by Derek Ross
Did you hear about the employer in California that just had a federal judge approve a $1.3 million class action lawsuit settlement against them? The company was accused of violating the Fair Credit Reporting Act (FCRA) by requiring employees to fill out and sign a background check authorization form and a liability waiver that violated FCRA requirements. The issue? The form they were using “was embedded with extraneous information” instead of being a stand-alone document, as required by the FCRA.
So why is a credit reporting law costing an employer so much money? The FCRA is a federal law that regulates credit reporting agencies, such as the companies that provide criminal and other background checks, and compels them to ensure the information they gather and distribute is a fair and accurate summary of a consumer’s history.
Under employment law, the FCRA has a number of requirements employers must abide by when using background information concerning an applicant or employee if the information is run by a third party consumer reporting agency. Failure to comply with these requirements can result in liability for the employer, possibly resulting in legal action against the employer. If your handling of a background check results in a violation of a candidate’s or employee’s rights under the FCRA, you could be on the hook for actual damages (no limit), statutory damages (up to $1,000), punitive damages (decided by the court) and attorney’s fees and costs.
What about employee authorization for the background check?
This is probably the step that tripped up that employer in California. They seemed to understand that running a background check means you need to obtain prior written consent from the applicant and/or employee. However, the FCRA requires that, If you use the services of a credit reporting agency, that authorization must be on a document separate from all other documents (i.e., this cannot be part of your job application, employee handbook, or any other form) and should NOT contain a release from liability statement. Ideally, the background check provider should have FCRA-compliant authorization forms for your use.
What if the report reveals an unacceptable history?
One requirement under FCRA is that an employer CANNOT disqualify or take action against a candidate or employee based on the results of a background check without providing the individual with a “pre-adverse action disclosure” which would include the following information:
- A summary of the consumer’s rights under the FCRA (available from the Consumer Financial Protection Bureau)
- A copy of the individual’s consumer report
- A copy of applicable state or local notices
In order to avoid liability, employers need to utilize the new Summary of Rights form which went into effect on September 21, 2018. In addition to the rights already summarized on the previous form, this new form notifies consumers of their right to place a “security freeze” on their credit report.
Once the adverse action is taken, the individual must be given an “adverse action notice.” This document provides the applicant/employee with the name, address, and phone number of the employment screening company that supplied the report, a statement that this company did not make the adverse decision, rather that the employer did, and a notice that the individual has the right to dispute any of the information contained in the report. Again, your background report provider should be able to supply these forms.
Given the potential cost of a violation, it is highly advisable for employers to have background and credit check forms and procedures reviewed by legal counsel to ensure compliance with FCRA requirements.
For additional questions or specific guidance on this or any other HR-related issues, please feel free to contact us at HRHelpline@eastcoastrm.com. If you have any questions about East Coast Risk Management and the services we offer, please visit our website (www.eastcoastriskmanagement.com) or call (724) 864-8745.
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