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What You Don’t Know Can Hurt You: Avoiding the Fair Credit Reporting Act Class Action Trap

The steps to avoid Fair Credit Reporting Act claims are relatively simple. But the cost of failing to follow them can be substantial.

By Elizabeth Torphy-Donzella and Teresa D. Teare

 

The Fair Credit Reporting Act, from the employer’s perspective, is all about process. Whenever an employer uses a third party to conduct an “investigative consumer report” (i.e. background check) on an employee or applicant, the law requires that the employer comply with technical notice and consent rules. These rules should not be discounted as “trivial stuff.”

In some cases, violations may be small to none (negligent violations yield an award of actual damages only) or larger but not individually catastrophic (willful violations – that is knowing or reckless – can range from $100 to $1000 per violation plus punitive damages). However, in all cases prevailing plaintiffs obtain “reasonable attorneys’ fees.”

It is this last element of recovery, and the prevalence of violations of the FCRA’s technical rules, that has led to a wave of class action lawsuits on behalf of hundreds of applicants that add up to huge liability when pursued collectively (and, of course, generate huge recoveries in attorneys’ fees for plaintiffs’ law firms). Waves of settlements have ensued, including:

  • Publix Supermarkets settled a FCRA class action in October, 2014 alleging technical violations of a notice and consent form for $6.8 million.
  • Domino’s Pizza settled an action for $2.5 million in October, 2013 that included an alleged failure to provide “pre-adverse action” notice before denying employment.
  • K-Mart settled an FCRA class action for $3 million in January, 2013, also involving an alleged “pre-adverse action” notices failure.

What are these technical rules and how does a company avoid violating this law?

Notice and Consent

The FCRA requires that individuals subject to third party-conducted employment related background checks be provided with notice of their rights and consent before a background check is conducted. The notice of rights may be included in one stand-alone document, but that document may not include any other information. The typical form provided by a background check firm that collects information necessary for the check (name, date of birth, social security number, etc.) and that authorizes the background check firm to conduct the check does not fulfill the employer’s obligation under the FCRA. Indeed, courts have found that the FCRA may be violated by including a release of liability against individuals who provide information in response to a request for reference in the “standalone” disclosure form. The moral of this story: do not include any extraneous information in this initial document — not even a blank for a Social Security number.

Pre-Adverse Action Notice

Whenever a background check may, in whole or even in part, result in an adverse action (such a denial of employment), the FCRA requires that the employer withhold a final decision until it follows yet another process. The employer must provide the applicant with a writing that explains that an adverse action may be taken as a result of the report, with a copy of the background check results as well as a “notice of rights” published by the Consumer Financial Protection Bureau. The law further requires that the employer wait “a reasonable period of time” before making a final decision and inform the individual what that time period is. (Five business days is generally considered a “reasonable period of time.)

The importance of this step is illustrated by the case of Cox v. TeleTech@Home Inc.  There, an employer’s third party background check firm sent an applicant a “pre-adverse action” notice by email that informed the applicant that the hiring company had “decided to revoke” the offer based on a background check “subject to successfully challenging” the report, which was not included. Separately, the company sent the applicant a form email entitled “Urgent/Rescinded Offer” explaining that the negative background check disqualified the applicant. The company then locked the applicant out of its online Internet portal for new hires. Company witnesses testified that they had no idea how the email had been created or even that it was being sent. Although the company denied that it made a final decision about the applicant’s employment at the time these communications were sent (and the applicant did not attempt to contest the report, which was inaccurate), the court held that a jury could find from this evidence that the “pre-adverse action” step and other informational requirements had not been complied with and that a willful violation of the law had occurred. The court found evidence of willfulness (“reckless disregard” of the law’s requirements) because the email “was sent to hundreds of applicants over a two year period without TeleTech’s management even being aware of it until this litigation was started. And TeleTech apparently had no systematic policy or procedure to ensure that it complied with the FCRA…”

The Cox case illustrates the need to ensure that there is controlled communication with applicants (i.e. know what your computers are generating and what your background check firm is sending on your behalf) and that the required forms are transmitted. It also illustrates the risk involved in starting the onboarding process before the background check is complete. In particular, while suspending orientation pending the applicant’s response to the pre-adverse action notice should not be an adverse action, revoking the offer pending receipt of the information will be.

Adverse Action Notice

After the employer has waited the “reasonable period of time” it may make a final decision. The FCRA does not require that the employer hire an applicant, even if he or she proves that the background check results were erroneous.  The FCRA is concerned with what is communicated, however. Thus, the employer is required to send yet another notice to the applicant, advising of the adverse decision, that it was based on information provided by the background check firm (which firm must be identified by name and address for purposes of inquiries about the report), that the background check firm did not make the decision, that that applicant has a right to obtain a free disclosure of the report by requesting it within 60 days from the background check firm (which report, by the way, the employer already provided in the prior communication to the applicant), and a statement of the individual’s right to dispute the accuracy of the report with the reporting agency.

Steps to Take For FCRA Compliance

FCRA claims can be avoided by following some relatively simple steps:

  1. Know the rules and follow them scrupulously. Avoid the temptation to “reduce paperwork” by including information in any form, the content of which is dictated by the FCRA.
  2. Prepare a written policy on FCRA compliance. If you are accused of violating the law, it will help show that the violation was not willful.
  3. Do not form a final decision (and do not send emails that would suggest that a final decision has been made) before the “reasonable period of time” has passed.  This includes refraining from calling your “second choice” applicant to offer her the job before this time period has passed (although you certainly can communicate that the opportunity might be coming available again).
  4. Refrain from bringing an individual on board pending the completion of the background check (unless you want to provide five days of paid leave while the pre-adverse action period is pending).
  5. If you have outsourced your entire background check process, make sure that what is being done on your behalf complies with the law. An employer will typically be liable for errors of a background check firm perpetrated on its behalf.  Hence, you also need to carefully review any indemnification clauses in agreements with such providers (and in particular, limits of liability).

Elizabeth Torphy-Donzella and Teresa D. Teare are partners in the management side labor and employment law firm, Shawe Rosenthal, LLP. Find them at fransocial.franchise.org.

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