Background Checks and the Fair Credit Reporting Act

by Michael Haberman on May 18, 2011 · 3 comments


A few weeks ago on HR Observations I wrote a post called Background Checks: Why the FCRA Basics Are Important in which I wrote about a company that was fined $2.6 million due to the improper use of background checks. In that post I published the following:

  • You must have the applicants permission and signature authorizing the background check.
  • The authorization that is signed must clearly spell out what the nature of the check may be
  • If you find out something that makes you decide to not hire the individual that is called an adverse action and you must inform the person of the adverse action by letter, supply them with a copy of the report and allow them to respond to the report.

All of these things are necessary, however, as I have discovered these steps are incomplete. There is one more notice that is required. It is called a pre-adverse action letter. According to the Federal Trade Commission:

Before you take the adverse action, you must give the individual a pre-adverse action disclosure that includes a copy of the individual’s consumer report and a copy of “A Summary of Your Rights Under the Fair Credit Reporting Act” — a document prescribed by the Federal Trade Commission. The CRA that furnishes the individual’s report will give you the summary of consumer rights. (Note: CRA stands for credit reporting agency.)

After you’ve taken an adverse action, you must give the individual notice — orally, in writing, or electronically — that the action has been taken in an adverse action notice. It must include:

  • The name, address, and phone number of the CRA that supplied the report;
  • A statement that the CRA that supplied the report did not make the decision to take the adverse action and cannot give specific reasons for it; and
  • A notice of the individual’s right to dispute the accuracy or completeness of any information the agency furnished, and his or her right to an additional free consumer report from the agency upon request within 60 days.

Here is an example of how this works. You advertise vacancies for cashiers and receive 100 applications. You want just credit reports on each applicant because you plan to eliminate those with poor credit histories. What are your obligations? You can get credit reports — one type of consumer report — if you notify each applicant in writing that a credit report may be requested and if you receive the applicant’s written consent. Before you reject an applicant based on credit report information, you must make a pre-adverse action disclosure that includes a copy of the credit report and the summary of consumer rights under the FCRA. Once you’ve rejected an applicant, you must provide an adverse action notice if credit report information affected your decision.

Here is a second example. A job applicant gives you the okay to get a consumer report. Although the credit history is poor and that’s a negative factor, the applicant’s lack of relevant experience carries more weight in your decision not to hire. What’s your responsibility? In any case where information in a consumer report is a factor in your decision — even if the report information is not a major consideration — you must follow the procedures mandated by the FCRA. In this case, you would be required to provide the applicant a pre-adverse action disclosure before you reject his or her application. When you formally reject the applicant, you would be required to provide an adverse action notice.

According to attorney Lester Rosen, there are a number of steps that must be taken to be compliant.

Step 1

  • Make a clear and conspicuous disclaimer to an individual, in writing, in a standalone document (not as part of the employment application), that a consumer report may be obtained for employment purposes.
  • Obtain the individual’s signed authorization to obtain the report. He notes that you can combine the disclosure and the request for authorization, but you cannot put excessive language on the form that detracts from the clear meaning.
  • Prior to actually obtaining an investigative consumer report, and in addition to the requirements listed above, an employer must clearly and accurately disclose to an individual that the report may include in-depth information about his or her character, general reputation, personal characteristics, mode of living, criminal, driving and work history, etc.

Step 2

Prior to taking adverse action based in whole or in part on a Consumer Report, employers must provide applicants with copies of the report and a Summary of Rights. Employers must give the  consumer (applicant) the same report the employer receives, whether  written or oral. The FCRA is silent on how long the employer must wait to raise an objection, but the best practice is to give the applicant a meaningful opportunity to review, reflect and object.

Step 3

If the adverse action becomes final, a second letter is required under FCRA Section 615; This letter must provide, orally, in writing, or electronically, the following:

  • Notice of the adverse action
  • The name, address, and  telephone number of the consumer reporting agency that provided the  consumer report
  • A statement that the consumer  reporting agency did not make the adverse decision and cannot provide the individual with the specific reasons supporting the action
  • Notice of the individual’s right to obtain a free copy of the consumer report (if the report is requested within 60 days of receiving notice of an adverse action, a  consumer reporting agency must provide the report free of charge) and
  • Notice of the individual’s  right to dispute the accuracy or completeness of the information contained  in the report.

The recent attention that has been given to the use of consumer background checks in the press and the scrutiny the EEOC is giving to this process makes it important to pay attention to these steps. The agency that you are using for background checks should be able to help you with this process and provide sample letters. Check with them.

Despite the difficulties of dealing with the FCRA it is important to do good background checks. As attorney Lester Rosen says “To avoid employee problems, avoid problem employees.”

Words of wisdom.

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