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Are your background checks compliant with the FCRA?

Molly Rezac

Employers are often stuck between a rock and a hard place. For example, employers who fail to conduct background checks on an employee could be held liable for negligent hiring of that employee (the rock). Therefore, many employers feel the need to conduct background checks on every employee. However, those same employers don’t realize the risk inherent in failing to think about how the background checks are being done and the liability that could be incurred for doing it incorrectly (the hard place). With a rise in both single plaintiff and class-action litigation based upon an employer’s failure to comply with the Fair Credit Reporting Act (FCRA), it is more important than ever to review your policies and procedures regarding background checks. While there are many benefits to having background checks conducted on employees, the checks must be done correctly or an employer could fall into problems in many different areas, including liability under the FCRA. Below are some tips to help you lessen this liability when conducting these reports on your employees.

Many of us think of the Fair Credit Reporting Act when working with credit bureaus such as Experian, Trans Union and Equifax and discussing our credit reports. However, the FCRA also regulates the exchange and use of consumer information between employers and the Credit Reporting Agencies (CRAs) that provide the consumer reports employers utilize to make employment decisions. Under the FCRA, “consumer reports means 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 [applicant’s or employee’s] eligibility for … employment purposes.” 15 U.S.C. S1681a(d)(1). The act goes on to define “employment purposes” as “a report used for the purpose of evaluating a consumer for employment, promotion, reassignment or retention as an employee.” 15 U.S.C. S1681a(h). Therefore, background checks conducted on behalf of employers (including those that do not seek information about someone’s credit history) are “consumer reports” and subject an employer to obligations under the FCRA. Please note that when an employer has an investigative consumer report conducted on an employee (i.e., when information is obtained through in-depth personal interviews), employers must comply with even more obligations that are not detailed in this article. However, as most employers conduct routine background checks, here is what an employer must do to comply with the FCRA:

1. Get authorization. Under the FCRA, an employer must make written, clear and conspicuous disclosures to the applicant or employee that they will be obtaining a consumer report; that the employer may be using it to make an employment decision. The disclosure document must be a stand-alone document. The applicant or employee must then provide written authorization for the employer to obtain the consumer report. A key point is that an employer can obtain authorization at the beginning of employment that would allow the employer to obtain a consumer report on the employee during employment without obtaining a new authorization provided the authorization is appropriately drafted.

2. Give notice. If an employer is going to take adverse action against an applicant or employee based upon information contained a consumer report, the employer must provide two separate notices to the applicant or employee. First, the employer must provide notice to the individual prior to taking any action at all. This notice must include a copy of the consumer report as well as a copy of the FTC’s Summary of Your Rights Under the Federal Credit Reporting Act (available at http://www.ftc.gov). The Summary of Your Rights is periodically revised so make sure to include the most recent version available. Second, when you do take adverse action based upon the information in the consumer report, you have to give the applicant notice of that adverse action. The notice must also include:

* the name, address, and phone number of the CRA that supplied the report;

* a statement that the CRA did not make the decision to take the unfavorable action and cannot give specific reasons for it; and

* notice of the person’s right to dispute the accuracy or completeness of any information the CRA furnished, and to get an additional free report from the CRA if the person asks for it within 60 days.

It is important that employers wait a reasonable amount of time between providing the first notice and the final notice of adverse action so that applicants and employees have adequate time to review and dispute the information contained in the consumer report.

3. Dispose of it properly. Once you are finished with a consumer report, it must be disposed of properly under the disposal rule. All consumer reports and all information derived from consumer reports must be burned, pulverized or shredded so that the information cannot be read or reconstructed. Electronic data must be destroyed or erased so that it cannot be read or reconstructed. If you have a third-party dispose of the consumer reports, conduct due diligence to insure compliance with the disposal rule.

A little time invested now reviewing how your background checks are being conducted to insure compliance with the FCRA may get you out from between that rock and the hard place. You will be able to rest assured that you have taken steps to reduce liability for negligent hiring and have conducted your background check correctly under the FCRA.

Molly Rezac is a shareholder in the Reno office of the law firm Gordon Silver, where she works in the employment law and litigations departments. Contact her at 775-343-7500 or through http://www.gordonsilver.com.