The following article has been prepared by HRCentral.  It discusses general principles and should not be construed as legal advice.  If you have any questions about how the information contained in this article may apply to a specific situation, you should consult legal counsel.

Companies that conduct background checks as part of a new hire or promotion process must make sure that their background checks comply with the federal Fair Credit Reporting Act (FCRA) and equivalent state laws.  Most people know that the FCRA regulates the use of credit reports, but the Act covers more than just credit reports.  It also covers what are called consumer reports and investigative consumer reports.

A consumer report is any written, oral, or other communication of any information by a consumer reporting agency (CRA) that bears on the individual’s credit worthiness, credit standing,  or credit capacity that is expected to be used in whole or in part in establishing an individual’s eligibility – among other things – for employment.

An investigative consumer report is a consumer report in which information on a consumer's character, general reputation, personal characteristics, or mode of living is obtained through any means.

The FCRA only applies if you have a CRA obtain the consumer report or investigative consumer report.  A CRA is any company that regularly assembles or evaluates consumer credit information or other information for the purpose of providing consumer reports to companies.  15 U.S.C. 1681a(f).  In other words, CRAs include the three main credit reporting agencies and any company that holds itself out as conducting background checks, credit reports, reference checks, criminal record checks or the like.

The FCRA does not apply if you conduct the background check internally without using a CRA.  For example, if you have one of your employees check an applicant’s references, you do not have to comply with the FCRA.  One word of caution, there are now an abundance of websites on the Internet that purport to provide access to databases of consumer information like credit reports, driving records and criminal records.  Even though using these websites may seem like you are conducting the background check yourself, the companies administering the websites usually still qualify as CRAs which means you must still comply with the FCRA requirements.

To use a CRA to obtain a consumer report for employment purposes, you must:

1. Disclose to the applicant or employee, in a document separate from any other document, that a consumer report may be sought and the permissible purpose for the report;
2. Get the individual’s written authorization to obtain the consumer report;
3. Certify to the CRA the permissible purpose for which the report is being sought, that the report will not be used for any other purpose or in violation of any federal or state equal opportunity law or regulation.  You must also certify that you have provided notice and obtained authorization from the individual and that before taking adverse action, you will provide a copy of the report to the individual; and
4. If taking adverse action based in whole or in part on the information contained within the consumer report, provide a copy of the report to the individual affected as well as a summary of the individual’s rights.

To use a CRA to obtain an investigative consumer report, in addition to the above, you must also:

1. Provide a checkbox on the written disclosure for the individual to request a copy of any report that is prepared;
2. Provide the name, address and phone number of the consumer reporting agency obtaining the report and a copy of the informational sheet, “A Summary of Your Rights Under the Fair Credit Reporting Act;”
3. Certify to the CRA that these additional required disclosures have been made.

If you decide to take action against an individual based on information in a consumer report such as not hiring an applicant or refusing to promote or firing an employee, you must take the following steps.

Step One:  Notify the individual of the negative report
- Before taking any adverse employment action you must notify the applicant of the action you intend to take, provide copies of the background check report and the informational sheet, “A Summary of Your Rights Under the Fair Credit Reporting Act” and give the applicant the name, address and phone number of the CRA.  A copy of the summary of rights is available for free download at www.ftc.gov.

Step Two:  After providing notice
- If the applicant responds and provides additional information within applicable timeframes, carefully review the information before making a decision; or
- If the applicant does not respond within applicable timeframes, proceed with the adverse action.

Step Three:  Notify the individual of the adverse action
Provide the applicant with the following information:
- Notice of the adverse action taken;
- Name, address, telephone number of the CRA and how to contact them;
- Statement that the CRA did not make the decision to take adverse action and does not know why the decision was made;
- Copy of the background check report; and
- Notice of the applicant’s right to obtain a copy of the report and to dispute the information.

Step Four:  Document
- For all adverse decisions, document each step taken and forward the information to a designated company official for review.

Legal Update
In 1999, in response to a letter from attorney Judi Vail, the Federal Trade Commission (FTC) issued an opinion stating that if an employer used an outside third-party to conduct a workplace investigation such as for misconduct or harassment, the employer would have to comply with the FCRA requirements before conducting the investigation.

According to the opinion, even attorneys, human resources consultants and private investigators would qualify as CRAs if they regularly conducted these types of investigations arguing that this type of workplace investigation was actually an investigative consumer report.  By being forced to comply with the FCRA, this meant that an employer would either have to risk having the employee refuse to consent to the investigation or conduct the investigation on its own without the benefit of the third-party’s expertise and objectivity.  Not surprisingly, many employers, attorneys and human resources consultants were upset by the opinion letter.

The Fair and Accurate Credit Transactions Act of 2003, passed this month, amended the FCRA.  Among the amendments, it specifically exempted these types of workplace investigations from the definition of a consumer report.  Therefore, moving forward, employers should be able to use third-parties to conduct investigations of workplace conduct without following the FCRA.

This is the last newsletter of 2003.  All of us at HRCentral wish you the happiest of holidays and a very prosperous new year!