Fair Credit Reporting Act & Background Checks – Part One

Fair Credit Reporting Act & Background Checks – What Every Employer Must Know Now


Several years ago, background screening was a somewhat isolated practice reserved for national organizations and sensitive positions, such as those working with vulnerable populations or in the financial sector. As negligent hiring lawsuits rise and the job market becomes more competitive, employers large and small are turning to background checks as a way to ensure their workplaces remain safe while hiring the most qualified and trustworthy individuals.

Part One of this four part series will explore the Federal Fair Credit Reporting Act while highlighting important obligations employers must be cognizant of when conducting background checks.


The Fair Credit Reporting Act (FCRA) was originally enacted in 1970 to address issues related to inaccurate credit reports. Following several subsequent amendments, the scope of the FCRA expanded to address all facets of background screening making the law’s title a bit of a misnomer. Many employers do not realize that the FCRA governs far beyond credit reports, and includes checks of an individual’s criminal history, employment and academic past, driving records, etc.

To establish a solid foundation, it is first important to understand the players involved. When an employer (“End User”) contracts with a background screening provider (“Consumer Reporting Agency”) to procure a background report (“Consumer Report”) to evaluate an individual (“Consumer”) for employment purposes, the FCRA applies and imposes several requirements onto the employer.

Employer Requirements

Employers must first certify to the Consumer Reporting Agency (CRA) that they have a “permissible purpose” obtain a background report. One permissible purpose is for employment, which includes hiring, retaining, promoting and terminating an individual.[1]

Next, the employer must, in “a clear and conspicuous disclosure”, notify the individual “in a document that consists solely of the disclosure, that a consumer report may be obtained for employment purposes.” In addition, the employer must receive the individual’s written authorization. The Federal Trade Commission (FTC) has opined in several advisory opinions that the disclosure and authorization may be combined into a single document (see Advisory Opinion to Steer (10-21-97)). If an employer is obtaining an “investigative consumer report” (a report which bears on a “consumer’s character, general reputation, personal characteristics, or mode of living”) through “personal interviews with neighbors, friends, or associates”, additional disclosure requirements will apply.

Once the employer has obtained the individual’s consent, a background report may be requested from the CRA the employer has contracted with to provide services. Once the background report is completed, the employer should carefully review each aspect to determine if the individual is qualified for the position, or if there is anything in the background report that may cause the employer to make an adverse employment decision (i.e., terminate an employee, or not hire, retain or promote an individual).

Before taking the adverse action, the employer must send the individual what is commonly referred to as a “Pre-Adverse Action” or “Preliminary Adverse Action” letter, along with a copy of the individual’s background report and a copy of the document “A Summary of Your Rights Under the Fair Credit Reporting Act”.[2] The pre-adverse action letter must notify the individual that the employer is considering making an adverse decision, and provide the individual with a reasonable opportunity to respond. The FCRA does not prescribe a specific time period; however, the FTC has opined in several advisory opinions that five business days appears to be reasonable (see Advisory Opinion to Weisberg (06-27-97)). It is important for employers to understand that the intent of this two-step adverse action process is to allow the individual a chance to dispute inaccurate information that, if corrected, would allow the individual to still be eligible for employment, the promotion, etc. Thus, employers should not make a final employment decision until after the time period identified in the pre-adverse action letter has elapsed.

If, after the business days identified in the letter have expired, the employer decides to make the adverse employment decision being considered, a “Final Adverse Action” or “Adverse Action” letter must be sent to the candidate. The FCRA requires several items be included in this letter, namely:

  1. the name, address and telephone number of the CRA that furnished the report,
  2. a statement that the CRA did not make the adverse employment decision and is unable to provide the individual with the specific reasons why the adverse action was taken,
  3. the individual’s right to obtain a free copy of the background report from the CRA within a 60 day period, and
  4. the individual’s right to dispute with the CRA the accuracy or completeness of information in the background report.[3]


The penalties for non-compliance with any of the FCRA requirements may be severe. If a court finds an employer willfully failed to comply, the employer may be liable for actual damages in the amount of $100 to $1,000 per consumer, in addition to any punitive damages the court may allow and reasonable attorney fees determined by the court. In the case of negligence, the employer may be liable for any actual damages sustained by the consumer and reasonable attorney fees.

The monetary penalty for willful noncompliance can add up quickly as the FCRA is becoming a hot target for class action lawsuits. Part Two of this series will highlight the rapidly expanding landscape of class actions, and will identify key areas employers must pay attention to when procuring background reports for employment purposes.

[1] The scope of this series will focus exclusively on background reports obtained for employment purposes.

[2] While beyond the scope of this article, several states have enacted legislation that impacts employers and their use of background reports. For example, New Jersey has its own Fair Credit Reporting Act which requires the employer include a copy of a “Summary of Rights” document under the NJ FCRA to consumers when sending a pre-adverse action letter.

[3] While the FCRA allows employers to provide notice of the adverse action “orally, in writing, or electronically” it is highly recommended to send the notice in writing in a well-documented fashion in the event litigation ensues.

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