Fair Credit Reporting Act & Background Checks – Part Two

Employers Are Increasingly Vulnerable to Background Screening Class Action Lawsuits


As addressed in Part One of this series, background screening is becoming increasingly more commonplace amongst employers all of sizes, in all industries. With the explosion of the background screening market, class action lawsuits scrutinizing employers’ compliance with the Fair Credit Reporting Act (FCRA) requirements have also skyrocketed. In the last few months alone, several new class actions have been filed against large organizations, including a nationwide retailer of home improvement supplies and a nationwide auto parts dealer. While larger organizations have traditionally been the bigger target, medium-sized and smaller companies should not be complacent in FCRA compliance as plaintiff’s counsel has targeted employers of all sizes.

Part Two of this series focuses on the two key areas being most heavily dissected – the disclosure and authorization document and the adverse action process – while providing recent examples of litigation and settlements that highlight where employers commonly misstep.

Disclosure and Authorization

The Fair Credit Reporting Act requires employers to present a disclosure to the individual in a “clear and conspicuous” document that “consists solely of the disclosure, that a consumer report may be obtained for employment purposes.” The FCRA further requires the employer to obtain a written authorization from the individual.

The “clear and conspicuous” and “solely” requirements in particular have been a popular target in recent litigation, resulting in sizeable settlements over the past year and a half. One oft-cited case from the District of Maryland resulted in a $2.5 million settlement with a national pizza chain. The complaint alleged that the employer violated the FCRA by including a release of liability on its “Background Investigation Information and Consent” (BIIC), and by including the BIIC within the employment application. According to the complaint, these practices violated the “solely” and “clear and conspicuous” requirements. The settlement also resolved allegations that the company failed to provide a copy of the background report before taking adverse action.

In another recent example, a complaint filed in the Northern District of California alleged that a staffing agency violated the standalone requirement of the disclosure and authorization by burying the document within a multi-page employment application. Further, the employer allegedly violated the FCRA by including additional information on the disclosure such as its right to refuse employment to anyone who did not consent to a background report and a statement that any employees who fail to cooperate internal investigations will be disciplined. Finally, the complaint alleged the disclosure and authorization contained a waiver of rights provision which also violated the “solely” requirement under the FCRA. As of March 2014, the parties agreed to mediate the case.

As a final example, the Western District of Pennsylvania granted the plaintiff’s motion for summary judgment, finding that the inclusion of a release of liability provision on the disclosure and authorization form “facially violates” the FCRA. Based on this finding, the court determined the employer (a home storage and organization company) acted in a willful manner, which as discussed in Part One, leads to severe penalties of $100-1,000 per consumer, in addition to any punitive damages the court may allow and reasonable attorney fees determined by the court. These penalties can add up quickly in larger class sizes, and can significantly impact a company of any size.

These examples represent just a fraction of ongoing cases. Employers are well advised to review their disclosure and authorization documents in consultation with legal counsel to determine if any changes should be made. Specifically, employers should gauge whether an argument could be made that any language on the document violates the “solely” provision and goes beyond the purpose of the disclosure and authorization requirements as these represent “red flags” that are catching the attention of plaintiff’s counsel.

Adverse Action

In addition to the disclosure and authorization requirements, the adverse action process is a popular target for litigation. Part One of this series outlined the specific requirements for the two-step process, which includes sending both a Preliminary or Pre-Adverse Action notice (in addition to a copy of the report and the “A Summary of Your Rights Under the Fair Credit Reporting Act” document) and a Final Adverse Action notice.

The most common allegations are that either employers are not conducting adverse action at all, or that they are not executing the process completely. In 2013, a national retail company settled for $3 million following allegations that it violated the FCRA by failing to provide the most current version of the “A Summary of Your Rights Under the Fair Credit Reporting Act”[1] and by failing to provide a copy of the background report in advance of taking adverse action.

Another settlement that recently grabbed national headlines involved allegations that the employer (a transportation company) violated the FCRA by taking adverse action against individuals without first advising that they could receive a free copy of the consumer report within 60 days and that they could dispute any inaccurate information. Further, the employer allegedly failed to provide a clear and conspicuous disclosure to the consumer before procuring a background report. These claims resulted in the $4.4 million settlement in which the employer claimed it did not violate the FCRA.

In an ongoing case from the Central District of California (Western Division), an auto parts distributor is facing allegations that it violated the FCRA by failing to conduct the adverse action process properly. Specifically, the complaint alleges the employer did not provide a copy of the background report or the “A Summary of Your Rights Under the Fair Credit Reporting Act” document prior to taking adverse action. In addition, the employer allegedly failed to provide the final notice of adverse action. Finally, the complaint alleges the employer violated the “solely” requirement by including a release of liability and other extraneous information on the disclosure and authorization.

Recently another argument has been raised which highlights the importance of attention to detail in the adverse action process. In the Western District of Pennsylvania case cited above, the complaint also alleged that the company did not wait the specified number of days before taking adverse action. Specifically, the company stated in its Pre-Adverse Action letter that it would wait five business days before making a decision; however, the company allegedly only waited four business days before sending the Final Adverse Action notice. The court determined that this practice could result in a jury finding that the individuals were not provided a “reasonable” time to dispute information, and thus denied the employer’s motion for summary judgment.

This process is ripe for litigation, and employers are well advised to devote time to ensuring adverse action is being conducted properly. Employers with multiple locations and a decentralized human resources system in particular may face challenges with the adverse action process as there is an inherent risk that a branch or location is not fulfilling its responsibilities. By working with qualified legal counsel, employers are able to better structure how they can properly execute and document adverse action across all locations ensuring greater defensibility and peace of mind.

Recommended Action Steps

Litigation is undoubtedly on the rise, which may raise concerns and questions for employers as to whether conducting background checks is worth the risk of a potential lawsuit. The positive news for employers is that the current litigation landscape is primarily focusing on the two key areas discussed in this article – the disclosure and authorization document and the adverse action process. Employers should work with legal counsel to ensure their internal processes are compliant, well-documented and consistently applied.

In addition to compliance with the Fair Credit Reporting Act, employers must be aware of local and state laws that may impact other aspects of the background screening process. Part Three of this series will address a particularly hot topic – “ban the box” legislation – that is currently creating procedural headaches for employers who hire in multiple jurisdictions.

[1] The Consumer Financial Protection Bureau assumed enforcement authority over the Fair Credit Reporting Act which resulted in the publication of a new version of the “A Summary of Your Rights” document effective in January 2013. Employers must provide this version and may be vulnerable to litigation if an outdated document is circulated to individuals.

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