FCRA Compliance: Consumer Reports & Adverse Action

Employers are erring on the side of caution in the hiring process to avoid paying big bucks for non-compliance of the Fair Credit Reporting Act (FCRA).  A recent SHRM publication revealed that some businesses have already been forced into million dollar settlements because they weren’t compliant with FCRA.  This year alone nearly 30 employers nationwide have faced class action lawsuits of noncompliance with FCRA regulations relating to consumer reports.

The two most common areas where employers are failing to become compliant are (1) in their background check disclosures and (2) in the adverse action process.

What is a Consumer Report?

By definition, a consumer report is a report prepared by a consumer reporting agency (CRA) consisting of information pertaining to an applicant or employee’s credit standing, character, general reputation, personal characteristics or mode of living that is used or collected for employment purposes.  Similarly, an investigative consumer report is a type of consumer report wherein information of the same nature is gathered through personal interviews of others (i.e. reference checks).  A consumer report can be obtained either pre-hire or post-hire.

Consideration of a Consumer Report:

Prior to obtaining a consumer report, an employer is required to submit to an applicant a written disclosure that a consumer report may be obtained and may be used for decisions relating to employment.  An applicant has to provide written permission for the employer and the CRA to obtain a consumer report.  The disclosure must state an applicant’s right to request information regarding the consumer report’s nature and scope.

What is Adverse Action?

Adverse Action is when an employer has decided not to hire a candidate based partly on information that was revealed in a consumer report (aka Background Check).  In these cases, there is a specific course of action you must take.

Consideration of an Adverse Action:

The employer must first give the candidate a Pre-Adverse Action Letter, which must include a copy of the consumer report and a copy of the federal and state summary of rights.  After five days, the employer must follow-up with a final Adverse Action Notice, which needs to include the following:

- The name and contact information of the consumer reporting agency (CRA) that compiled the consumer report.

- A statement that the CRA provided information only and did not make the adverse hiring decision and or influence the adverse decision.

- A statement indicating the applicant has the right to obtain a free copy of the consumer report from the CRA within 60 days.

- A statement that the applicant has the right to directly dispute any information in the consumer report they find to be inaccurate or incomplete, with instructions for how to dispute with the CRA.