The Fair Credit Reporting Act ("FCRA") is a federal law which regulates the use by businesses of credit reports and other similar reports about individuals. Although the name of the law suggests a focus on "credit reports," and although that was the focus of the law originally, the law now has a much broader scope. In particular, the law now regulates the use by employers of most common "background check" reports concerning applicants and employees.

     In 1996 the Fair Credit Reporting Act was amended, effective September, 1997. The 1996 amendments substantially broadened the coverage of the Act and increased the restrictions on the use of not just traditional credit reports but also many other types of "consumer reports." In 1997 the Maine Fair Credit Reporting Act was amended, effective October, 1997. Fortunately, the Maine statute's requirements are very similar to the federal statute's requirements, so this article discusses the two statutes' requirements as one set of requirements.

     A. Broad Definitions Result In Broad Coverage

     In general, FCRA applies to an employer's use of "consumer reports" for employment purposes. A "consumer" is defined as "an individual." This includes job applicants and employees.

     The phrase "consumer report" is defined broadly to include "any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer's . . . 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 employment purposes." The Federal Trade Commission, which enforces and interprets the FCRA, has specifically stated that reports about "driving records and criminal histories" are consumer reports if they are obtained from a consumer reporting agency. Other typical reports which are consumer reports if obtained from a consumer reporting agency are: credit reports, social security reports, workers' compensation reports, work history reports, civil litigation reports, and medical history reports.

     A "consumer reporting agency" has been defined by the FTC simply as "a business that assembles information reports for other businesses." This includes traditional credit reporting companies as well as most "screening organizations," "records search firms," and private investigation firms that do basic background checks for employers.

     B. Putting The FCRA In Perspective

     The FCRA does not prohibit employers from using background checks on applicants or employees. It only regulates the use of those types of "consumer reports" under certain circumstances. In particular, the FCRA regulates the use of consumer reports obtained from consumer reporting agencies. It does not regulate an employer's own direct information gathering activities. For example, if an employee in an employer's personnel department calls former employers of job applicants to check on the applicants' work histories and calls various public agencies or courts to check on the applicants' licenses and criminal histories, the FCRA does not apply to the employer's activities. However, if an employer hires an outside business to similarly investigate and report on job applicants or employees, the FCRA regulates the information gathering and reporting activities of both the employer and the outside business.

     C. Specific Compliance Requirements

     An employer which uses consumer reports from a consumer reporting agency must comply with FCRA's detailed set of requirements, as follows:

      Step 1. Disclosure To Consumer And Authorization From Consumer

     Before an employer requests or procures a background report on a job applicant or an employee, (a) the employer must make a clear and conspicuous written disclosure, in a document that consists solely of the disclosure or the disclosure and an authorization form, to the job applicant or employee, that a consumer report may be obtained for employment purposes, and (b) the job applicant or employee must authorize in a separate signed writing the procurement of the consumer report by the employer.

     NOTE: A disclosure and authorization form which is part of a job application form may not be used to meet this FCRA requirement. The disclosure and authorization form must be on a separate sheet of paper. Although the disclosure form and the authorization form may be on two separate sheets of paper, I recommend the use of one combined disclosure and authorization form. Use of such a single combined form reduces paperwork and increases the validity of the authorization signed.

     NOTE: If a job applicant or employee refuses or fails to complete and submit to an employer the requested authorization form, the employer may take adverse action against the job applicant (i.e., refuse to hire the applicant) or employee (i.e., discharge the employee). The employer's written policies should clearly state what the consequences may be of a refusal or failure to submit a completed authorization form.

     NOTE: An employer's current employee must receive a disclosure and authorization form for any consumer report about the employee that the employer may seek, even if the employee is currently suspected of misconduct or under investigation for misconduct. An employer concerned that such a disclosure form "at the wrong time" may undermine an investigation may (1) delay seeking a consumer report on an employee being investigated until after all sensitive portions of the investigation are completed, or (2) use "blanket" disclosure and authorization forms in advance with all employees (the FCRA says that an employee must get a disclosure and authorization form before the employer seeks a consumer report about the employee, but the FCRA does not prohibit the form from being given to the employee long before the request, i.e., at the time of hiring).

