Employers routinely check credit, employment, and even personal references before hiring a new employee or promoting a current employee. However, thanks to recent amendments to the Fair Credit Reporting Act ("FCRA"), employers must comply with extensive, and often confusing, disclosure and reporting requirements. Previously, employers performing credit checks of applicants or employees had to notify the individuals only if employment was denied either in whole or in part because of information contained in a credit report provided by a consumer reporting agency. Effective September 30, 1997, employers must comply with comprehensive notice, consent, and disclosure obligations both prior to performing a check and after the results of the check are reported. The following is a discussion of some of the more cumbersome requirements of the new provisions.

Definition of Consumer Reports Overly Broad

The FCRA is intended primarily to protect the privacy of credit report information and to guarantee that the information provided by credit bureaus is accurate. It does not prohibit employers from checking an applicant’s or employee’s credit history or making an employment decision based on this information. However, the law covers significantly more information than credit reports.

Accordingly, employers that ask a consumer reporting agency to provide information on an applicant’s or employee’s credit, employment history, motor vehicle records, criminal background, and references must be prepared to comply with the FCRA requirements. Note, however, that employment agencies and search firms generally are not covered by the FCRA when reporting references in accordance with employee placement.

Written Disclosure and Consent of
Applicants or Employees

Under the new requirements of the FCRA, an employer that intends to obtain a consumer report first must make a clear and conspicuous written disclosure to the applicant or employee that a consumer report may be obtained for employment purposes. The disclosure cannot be included in an employment application or other document that contains additional information; it must be on a separate self-contained page. The employer also must get the written authorization of the employee or applicant before obtaining the report. The Federal Trade Commission ("FTC"), the federal agency that enforces the FCRA, indicated in a staff opinion letter dated October 21, 1997, that an employer may combine the notice and authorization in one form for the applicant or employee.

Certification to the Reporting
Agency Required

Employers also must comply with reporting requirements for the consumer reporting agency. In order to obtain a consumer report from a consumer reporting agency, the employer must provide certification to the agency that the employer: (1) is requesting the report for employment purposes (which includes to evaluate a consumer for employment, promotion, reassignment, or retention as an employee); (2) has provided the required disclosure to the consumer and received the necessary written authorization to request the report; (3) will provide the consumer with a copy of the report and a written description of the consumer’s rights before taking any adverse action based in whole or in part on the report; and (4) will not use the information from the report in a manner that violates federal or state equal opportunity laws.

"Two-Tier" Notice for Adverse Actions

The FCRA does not specify how much time, if any, must pass between the notice prior to adverse action and the notice after the action. However, a FTC staff opinion letter dated June 27, 1997, suggests that five days is a reasonable period of time. The opinion letter also acknowledges that "the facts of any particular employment situation may require a different time," indicating that a shorter period of time may be appropriate. Because of the ambiguity, employers can expect that this period of time will be the topic of future regulations or opinion letters.

Additional Requirements for Investigative Consumer Reports

In order to obtain an investigative consumer report, employers must comply with the same notice, authorization, and disclosure (both to the consumer reporting agency and to the applicant or employee if adverse action is taken) requirements that apply to consumer reports. In addition to complying with these requirements, the employer must, within three days of requesting the report: (1) disclose in writing to the applicant or employee that the investigative consumer report may be made; (2) inform the applicant or employee of the right to request disclosure of the nature and scope of the investigation to be made; and (3) provide a written summary of the consumer’s rights under the statute. In addition, if the applicant or employee requests in writing information on the nature and scope of the investigation, the employer must send this information to the individual, also in writing, within five days after the date of the request.

Big Penalties for Noncompliance

Employers that are "negligent in failing to comply" with the FCRA’s requirements are liable to a consumer for actual damages, costs of a suit, and attorney’s fees. In addition, if an employer is determined to be in "willful noncompliance," it may face punitive damages. Criminal penalties also may be imposed if an person obtains a credit report under false pretenses.

Employer Lesson: Check Employment
and Promotion Policies