Fair Credit Reporting Act

The Fair Credit Reporting Act: Rules Every Employer Must Follow

Some employers have always relied on background checks for information on potential hires and making decisions about current employees. The number of employers using reports prepared by a Consumer Reporting Agency (CRA) increased dramatically following the terrorist attacks in 2001, and this number has continued to climb ever since. Criminal background checks and credit reports are still used, but CRAs that compile information from multiple sources are exceedingly popular options.

In 2005, the Federal Trade Commission enacted a set of protections for employees and other consumers outlined in the Fair Credit Reporting Act. The FDRA covers all types of consumer reports, including credit reports from the central agencies, criminal background checks from relevant law enforcement agencies, and compiled reports ordered from CRAs. Employers need to be aware of FCRA regulations for compliance purposes. Following the rules will protect the rights of their employees and the employer’s interests.

Written Authorization and Notices

The use of any consumer report by the employer requires advance notification to the individual. This notification must be delivered separately from other paperwork and consist solely of the disclosure. It is permissible to include a few other pieces of information with the disclosure, such as:

Disclosure is necessary for employers to satisfy the second requirement. There must be written authorization from the individual on file. A notice to pull reports must be given in each instance, but employers may request blanket authorization on applications per an FTC amendment. Authorization can also be accomplished with the individual’s signature confirming receipt of each instance of disclosure. The final requirement is providing a certified statement to the consumer report provider that all information obtained will only be used for purposes outlined in the FCRA.

Rules for Adverse Actions

In all cases where employment is denied, or some other adverse action is taken, following receipt of a consumer background check, employers must follow a strict procedure. The first step requires the individual be provided with a notice before the adverse action is taken along with a copy of the report and a copy of “A Summary of Your Rights Under the Fair Credit Reporting Act,” which is provided to employers for distribution from the CRA.

Individuals must be given a reasonable time to contest incorrect information on the report before action is taken, but the FCRA recognizes that a reasonable time frame will differ by circumstance. The general rule for many employers is to give individuals a minimum of five days before taking the action and providing the ability to request extension of this time in certain circumstances. This protects the employer from civil damages.

After an adverse action, the employer has three days to notify the individual of the action in writing. The notice should consist of the following items:

Benefits for Employers

The FCRA seem like it is designed to only protect the rights of consumers, but it also provides significant benefits to employers beyond simply avoiding fines and civil lawsuits. The explosive growth in the number and type of credit reporting agencies has been poorly regulated at the federal level besides the protections defined in FCRA. There is no central database from which agencies draw information, and many CRAs routinely outsource data collection to third parties. State laws may place restrictions on these activities, yet a culture of inaccurate information was found in 2010 research by the National Consumer Law Center. They discovered routine errors, including:

The frequency of adverse actions against individuals based on inaccurate information is unknown. From an employer’s standpoint, the cost of turning down, failing to promote and letting go of qualified applicants is significant. The cost of hiring or promoting individuals based on poor information is likewise unknown. The FCRA protects employers from these losses. It is still up to employers to fully investigate each selected CRA and choose one with the most transparent operations.