Employers must comply with FCRA or face penalties

Starbucks was recently hit with two major class-action lawsuits claiming it repeatedly violated the Fair Credit Reporting Act (FCRA). The lawsuits allege that Starbucks obtained background reports on thousands of job applicants which contained inaccurate information, then failed to give those applicants an opportunity to review or correct those errors before denying employment. A recent CBS News report revealed that big employers, including Amazon and Uber, have paid more than $300 million to settle FCRA claims in recent years. Criminal background reports often contain inaccurate information regarding charges—one study found that as many as 41% of reports contained erroneous information.

Many employers obtain background reports when evaluating job applicants. Some employers are even required under state or federal laws to perform background checks on certain job applicants. However, it is important that employers be aware of the Fair Credit Reporting Act (FCRA) and ensure they are following the strict obligations it imposes on employers.

The FCRA is a federal law that was originally passed in 1970. It is regarded as the first major consumer data protection law. The FCRA protects the use of “consumer reports.” Originally designed to require banks to ensure the protection and accuracy of consumer financial data, Congress has expanded the scope of “consumer reports” to include any information that involves a person’s general character or personal reputation. This includes criminal background history. The Federal Trade Commission (FTC) and Consumer Financial Protection Bureau (CFPB) are tasked with enforcing the FCRA.

The FCRA imposes strict procedural requirements on employers who use third-party background checks for employment purposes. Here are just some of the requirements employers face:

Employers may not obtain a background report before first receiving express written consent from the prospective employee in a standalone document consisting solely of the disclosure. It is crucially important that employers provide this consent form in a standalone document and not incorporate it into the application form. Failure to strictly follow this seemingly innocuous step can be an actionable FCRA violation.

Before an employer may take any adverse action against the job applicant (including deciding not to hire) based on information found in the background report, the employer must first provide the job applicant a full and complete copy of the background report, along with a summary of the job applicant’s rights under the FCRA. The employer must then allow the job applicant a chance to challenge and correct erroneous information on the report.

After any adverse action has been taken, the employer must also provide the name, address, and phone number of the background report company, a statement that the background report company was not involved in the hiring decision, and a notice of the job applicant’s right to challenge the accuracy of the background report.

The FCRA carries stiff penalties for employers who fail to comply with the law. Violators can be sued for actual damages, attorney fees, and even punitive damages. The FTC also has the authority to penalize employers who violate the FCRA and can fine employers thousands of dollars per violation.

The FCRA is a complex law that imposes strict procedural requirements on employers that obtain background reports on job applicants. Adding to the confusion, the law is currently being applied inconsistently among different jurisdictions. Even large, sophisticated companies are making procedural mistakes and are paying millions. Employers should consult with our experienced attorneys at Hale, Skemp, Hanson, Skemp & Sleik to ensure that their employment policies are in compliance with the FCRA.