by Ann Marie Painter
Many employers have discovered the hard way that the federal Fair Credit Reporting Act (FCRA) concerns more than just credit reporting. It governs the manner in which employers gather and use pre- and post-employment background checks when the employer pays a third party to prepare them.
Class actions alleging FCRA violations with regard to background checks have been on the rise. Most of these class actions focus on two issues: (1) failure to give proper notice to, and obtain authorization from, the individual to conduct the background check; and (2) failure to give the appropriate notices when the employer plans to take and then does take an adverse personnel action based, in whole or in part, on the information in the background check. Both kinds of claims can be avoided easily.
What is commonly referred to as a background check is a consumer report (CR) under the FCRA. A CR is “any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer’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 . . . employment purposes.” See 15 U.S.C. § 1681a. A “consumer reporting agency” (CRA) is “any person which, for monetary fees, dues, or on a cooperative nonprofit basis, regularly engages in whole or in part in the practice of assembling or evaluating consumer credit information or other information on consumers for the purpose of furnishing consumer reports to third parties.”
In order to obtain a CR, an employer must have a “permissible purpose.” An “employment purpose” constitutes a permissible purpose. “Employment purposes” include evaluations of the consumer for “employment, promotion, reassignment or retention as an employee.” However, certain reports of employee misconduct or investigations into compliance with an employer’s rules or policies are excluded from this definition. Note that the regulations construe the notion of employment broadly, which means that this definition may cover independent contractors.
Once these requirements are met, the employer may obtain a CR to use for employment decisions. Many employers make mistakes at the disclosure and authorization stage. The disclosure and authorization must be in a standalone document. It may not be incorporated into an employment application or other document. Another common mistake is to include verbiage in the standalone document that is not prescribed by the regulations, such as a release and waiver of claims by the individual who is the subject of the CR.
The next stage at which employers make mistakes is when the CR reveals information that is the basis for an adverse personnel action. Before the employer may take the adverse action, whether it be declining to hire or terminating employment, the employer must provide a notice that advises the individual, among other things, of this fact, provides information about the CRA and is accompanied by copies of the CR and the “FCRA Summary of Rights” document. The purpose of this requirement is to allow the individual to correct any errors in the CR before the employer takes the adverse action. Many employers skip this step altogether or collapse it into the actual notice of the adverse action itself. Either way, the omission is a violation of the statutory requirements. There is no bright-line rule about the number of days that must pass after an employer has given pre-adverse action notice and before the adverse action is taken, but it has been suggested that as few as five business days may be acceptable. What is reasonable will vary depending on the circumstances.
Damages are available to a party about whom a CR has been generated without proper disclosure and authorization or about whom an adverse employment action has been made without the proper pre-adverse action and adverse action notices. Damages depend on whether the noncompliance was negligent or willful. For negligent noncompliance, a claimant may recover actual damages plus reasonable costs and attorneys’ fees. For willful noncompliance, a claimant may recover actual damages or statutory damages up to $1,000 plus punitive damages and reasonable costs and attorneys’ fees. “Willfulness” in this context is a knowing or intentional violation or a violation in reckless disregard of the law. Claims must be brought two years after the date of discovery of the violation or five years after the date of the violation.
Ann Marie Painter is a partner at Perkins Coie LLP. She may be reached at firstname.lastname@example.org.