling background information. When compiled by such a company, employment background checks are generally consumer reports. Consumer reports can include information from a variety of sources, including, but not limited to, residential and employment history, and education and criminal records.
What does the FCRA require employers to do?
The FCRA requires employers to take certain steps before they obtain a consumer report, and before and after they take any adverse action based on that report. Before requesting a consumer report on an applicant or employee, the employer must do the following:
Disclosure: The employer must disclose to the individual in writing that the employer will procure a consumer report(s) and might use that information for employment-related decisions. This disclosure must be in stand-alone format and cannot be included in the employment application. The disclosure can include a brief description of the nature of the consumer report the employer will procure. Notwithstanding, the disclosure should not contain any other information that will detract from the disclosure, like release or waiver language. • Authorization: The employer must obtain written permission from the individual. The authorization form should clearly describe the type of consumer report being authorized and the frequency at which the report will be procured. For instance, if the employer will seek consumer reports throughout employment in advance of any promotion or reassignment, the authorization language should conspicuously state that. Otherwise, the employer will need to provide a disclosure and obtain authorization each time.
The employer is required to certify to the company who is preparing the report that the employer has complied with FCRA requirements, and that the employer will not discriminate or otherwise use the information in violation of applicable federal and state equal employment opportunity laws.
Before taking adverse action against an applicant or employee based on information in a consumer report (e.g. reject an application, terminate an employee, deny a promotion, etc.), the employer must provide a pre-adverse decision notice that explains what the adverse decision will be and includes:
• A copy of the consumer report relied upon to make the decision
• A copy of “A Summary of Your Rights Under the Fair Credit Reporting Act,” which the company furnishing the report should have provided to the employer or, if not, can be found on the Federal Trade Commission website (ftc.gov)
• An opportunity for the individual to review the report and correct any inaccuracies and/or explain information in the report.
Finally, if the employer ultimately takes adverse action against the individual based on information in the consumer report, the employer must provide an adverse decision notice that explains the decision and includes: The contact information (name, address, and phone number) of the company that provided the consumer report; an explanation of the individual’s rights to dispute the accuracy or completeness of the report and get an additional free report from the providing company within 60 days; and a statement that the company providing the report did not make the decision and cannot give specific reasons for it.
Employers who use investigative consumer reports that are based on personal interviews have additional obligations under the FCRA.
As evidenced above, failure to comply with the FCRA can be costly for employers. Noncompliance may result in actual damages, statutory damages, punitive damages, and attorney’s fees and costs. Thus, employers using background checks for applicants or employees should work with their legal counsel to assess current background check practices and, if need be, create compliant policies and documentation.
Lindsay Raymond represents employers in all aspects of employment-related matters and litigation.
This article was featured in the July 2019 issue of the Traverse City Business News.