• FACTA Eases Employers' Burden in Workplace Investigations
  • May 16, 2004
  • Law Firm: Pepper Hamilton LLP - Princeton Office
  • On December 4, 2003, President Bush signed into law the Fair and Accurate Credit Transactions Act of 2003 (FACTA), which amends the Fair Credit Reporting Act (FCRA). The primary purpose of FACTA is to combat identity theft, to increase the accuracy of consumer reports, and to give consumers greater control over the type and amount of marketing solicitations they receive.

    Significantly for employers, however, Section 611 of FACTA allows employers to do something that FCRA did not -- retain third parties to conduct workplace investigations without first notifying the target of the investigation or obtaining their consent. Section 611 became effective on March 31, 2004.

    Background on FCRA

    FCRA is designed to promote accuracy and ensure the privacy of information used in consumer reports. Understanding the law requires knowing a few definitions under it:

    • A Consumer Reporting Agency (CRA) is anyone who, for a fee, regularly assembles or evaluates credit or other information about consumers for reports to third parties.
    • Consumer reports are communications from a CRA that bear upon a consumer's creditworthiness, "character, general reputation, personal characteristics or mode of living," and are used as factors in establishing eligibility for employment.
    • Investigative consumer reports seek the same information, but rely on personal interviews of the neighbors, friends or associates of the person being investigated.

    In 1997, FCRA was amended, significantly increasing the legal obligations of employers who use consumer reports. In particular, since 1997, FCRA requires that employers:

    before requesting a report from a CRA, provide individuals with written notice that consumer reports may be used for employment purposes (such as for use in background checks)

    obtain the individuals' written consent to such use

    notify individuals promptly if information in a consumer report may result in a negative employment decision

    provide individuals with a complete copy of the consumer report and a description in writing of their rights under FCRA before taking any adverse action based on information in the report

    after providing individuals with the consumer report and notice of rights, wait before taking any adverse action, to give the individuals an opportunity to respond to any disputed information.

    The Vail Letter

    On April 5, 1999, the FTC issued an Opinion Letter in response to an inquiry by attorney Judi Vail about the applicability of FCRA to sexual harassment investigations. (See our March 2000 newsletter.) In the letter, FTC lawyers stated that "outside organizations utilized by employers to assist in their investigations of harassment claims" are CRAs, and that oral or written reports resulting from their investigation of harassment claims are "most likely 'investigative consumer reports' within the meaning of the FCRA."

    The Vail Letter, as it is known, meant that employers, as recipients of harassment investigation reports (now deemed "investigative consumer reports" within the meaning of FCRA), would be subject to FCRA's stringent notice and disclosure requirements. In particular, they would be required to notify the harasser of the sexual harassment investigation, obtain the written authorization of the harasser before ordering any investigative report, provide notice to the harasser before taking adverse action against him, and furnish a complete copy of the investigative report to the harasser if any adverse action is taken against him or her.

    Employers were justifiably concerned that: (1) notice of the investigation to the alleged harasser could result in the harasser intimidating witnesses or covering up the misconduct; (2) the harasser could impede the investigation by not consenting to the employer's retention of an outside entity to investigate the charges; and (3) disclosure of the harassment report, including the name of those interviewed, to the harasser, could compromise the privacy (or safety) of victims and witnesses, and discourage co-workers from coming forward with relevant information.

    The Vail Letter was a significant deterrent for companies seeking to use third parties, such as law firms, private investigators and consultants, to investigate allegations of workplace misconduct. Paradoxically, these third parties are often the best-equipped to conduct investigations, which employers are obligated to perform promptly and effectively under Title VII and state anti-harassment and discrimination laws.

    FACTA Puts Vail to Rest

    FACTA lays to rest the most significant concerns raised by the Vail Letter. Section 611 of FACTA excludes from FCRA's definition of consumer report communications made to employers in connection with investigations of: "(i) suspected misconduct relating to employment; or (ii) compliance with Federal, State, or local laws and regulations, the rules of a self-regulatory organization, or any preexisting written policies of the employer."

    Most importantly, Section 611 permits employers to hire consultants, investigators or law firms to investigate a myriad of workplace issues without first notifying targets of the investigation or obtaining their consent. This will help minimize the risk the accused will alter or destroy evidence, intimidate or influence witnesses, or otherwise impair any investigation.

    Section 611 also provides that any workplace investigation report generated can be disclosed only to the employer; federal, state or local officers, agencies or departments; any organization with regulatory authority over the employer; or as otherwise required by law. The investigative report need not be disclosed to the accused -- or to the complaining party.

    Additionally, if an employer takes an adverse action based on the report, including but not limited to a rescission of employment offer, warning, suspension, demotion or termination, it must disclose to the target of the investigation a summary of the report. The summary must include the nature and substance of the report, but need not identify the individuals who have been interviewed or other sources of information. This will help minimize the risk witnesses will refuse to participate in the investigation for fear of retaliation by the accused.

    Many kinds of common workplace investigations are likely not subject to FCRA's strict notice and consent requirements, such as complaints of sexual and other types of harassment or employment discrimination; violations of workplace safety rules and regulations; and incidents of workplace theft, drug use or violence.

    Employers should remember that FCRA's notice and consent requirements still apply when employers use third parties to gather information related to an individual's creditworthiness, credit standing or credit capacity.