     Step 2. Request For Report From, And Certification To, Consumer Reporting Agency

     When an employer sends in to a consumer reporting agency a request for a report, the employer must send in a "Certification" that the employer seeks the report for a lawful purpose, that the employer will use the information for no other purpose, that the employer has complied with Step 1 above, that the employer will comply with Step 4 below, if it becomes applicable, and that the employer will not use the report in violation of any applicable federal or state equal employment opportunity law or regulation. An employer which is a volume user of consumer reports from a particular consumer reporting agency may send a "blanket" certification to a consumer reporting agency instead of repeatedly sending a certification with each request for a report.

     Step 3. Receive And Process The Report

     When an employer receives the consumer report, the employer should evaluate the report and assess whether any adverse action may be taken against the job applicant or employee. If no adverse action is going to be taken against the job applicant or employee, then the employer need take only two actions: (1) the employer must keep copies of the report and the disclosures for two years, and (2) the employer must, in response to a request from the job applicant, inform the job applicant whether or not a consumer report was requested and, if a report was requested and received, the name, address, and phone number of the consumer reporting agency that furnished the report. If an adverse action may be taken against the job applicant, then Steps 4 and 5 must be followed.

     Step 4. Pre-Adverse Action Disclosure To Consumer

     Before an employer may take any adverse action against a job applicant or employee based in whole or in part on a consumer report, the employer must provide to the job applicant or employee (a) written notice that adverse action may be taken, (b) a complete copy of the report (not a partial or redacted copy), and (c) a written notice of the consumer's rights under the law. The written notice of rights may be obtained from the consumer reporting agency or the FTC. If an employer receives only an oral or unwritten report, the employer nevertheless must disclose the contents of that report to the job applicant or employee. According to the FTC, that disclosure may be oral or in writing, but I recommend that the disclosure be in writing so that the employer has documentation of making an appropriate disclosure.

     NOTE: Although there may be a few cases in which an adverse action may be taken against a job applicant or employee after a report is received but for reasons totally independent of and unrelated to any report information, those cases are very rare, so the general rule is that if an employer is going to take or is considering taking any adverse action against a job applicant or employee for any reason after the employer obtains a consumer report, the employer should make this Step 4 disclosure. Non-disclosure unnecessarily risks litigation, because both the state and federal statutes do not require the consumer report to be the "sole" or "primary" or "main" reason for the adverse action; if the report is considered by the employer in any way at all, the disclosure must be made.

     NOTE: The law says that this pre-adverse action disclosure is to be made "before taking any adverse action," but the law does not say how long before the adverse action the disclosure must be made. An hour? A day? Five days? The FTC has steadfastly refused to state what specific number of days is required. I recommend at least three days, if at all possible, in order to give the consumer at least a minimal chance to react to the consumer report and address any concerns the employer may have. After all, the report received by the employer may be inaccurate or incomplete, so the job applicant or employee needs at least some time to review the report and advise the employer of any relevant explanation or information. The pre-adverse action disclosure form should advise the consumer by what deadline the consumer must notify the employer of any response to the consumer report.

     NOTE: Just because an employer sends out a pre-adverse action disclosure does not mean that the employer is required to go ahead and take adverse action against the consumer. If the employer takes no adverse action against the consumer, the employer may skip Step 5 and go to Step 6.

