Fair Credit Reporting Act is definitely not child’s play

Blog Post
Chuck E. Cheese’s recently announced $1.75 million settlement of a Fair Credit Reporting Act (“FCRA”) claim is the latest in a string of class action suits against national employers, including Whole Food, Michaels, and Dollar General, relating to the background check process. The Chuck E. Cheese settlement, which is pending court approval, is a reminder of the perils that employers face in conducting background checks in compliance with the FCRA.

The FCRA requirements are technical, which means that there are many opportunities to make mistakes. This article will provide a brief overview of the requirements.

WHAT IS COVERED BY THE FCRA?

The FCRA requires employers who gather certain information about employees through third parties – known as consumer reporting agencies – to follow detailed procedures when they obtain information – known as a “consumer report” – if the information relates to:

a consumer’s [applicant’s/employee’s] credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumer’s eligibility for—credit or insurance to be used primarily for personal, family, or household purposes; employment purposes….

As you can see, a “consumer report” covers much more than just an applicant’s credit standing. The definition includes information that is a regular part of the background check process, such as driving records, criminal history, and reference checks, when provided to the employer by a third party. Any employer that plans to obtain this information needs to do so in the right way.

WHAT IS REQUIRED TO COMPLY WITH THE FCRA?

The FCRA establishes procedural requirements related to obtaining consumer reports and making decisions about the information in those reports.

Disclosure and consent.
 First, an employer must get an applicant’s/employee’s consent to obtain consumer report information in the proper manner.
  • An employer must make a “clear and conspicuous” written disclosure to the applicant/employee that it will obtain a consumer report.
  • The disclosure document must consist “solely” of the disclosure that a consumer report may be obtained. This means that other information cannot be included on the disclosure/consent form.
  • The applicant/employee must provide written permission for the employer to obtain a consumer report.

These steps sound simple enough. However, a number of recent FCRA cases have involved alleged failures by employers to get those requirements right. For instance, in a California federal court case involving Whole Foods, the plaintiffs claimed the company’s inclusion of a liability waiver in the FCRA disclosure form allegedly violated the FCRA requirement that the disclosure/consent form should not include other information.

In fact, this is the same provision that caused problems for Chuck E. Cheese. The plaintiffs in the Chuck E. Cheese case alleged that the company’s practice of including the FCRA disclosure and authorization as part of a multi-page printed employment application, rather than on a stand-alone page, violated the FCRA.

Adverse action based on report.
 The next FCRA provision that trips up many employers is how to handle consumer reports that contain negative information. Again, the FCRA establishes a specific process.
  • Under the FCRA, if an employer intends to take “adverse action” against an applicant/employee based in whole or in part on the information in the report, the employer must provide a pre-adverse action notice to the applicant/employee.
  • The pre-adverse action notice must include a copy of the background report(s) and a statement of rights prepared by the Federal Trade Commission (FTC) along with notice that adverse action will be taken after the applicant/employee has a reasonable opportunity to provide information that disputes the contents of the consumer report.
  • Then, if the employer decides to proceed with the adverse action, it must provide an applicant/employee with an adverse action notice that meets certain FCRA specified requirements.

WHAT CAN EMPLOYERS TAKEAWAY ABOUT FCRA COMPLIANCE?

The devil is in the details with the FCRA. It is critical to understand the FCRA’s technical requirements at each step of the process.
  • Review hard-copy and online applications to ensure that the disclosure and consent provisions meet the FCRA stand-alone requirements.
    • Review disclosure and consent documents provided by third party vendors as well.
  • If adverse employment action is based on information in a consumer report:
    • Provide notice of potential adverse action based on a consumer report.
    • Provide notice of the actual adverse action with required information.
  • Use checklists and template documents to assist the company in complying with the technical FCRA requirements.
  • Ensure that the company is complying with any state credit reporting requirements in addition to the federal FCRA requirements.
  • It’s complicated, so seek assistance to ensure that your background check process is FCRA-compliant.
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