COMPLIANCE WITH THE FAIR CREDIT REPORTING ACT

Authors:

Donald A. Van Suilichem
dvslawyer@dvsemploymentlaw.com

Kelly A. Van Suilichem
kelly.van@kvslaw.com

March 28, 2017

Do you use background checks for hiring or promotion?  If so, are you in compliance with the Fair Credit Reporting Act?

As part of the hiring process, many employers rely on third party companies to conduct background checks.  Background checks may look at employment history, criminal records (in certain cases), legal matters, credit ratings, and financial matters that may provide a better window into the personality of the applicant well beyond the resume, application form and interview.  But what many employers do not recognize is that when the background checks are “consumer reports” or “investigative consumer reports” under the Federal Fair Credit Reporting Act (“FCRA”) the door of legal compliance opens.  Failure to comply with the highly technical aspects of the Act can expose an employer to substantial liability.  This was most recently demonstrated in the recent 9th Circuit Court of Appeals decision in Syed v. M-I, LLC where technical non-compliance led to a finding of violation.

On January 20, 2017, the 9th Circuit Court of Appeals held that a prospective employer willfully violated the FCRA by including a release of liability under the Act in the same document as the statutorily mandated disclosure. The FCRA prohibits a prospective employer from procuring or causing the procurement of a credit report for a job applicant unless it obtains authorization after disclosing to the applicant his or her rights under the FCRA. Specifically, the FCRA provides,

(2)        Disclosure to consumer

(A)       In general

Except as provided in subparagraph (B), a person may not procure a consumer report, or cause a consumer report to be procured, for employment purposes with respect to any consumer, unless –

           i         A clear and conspicuous disclosure has been made in writing to the consumer at any time before the report is procured or caused to be procured, in a document that consists solely of the disclosure, that a consumer report may be obtained for employment purposes; and

           ii       The consumer has authorization in writing (which authorization may be made on the same document referred to in clause (i)) the procurement of the report by that person.

           In Syed v. M-I, LLC, the issue was not whether the disclosure contained enough information to be “clear and conspicuous,” but rather whether it contained too much information.  M-I provided job applicants a Disclosure Release which (1) informed applicants that a credit report may be collected and used as a basis for employment decisions, (2) authorized M-I to procure the credit report, and (3) waived the applicant’s rights to sue for violations of the FCRA. Inclusion of the third item violated the FCRA and invalidated the authorization. When M-I later caused applicants’ credit reports to be procured and used those for employment decision without valid authorizations, it did so in violation of the FCRA and the privacy rights of the applicant opening the door to liability.

         The Court of Appeals decision that M-I’s violation was “willful” was an important holding. The named plaintiff did not allege actual damages and likely would have had difficulty proving any actual damages. However, with the finding of a “willful” violation, the named plaintiff was entitled to statutory damages without proving anything. This is the juice to plaintiff-class-action law firms.

Steps for Compliance:

Step I.             Before You Request FCRA authorization.

First, you need to determine if the FCRA authorization you use, whether drafted by an attorney or provided by the search firm, is complaint with the FCRA.  The disclosure document must consist solely of the disclosure. The only exception to this requirement is that the authorization to procure a credit report may be made on the disclosure document as expressly allowed by the FCRA. No other information may be included in the disclosure document. M-I made a procedural and costly error.  In addition to the federal FCRA, several states have additional requirements for an authorization to be valid. We can carefully draft disclosure documents and authorizations to meet the statutory requirements of the FCRA and any state statutes and help you avoid liability for violations.  If you comply with the FCRA, then the authorization form can be presented to the applicant or employee for a signed authorization to conduct the background check.

Step II.            Before You Take an Adverse Action.

If you determine, based on information contained in the credit report, not to hire the applicant, deny a promotion, reassign an employee, or terminate an employee you are required to give notice to the applicant.  This Notice includes:

The employee or applicant then has an opportunity to review the report and tell you if it is correct.  The employee or applicant can also work with the credit reporting agencies to correct the report.

Step III.          After you take adverse action.

Once you take an adverse action based on information in a consumer report, you must give the employee or applicant notice that an adverse action has been taken.  This notice can be given orally, in writing, or electronically.  We strongly recommend that the notice be given in writing.  An adverse action notice tells people about their rights to seek information being reported about them and to correct inaccurate information. The notice must include:

  • the name, address, and phone number of the consumer reporting company that supplied the report;
  • a statement that the company that supplied the report did not make the decision to take the unfavorable action and can’t give specific reasons for it; and
  • a notice of the person’s right to dispute the accuracy or completeness of any information the consumer reporting company furnished, and to get an additional free report from the company if the person asks for it within 60 days.

Step IV.          Disposing of Consumer Reports.

After using a consumer report, you must securely dispose of the report and any information you gathered from it. That can include burning, pulverizing, or shredding paper documents and disposing of electronic information so that it cannot be read or reconstructed.

 

The Fair Credit Reporting Act is a mine field of compliance issues that are strictly construed by the courts.  Background checks can be a very important hiring tool.  You just need to make sure that you comply with the Act.  Unfortunately, most employers are not aware of the strict requirements of the Act once a consumer report is received. This mistake can lead to substantial liability.  If you have questions, we can help you insure compliance.