     Step 5. Post-Adverse Action Disclosure To Consumer

     If an employer takes adverse action against a job applicant or employee based in whole or in part on any information contained in a consumer report, the employer must provide oral, written, or electronic notice to the consumer (document any oral or electronic notice given) (a) of the adverse action, (b) of the name, address, and telephone number (including toll-free number, if any) of the consumer reporting agency that furnished the report, (c) that the consumer reporting agency did not make the employment decision and is unable to explain why the adverse action was taken, (d) of the consumer's right to obtain a free copy of a consumer report on the consumer from the consumer reporting agency, including notice of the 60-day period for obtaining such a copy, and (e) of the consumer's right to dispute with the consumer reporting agency the accuracy or completeness of any information in the consumer report.

     NOTE: These required post-adverse action disclosures overlap somewhat with the complete copy of the report and the notice given to the job applicant or employee at Step 4, but complete Step 5 disclosures nevertheless must be made as specified. An employer that takes adverse action against a job applicant or employee must comply with both the pre-adverse action disclosures and the post-adverse action disclosures.

     Step 6. Document Retention

     An employer must keep a copy of each consumer disclosure made and each consumer report received for two years.

     NOTE: Forms Recap

     To recap, the forms the FCRA may require an employer to use are:

• Disclosure And Authorization form (employer to consumer and back)
• Certification form (employer to consumer reporting agency)
• Pre-Adverse Action Disclosure form (employer to consumer)
• Notice of FCRA Rights form (employer to consumer)
• Post-Adverse Action form (employer to consumer)

     NOTE: Other Reference Checks

     The above six Steps are required only in connection with an employer's use of "consumer reports" for job applicants or employees. Ordinary reference checks, prior employment checks, and education checks that an employer itself undertakes directly as part of its hiring process or employee evaluation process are not consumer reports under the FCRA. The law does not require an employer to make any particular disclosures or send out any particular notices with regard to those types of reference checks. Also, criminal history information and other similar information that an employer may obtain directly from a public agency or the courts are not "consumer reports" under the FCRA.

     D. Investigative Reports For Hiring; Employment Agency Exemption

     An "investigative report" is a special type of consumer report which is based on personal interviews with neighbors, friends, associates, employers, and/or other persons acquainted with or having knowledge about a consumer. It is not a mere "fact checking" report (i.e., not a report which just confirms dates of employment, last rate of pay, schooling, etc.). If an employer hires an employment agency or a personnel agency to provide an investigative report about a job applicant, or to provide similar hiring or placement services involving the investigation and interview of a job applicant, then the employer need not treat the agency's report as a "consumer report" and the employer need not use all the forms indicated above if (1) the report is made and used only for a hiring purpose (i.e., not for the evaluation of an existing employee, for a promotion purpose, or for some other non-hiring purpose), (2) the job applicant is notified in advance of and authorizes the proposed investigative process and report (on a form given to the job applicant by the employment agency), (3) the employment agency makes no illegal inquiries, and (4) the employment agency (not the employer) provides certain disclosures to the applicant. This FCRA provision is commonly known as the "employment agency" exemption. The purpose of the exemption is to allow employers to use the hiring and placement services of traditional employment agencies without the employers being required to use any of the FCRA notices and forms described above. The exemption does not apply to "screening agencies" or other businesses which perform "non-interview" or "mere fact-checking" investigations.

     E. Enforcement

     The FCRA is enforced by the Federal Trade Commission and by private civil actions. In an appropriate case, an injured consumer may recover compensatory damages and attorney's fees and, for a willful FCRA violation by a defendant, punitive damages.

     F. Further Information

     Extensive information concerning the Fair Credit Reporting Act is available from the Federal Trade Commission on the FTC's Internet web site at www.ftc.gov.

DISCLAIMER: All information is provided for educational or promotional purposes only and not as legal advice on a particular matter. The information is provided AS IS with no warranties of accuracy, completeness, merchantability, or fitness for a particular purpose. Providing this information DOES NOT create an attorney-client relationship between Lawrence C. Winger, Esq. and the reader. All information is Copyright (c) Lawrence C. Winger, Esq. 2000 All Rights Reserved.

Dated: January, 2000
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