• Are your company's background checks subjecting it to potential liability under the Fair Credit Reporting Act?
  • July 3, 2012 | Authors: Ryan L. DiClemente; Francis X. Riley
  • Law Firm: Saul Ewing LLP - Princeton Office
  • Recently, there has been an increase in both individual and class action lawsuits alleging that the procedures used by employers in conducting their background checks of proposed or actual employees fail to comply with the requirements set forth under the Fair Credit Reporting Act ("FCRA"). This is because, unbeknownst to many employers, FCRA regulates an employer's use of third party background checks (which may fall within FCRA's definition of a "Consumer Report" which is described in more detail below). As set forth below, FCRA requires employers who intend on using these background checks to follow certain steps before obtaining this information, as well as prior to and after taking an adverse employment action against an employee.

    FCRA governs the rights and responsibilities of "Users" of consumer credit information and one of its primary purposes is to regulate the compilation and use of "consumer reports." A "User" is defined as an entity that requests and/or makes use of a "consumer report." A "Consumer Report" is defined as any written, oral, or other communication by a consumer reporting agency bearing on "a consumer's creditworthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or collected in whole or in part for the purpose of serving as a factor in establishing a consumer's eligibility for...employment purposes." A "Consumer Report" includes, among other things, credit payment history, driving records, or criminal histories.

    A "Consumer Reporting Agency" or CRA is defined as an entity that, for monetary consideration, regularly engages in the practice of assembling or evaluating consumer credit information or other consumer information for the purpose of furnishing Consumer Reports to third parties. Based on these broad definitions, many employers who are using background checks obtained from a third parties will fall within the purview of FCRA as a "User" of a "Consumer Report." Accordingly, employers who fall within these statutory definitions will want to make sure they are fully compliant with FCRA's requirements.

    In order to comply with FCRA's basic requirements, employers may need to take the following steps:

    1. Notifying the applicant/employee in writing, on a separate document preferably, that a consumer report may be used for employment purposes;

    2. Obtaining the applicant/employee's written authorization to obtain the Consumer Report;

    3. Prior to taking any adverse employment action (which includes a denial of employment or any other decision which adversely affects any current or prospective employee) based in whole or in part on the Consumer Report, employers should also be:

    a. providing the applicant/employee with a copy of his or her Consumer Report;

    b. providing the applicant/employee with a description of his or her rights under the FCRA (a copy of a form notice is available on the FCT's website); and

    c. allowing the applicant/employee enough time to dispute the accuracy of the Consumer Report before any adverse action is taken;

    4. Once an adverse employment action has been taken, employers must also give the applicant/employee notice:

    a. that an adverse employment action has been taken;

    b. the information about the CRA who supplied the Consumer Report;

    c. a statement that the CRA did not make the adverse employment decision; and

    d. a statement of the individual's right to dispute the accuracy of the information, as well as his or her right to obtain a free consumer report from the agency.

    Failure to follow the steps set forth above could lead to potential liability under FCRA, which provides for statutory damages in an amount between $100 to $1,000 for each consumer who has been subject to a willful violation of the Act, as well as other potential damages. In addition to the requirements set forth above, employers should also be aware of the individual state laws in which the company and employees are located, as each state may have additional requirements and protections associated with employee background checks. In light of the statutory damages available under FCRA, large employers who fall within the purview the Act through their use of Consumer Reports should also be aware about the potential for a class action claim.