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Background Checks & Complying with the Fair Credit Reporting Act

Spokeo was founded in 2006 and today is a “leading people search service” based in Pasadena, California. More relevant to this Client Alert, its Fair Credit Reporting Act (FCRA) violations case is set to be reviewed by the Supreme Court next term. The FTC ordered Spokeo to pay $800,000 in 2012 for technical violations of the FCRA. In February 2014, the Ninth Circuit affirmed that judgment and held that FCRA class-actions plaintiffs need not show any actual injury in order to be entitled to damages. The Supreme Court will review whether this departure from normal constitutional standing requirements is acceptable.

And so while Spokeo the company has made doing research on individuals much easier, its litigation efforts have thus far opened the flood-gates for some massive class actions against employers for some exceedingly small, but technical, violations of the FCRA in conjunction with background checks. While the Supreme Court may ultimately step in to break up this party the plaintiff’s bar has been having, it is imperative for employer’s to review their background check policies in the interim.

Indeed, pre-employment background checks are a challenging area for employers for a few reasons. First, as discussed in other Client Alerts, a number of local governments (and a few states) have recently enacted measures to “ban the box” on employment applications –making it impermissible for an employer to run a background check on a job-candidate prior to a conditional offer of employment. New York City actually passed such a measure earlier this week. Navigating this patchwork of local laws can be challenging for national employers. Nonetheless, the legislation can at least be supported by genuine anti-recidivism interests.

Similarly, the EEOC has indicated a renewed desire to crackdown on employers with background checking policies that serve to limit employment opportunities in an impermissibly discriminatory manner. While it may be difficult to definitively assess whether your background check policy is discriminatory, employers at least can understand and predict the motivation of the EEOC in this regard.

FCRA violations are another beast entirely however. A cursory search of the Federal Docket system shows that well over 100 suits involving FCRA violations have been filed already in June alone. While a significant portion of these suits involve the major credit bureaus (Equifax, Experian, Trans-Union) and financial services companies, the majority are targeted against large private employers. Hertz, Avis, Kohl’s and Wal-Mart are among those companies who have been sued this month for FCRA violations. Whole Foods is currently litigating its own FCRA lawsuit, and despite the upcoming Supreme Court review of the law, its case will not be stayed.

In addition to the sheer number of cases being filed, the sizes of the settlements are astounding, especially in light of the alleged wrongdoing. The most common violation is the inclusion of liability releases in the required disclosure. Because the FCRA prohibits “extraneous language” in disclosure notices, a sample of recent settlements for this violation include:

  • Home Depot, $1.8 million. Settled April 2015.
  • Delhaize America (Food Lion’s parent), $3 million. Settled March 2015 (failure to receive disclosure)
  • Publix, $6.8 million. Settled December 2014.
  • Dollar General, $4 million. Settled October 2014.

This is just a small sample of some of the recent major settlements in this area of litigation. The purpose of the FCRA is to ensure that those who are denied a job or promotion based on a background check (criminal or credit) at least have the right to inspect the documents that the employer has relied upon for accuracy. These settlements not only include instances where the reports have been accurate and thus there could be no issue, but also include checks that have come up clean and thus no adverse action was ever taken. The Whole Foods case mentioned above is alleging a violation based on the fact that Whole Foods simply provided a release of liability, in a separate document, at the same time as the FCRA disclosure.

Adverse Action Procedures

Accordingly, if you are an employer who uses a third-party service to conduct “consumer reports” in conjunction with your hiring or employment decisions, you must be sure to follow the letter of the law. The employer’s responsibilities may be viewed as three distinct stages: 1. Pre-check, 2. Pre adverse-action, and 3. Post adverse-action.

Consumer reports include 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 consumer’s eligibility for credit, insurance, employment purposes, or other similar reasons. 15 U.S.C. § 1681a(d).

1.      Before obtaining the consumer report

First, the law requires employers wishing to use a third-party service to obtain information about an employee’s or applicant’s background to:

  • Provide a clear and conspicuous disclosure notice to the employee/applicant informing them of the intent to procure the report for employment purposes. This document must consist only of this disclosure (and authorization);
  • Obtain a written authorization from the employee/applicant authorizing the procurement of the report. This should be procured via a signature line on the disclosure document.; and
  • Certify to the consumer reporting agency (the vendor) providing the report that such a disclosure was made, authorization was received, that the employer will comply with the FCRA’s provisions regarding taking adverse action against an employee/applicant based on information obtained in the report, and that the employer will not violate any state or federal equal employment opportunity laws or regulations.

As mentioned above, by far the most common error here is including “extraneous” language, like a release of liability, in this initial disclosure document.

2.      Prior to taking adverse action

If the employer does wish to take adverse action based on the results of the report, the employer must first provide the employee/applicant a copy of the report and a description of their rights under the FCRA, prior to taking the adverse action. “Adverse actions” include not only obvious actions like termination of employment or denial of the application, but also any unfavorable change in the terms of employment.

The mandatory summary of rights is available here:

The key to this is that the employee must be given an opportunity to cure any inaccuracies report.

3.      After taking adverse action

Once the employee/candidate has had a reasonable time to try to cure any inaccuracies, the employer may take adverse action.

At this point, the employer must provide the employee/candidate notice (orally, in writing, or by electronic means):

  1. that he or she was rejected because of information in the report;
  2. the name, address, and phone number of the company that sold the report;
  3. that the company selling the report didn’t make the hiring decision, and can’t give specific reasons for it; and
  4. that he or she has a right to dispute the accuracy or completeness of the report, and to get an additional free report from the reporting company within 60 days.

It must also be noted that if your employment decision is based on a more intensive investigation into the candidate’s background, i.e. you have taken interviews about the person’s character, reputation, characteristics, and lifestyle, the FCRA imposes additional disclosure requirements for these so-called “investigative reports.”

Additional Considerations

4.      Social Media Reports

The propriety of using social media reports as a component of the hiring process is a subject of much debate. The most nefarious type of social-media investigation will require candidates to disclose social media credentials to the employer, or permit a manager to “shoulder-surf” the employee’s profile(s). There is not much evidence that this is a widespread practice however, and it has indeed been outright outlawed in many states already. Moreover, the NLRB has shown an interest in ensuring that employees have the ability to comment relatively freely, via social media, about the terms and condition of their employment.

A bigger question has been whether an employer may even look at publically available social media in conjunction with employment decisions.

A recent decision from the Northern District of California suggests, fortunately, that this is permissible. In Sweet v. LinkedIn, No. 14-cv-04531 (N.D. Cal. Apr. 14, 2015), the district court notably held that LinkedIn is not a credit reporting agency, and its reports are not consumer reports. The major difference, according to the court, is that LinkedIn gets its information directly from the consumers, while services like Spokeo aggregate information from a number of sources. As such, employers may stay clear of the FCRA by doing their own hunting so long as they rely on “primary sources.” Once they involve a third-party service like Spokeo, they will need to comply with the FCRA.

5.      State Law Requirements

This article is intended only to ensure that employers are aware of the FCRA as it relates to background checks. Many states have additional requirements pertaining to background checks. In many instances, these laws will mirror the FCRA’s disclosure and opportunity-to-cure provisions. However, a growing trend within certain local governments is to ban using credit reports as a basis for employment decisions all together. Accordingly, ensure that you check your state’s background check laws in addition to the federal requirements.


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