Complying with the Fair Credit Reporting Act

Complying with the Fair Credit Reporting Act

If you are a business and you are hiring employees, you are either running background checks on applicants or you have likely thought about it. The good news is that you are legally able to do so. The bad news is that, as with most business activities when it comes to employees, there are federal and state laws that govern using background checks in employment decisions. Employers who fail to comply with these laws can find themselves spending time and money where it doesn’t need to be spent. One federal law that governs the use of background checks by businesses in hiring and other employment decisions is the Fair Credit Reporting Act (FCRA).

When businesses become responsible for FCRA compliance

The Fair Credit Reporting Act applies to businesses who use a “consumer reporting agency” to conduct background checks. A “consumer reporting agency” is any entity that regularly furnishes consumer reports to third-parties for money, including dues. This means that businesses who conduct their own employee screening research without relying on consumer reporting agencies for assistance are not subject to the FCRA (although they may be subject to state law restrictions).

Types of information covered by the FCRA

The type of background information covered by the Fair Credit Reporting Act is very broad. It includes any written, oral, or other type of communication containing information bearing on an individual’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living. Thus, the FCRA does not just limit its protection to an individual’s credit history, but also covers information about who the individual is, how they live, and what type of person they are.

Employer responsibilities when using a Consumer Reporting Agency

background-check

The Fair Credit Reporting Act requires businesses to comply with certain requirements before they may lawfully obtain background checks and before they may lawfully rely on then to take action against an applicant or employee. The main purpose of these requirements is to give the applicant or employee notice about the employer’s intention to use a background check in its employment decisions, the opportunity for them to prevent that from happening, and information they may need about their rights under the FCRA.

Employee notice and consent to perform a background check

Before an employer can have a consumer reporting agency perform a background check on an applicant or employee, the employer must do two things:

  1. The employer must provide the applicant or employee clear and conspicuous notice in writing that a background check may be performed by the business. The document containing the written notice about the background check may not contain any other information, meaning that it is not enough that the background check policy is outlined in an employment application or in an employee handbook. Also, the written notice must be provided before the background check is performed.
  2. The employer must receive the applicant or employee’s written consent before the background check may be performed. Applicants and employees can provide written consent by signing the same standalone form that informs them about the business’ background check policy.

Requirements when taking an adverse action based on a background check

After a business provides the proper notice, receives written consent from an applicant or employee, and obtains the consumer report from the consumer reporting agency, it may decide to not hire an applicant or to take some adverse action against an employee in part or in whole because of information in the consumer report. Before such action may be taken, the employer must provide the applicant or employee with a notice that the adverse action is being considered. This pre-adverse action notice must contain a copy of the consumer report provided to the business by the consumer reporting agency as well as a copy of ”A Summary of Consumer Rights under the FCRA.”

After the pre-adverse action notice has been provided, the business may proceed with taking the adverse action against the applicant or employee. However, again, the FCRA requires the business to provide notice to the applicant or employee. This adverse action notice must include:

  • notice that adverse action was taken in whole or in part because of information in the background check report provided by the consumer reporting agency;
  • the name, address, and phone number of the consumer reporting agency that provided the background check report;
  • a statement that the consumer reporting agency that provided the report was not involved in the adverse employment action decision and, therefore, cannot give specific reason for the decision; and
  • notice that the applicant or employee has a right to dispute the accuracy or completeness of the report and that they can obtain a free report from the consumer reporting agency with 60 days of the notice.

Penalties for failing to comply with FCRA

The potential costs for failing to comply with the FCRA can be expensive. The FCRA gives applicants and employees the right to sue businesses when they fail to comply with the FCRA’s requirements. Penalties for a business’ willful noncompliance with the FCRA can be either: 1) the actual damages suffered by the applicant or employee or 2) damages that may not be less than $100 and not more than $1,000 per violation. The applicant or employee will also be awarded reasonable attorney fees. Additionally, in severe cases, a court may choose to award punitive damages that have no set limit.

Conclusion

As an employer, you can benefit from using background checks when hiring and managing employees. They can help you avoid decisions you will later regret. However, when using background check in employment decisions, you must be aware of any federal and state requirements and limitation. Otherwise, any benefit you may gain by doing the background check may be undermined by the losses resulting from legal action and penalties.

About The Author

Drew Lunt is the President of The Lunt Group LLC, the company that owns and operates EmploymentLawHandbook.com. Mr. Lunt is a licensed attorney with over 10 years experience practicing employment and labor law. His prior experience includes working for private law firms as well as the National Labor Relations Board and the Equal Employment Opportunity Commission. We are grateful to have you as a visitor to our site.

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