The Equal Employment Opportunity Commission (“EEOC”) created a fair amount of commotion in 2013 with its litigation initiative against employer background check practices. To say that the results thus far for the EEOC have been mixed would be kind to the EEOC. In August, the U.S. District Court for the District of Maryland granted summary judgment against the EEOC’s theory that background checks have a disparate impact on racial minorities. In EEOC v. Freeman, the Maryland federal court found that “[t]he story of the present action has been that of a theory in search of facts to support it.” No doubt the EEOC is hoping for better outcomes in similar cases pending in other federal courts against BMW Manufacturing Co. and Dollar General.

While the EEOC’s enforcement activities are serious matters that could dramatically affect employers’ background check practices, employers should not overlook another, less-reported area of risk when it comes to background checks: the Fair Credit Reporting Act (“FCRA”). Although the FCRA permits the use of credit and criminal background checks for employment purposes such as hiring and promotion, the statute imposes significant procedural requirements that employers can easily forget or misapply.

The FCRA’s remedies include fines, actual damages, punitive damages, costs and attorneys’ fees, and the consequences for violations can be costly. In June 2013, for example, Advance Auto Parts reportedly paid an estimated $360,000 to settle a case in the U.S. District Court in Roanoke, Virginia. The plaintiff in the case claimed that Advance did not properly use information in consumer reports to make decisions about hiring and firing, which Advance denied. In 2012, Pepsi agreed to pay $3.13 million to settle an EEOC case in which the EEOC found the company’s background check policy violated Title VII of the Civil Right Act of 1964.

To reduce the risk of claims and to comply with the FCRA, employers should:

1. Give Proper Notice to the Consumer Reporting Agency. Send a certification notice to the background or credit check agency to document each request for consumer and/or investigative reports in accordance with the FCRA. This communication should be sent for every report requested by the employer. It should certify the employer’s compliance with disclosure requirements and that the employer will not use the information provided by the agency to violate equal employment opportunity requirements.
2. Get the Individual’s Authorization. An employer may not procure a consumer report on an applicant or employee unless the employer has provided clear and conspicuous written disclosure to the applicant or employee that a consumer report may be obtained. The disclosure must be made in a document that is separate from any other documents. In addition, the applicant or employee must give his or her written authorization for obtaining the report. The compliant authorization form may differ from a reporting agency’s authorization form, which the agency may require for its own purposes. The employer’s form may provide for the applicant or employee to authorize the employer to obtain a consumer report or investigative consumer report at any time during the application process or during the employment if the applicant is hired. The employer may also include with the authorization form a copy of the federal Consumer Financial Protection Bureau’s Summary of Rights under the Fair Credit Reporting Act.
3. Use Pre-Adverse Action Notices. Before any adverse action is taken against an applicant or employee because of information in a report, the employer is required send to the employee or applicant a pre-adverse action notification, a copy of the consumer report and a copy of the Consumer Financial Protection Bureau’s “A Summary of Your Rights Under the Fair Credit Reporting Act.” The notice is designed to provide to the individual an opportunity to explain or correct the information in the report. In order to provide for an individualized assessment with respect to an employee or applicant and thereby address disparate impact issues under Title VII, the pre-adverse action notice should solicit information from the individual on which the individual may base any belief that he or she should not be screened out from employment.
4. Use Written Notices of Adverse Action. The FCRA requires the disclosure of the name and contact information of the reporting agency as well as other disclosures, and employers should satisfy these requirements by providing written notice to applicants and employees subjected to an adverse action based on information in a consumer report. The FCRA requires that specific information be included in the various notices required under the statute, and employers should carefully ensure that their documents comply with the FCRA’s specific notice requirements. This article summarizes only some of the FCRA’s requirements and does not address any state or local legal requirements relating to background checks. Some states may have additional or different requirements.