FCRA Compliance: Keep Your Background Checks Legal
Background checks provide useful information and can help employers avoid legal issues, like negligent hiring. However, failure to collect and use the information correctly exposes employers to significant liability, as the federal Fair Credit Reporting Act (FCRA) allows job applicants to sue employers who fail to comply with any requirement imposed by the law.
Passed by Congress in 1970, the FCRA exists to promote fairness, accuracy and privacy for information used by consumer reporting agencies for various purposes. While it’s called the Fair Credit Reporting Act, the FCRA actually applies to a lot more than just credit reports.
The FCRA defines consumer reports as “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 credit, insurance or employment purposes.
This means the FCRA extends to criminal and civil records, lawsuits, reference checks, and other information obtained by a consumer reporting agency. Thus, background checks are considered to be “consumer reports” under the FCRA.
While FCRA non-compliance is an attractive class-action target, there are also statutory penalties of $100-$1,000 per violation. The good news is that complying with the FCRA’s report disclosure requirement is fairly easy.
How to Comply
How do you ensure your consumer report disclosure is compliant? There are three basic requirements:
It must notify the employee or applicant that “a consumer report may be obtained for employment purposes”
How to comply: Send a stand-alone disclosure informing the individual that you will be checking their background for employment purposes. Obtain signed authorization from them before you proceed
It must be “clear and conspicuous”
How to comply: the disclosure should be clear and easy to understand. No jargon, legalese, tiny fonts, or the like, and it must be in a noticeable place - the front page, for example
It must be in “a document that consists solely of the disclosure.”
How to comply: don’t include any other information - bare essentials only. No extraneous documents like liability waivers or releases, or documents with titles like “Summary of Your Rights Under the Fair Credit Reporting Act”. The more you add here, the greater your risk for FCRA non-compliance. If you’re in doubt, seek legal counsel
Tip: If a sentence doesn’t start with either "We hereby disclose to you that ..." or "You hereby authorize us to ...", you’re likely trying to include extraneous information and threatening your FCRA compliance.
Taking Adverse Action
If a background check returns red flags, you may decide to disqualify a candidate or rescind a job offer - known as “adverse action” in FCRA terminology. When this happens, additional FCRA requirements apply. Before a negative final employment decision is made - based even partially on the results of a consumer report - you must provide a pre-adverse action notice to the applicant, including:
A copy of the individual’s consumer or background report
A document summarizing their rights under the FCRA. For example, the Consumer Financial Protection Bureau's Summary of Rights.
It’s advisable to wait 5 days after providing this before taking adverse action of disqualification. After the waiting period, you are required to provide a post-adverse action notice to the individual, including:
The name and contact details of the consumer reporting agency that provided the background check on which the adverse employment decision was based
A statement advising that the consumer reporting agency did not make the adverse employment decision and thus cannot offer any information on why the decision was taken
Notification that the individual is entitled to receive a free copy of the background check or consumer report on which the adverse action was based, within 60-days
Exercise caution when using background check results for adverse actions, and keep in mind that you can't just worry about federal law. State and local jurisdictions also have legislation, ordinances, and regulations that you need to be aware of. In New York City, for example, employers must also comply with:
The Fair Chance Act - employers must not ask about an applicant’s criminal history or even mention a background check before offering employment
The Stop Credit Discrimination in Employment Act - places significant limits on when companies can order credit checks on job applicants
If a background check reveals an arrest or conviction record, employers must also ensure compliance with the Equal Employment Opportunity Commission (EEOC). In this instance, you would need to review the enforcement guidance before making employment decisions under Title VII.
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