Employers use a number of tools to assess any potential hire, and to evaluate existing employees. When using a credit report for these purposes, employers need to be wary of the Fair Credit Reporting Act’s (“FCRA”) (15 U.S.C. 1681 et seq.) provisions. The FCRA has strict procedures, requiring that employers obtain permission before pulling employees’ credit reports, and before and after acting on the information discovered therein. Class actions based on these provisions of the FCRA are a rising trend, leading to several multi-million dollar settlements in 2013 (see, e.g., Pitt v. K-Mart Corp., Case No. 11-cv-00697 (E.D. Va.) (creation of $3 million settlement fund); Singleton v. Domino’s Pizza LLC, 8:11-cv-01823-DKC (D. Md.) (creation of $2.5 million settlement fund)), and plaintiffs continue to file new class actions premised on FCRA violations (see, e.g., Gezahegne v. Whole Foods Market California, Inc., Case No. 4:14-cv-00592-DMR (N.D. Cal.)). The penalties are particularly high where an employer’s failure to comply with the FCRA is deemed willful – up to $1,000 in statutory damages per class plaintiff, potential punitive damages, as well as attorneys’ fees and costs. See 15 U.S.C. § 1681n(a).
So as not to run afoul of the FCRA, employers should be mindful of two things when using credit reports: (1) the definition and scope of the term “consumer report;” and (2) the notice and disclosure requirements mandated by the FCRA.
“Consumer report” is very broadly defined by 15 U.S.C. § 1681a(d)(1) as any communication concerning a consumer’s “credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living.” If the consumer report is used for “employment purposes” – which is also broadly defined as “a report used for the purpose of evaluating a consumer for employment, promotion, reassignment or retention as an employee” – then the employer must comply with the notice and disclosure provisions of the FCRA. See id. § 1681a(h).
Employers must also be cognizant of the FCRA’s requirements before requesting an employee’s consumer report, as well as before and after “using” the credit information in the report to take any adverse action – defined as “a denial of employment or any other decision for employment purposes that adversely affects any current or prospective employee” (id. § 1681a(k)) – against the employee. See id. § 1681b(b)(3); 1681m(a).
Before requesting a consumer report, the employer must obtain the employee’s written authorization to request the consumer report. See id. § 1681b(b)(2)(A). The written authorization must contain no information other than the authorization, and must be signed by the employee. See id. § 1681b(b)(2)(A)(i), (ii).
Once the employer obtains the consumer report, it cannot take any adverse action against the employee until it has provided the employee with a copy of the report and describe the consumer’s rights under the FCRA. See id. § 1681b(b)(3). After taking any adverse action, the employer must provide the following notices, which can be made orally, electronically, or in writing (unless otherwise indicated): (1) the adverse action; (2) the numerical credit score contained in the consumer report (electronically or in writing only); (3) contact information for the credit reporting agency and a disclaimer that the credit reporting agency did not make the decision to take the adverse action; and (4) the employee’s right to obtain a free copy of the consumer report and to dispute the contents of the report. See id. § 1681m(a)(1)-(4).
In light of the potential penalties for noncompliance, litigation risk, and negative publicity, it is well worth the time to ensure that FCRA compliance procedures are in place for those in positions to evaluate employees or make hiring decisions. Doing so will help employers steer clear of the potential costly pitfalls of FCRA noncompliance.