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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.
The FCRA
requirements apply whenever an employer requests a "consumer report" or
"investigative consumer report" from a consumer reporting agency. A
"consumer report" includes any written, oral, or other communication of
any information by a consumer reporting agency regarding a consumer’s
credit worthiness, credit standing, credit capacity, character, general
reputation, personal characteristics, or mode of living which is used as a
factor to establish the consumer’s eligibility for employment. An
"investigative consumer report" is defined as a consumer report or portion
of a consumer report which relies on interviews with neighbors, friends,
and associates to compile information about the applicant’s character,
general reputation, mode of living, and other personal characteristics.
These definitions were not changed by the FCRA amendments.
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
One of the most cumbersome obligations added by the FCRA
amendments requires employers to give notice to applicants and employees
not once, but twice, if the employer takes adverse action based on
information received in the consumer report. According to the amendments,
before taking adverse action an employer must provide a copy of the
report to the applicant or employee and describe in writing the person’s
rights under the FCRA. The FTC has provided a sample notice titled "A
Summary of Your Rights under the Fair Credit Reporting Act" addressing
consumers’ rights that may be used to comply with these requirements. As a
practical matter, the consumer reporting agency is required to provide
this summary to the employer with the report.
A second,
separate notice must be provided after the employer takes adverse
action. The notice can be given orally, in writing, or electronically, and
must include: (1) the name, address, and telephone number of the consumer
reporting agency issuing the report; (2) a statement that the agency did
not make the decision and is not able to explain why the decision was
made; (3) a statement regarding the consumer’s right to obtain a free
disclosure of the consumer’s file from the agency if the consumer requests
the report within 60 days of notice of the adverse action; and (4) a
statement regarding the consumer’s right to dispute directly with the
consumer reporting agency the accuracy or completeness of any information
provided by the agency. Employers should note that they do not have to
hire or reconsider the qualifications of an individual who can show the
reported information was false.
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
Clearly, the FCRA requirements place new
burdens on employers using consumer reporting agencies to perform credit
and other background checks of new and current employees. Since the
requirements are comprehensive, employers should analyze their employment
and promotion policies and procedures to ensure that they incorporate the
Act’s requirements. For additional information on the FCRA and copies of
sample notices, visit the FTC’s web site on the Internet at
http://www.ftc.gov/os/statutes/fcrajump.htm. For further discussion of
the requirements, see Hiring, page 202:22, note 18; and Personal Finances
of Employees, page 803:3, note 8. |