Employers Must Comply with Detailed Requirements When Having a Third Party Perform Background Checks

Q: Are there certain rules an employer must follow when conducting background checks on employees and prospective employees?

A: The Fair Credit Reporting Act (“FCRA”) is an often overlooked federal law that imposes stringent technical requirements on employers wishing to procure a “consumer report” from a third party “consumer reporting agency” for hiring or other employment purposes. Individual FCRA lawsuits and class actions are on the rise and failure to comply with the FCRA can result in harsh financial penalties.  This blog post provides a brief overview of the FCRA.

The FCRA’s definition of a “consumer report” is quite broad and includes, but is not limited to, credit reports, criminal history reports, and driving records obtained from a “consumer reporting agency.” Nearly every third party background check provider will qualify as a “consumer reporting agency” under the FCRA.  Before obtaining a consumer report to be used for employment purposes, employers are required to provide applicants and employees with a written disclosure stating that the employer plans to conduct a background check and employees/applicants must provide written authorization for the employer to obtain a consumer report prior to the employer actually obtaining the consumer report. The disclosure and authorization must be in a stand-alone document and cannot be part of the employment application.

After obtaining a consumer report, but prior to taking any adverse action based on the consumer report (e.g., not hiring an applicant because of her criminal record), the employer must provide an applicant with a “pre-adverse action” notice that includes a copy of the consumer report at issue and written notice of an applicant’s rights under the FCRA. The purpose of this requirement is to give the applicant the opportunity to correct any wrong information in a consumer report prior to the employer taking adverse action. Although the FCRA does not specify how long in advance the pre-adverse action notice must be given prior to taking adverse action, a period of at least five (5) business days generally is considered appropriate.

If an employer eventually decides to take adverse action, the employer must provide oral, written, or electronic notice of the adverse action and provide the applicant with certain information required by the statute. Although a written adverse action notice is not required by the FCRA, it is a good business practice to provide written notice so that documentation of compliance with FCRA requirements is available in the event of litigation.

A willful violation of the FCRA can result in statutory damages of $100 to $1,000 per violation, punitive damages and attorneys’ fees. Even if an employer is merely negligent in violating the FCRA, an applicant can still sue for any actual damages plus attorneys’ fees.

Before conducting any employment-related background checks or taking any adverse action based on a consumer report, be sure to also consult local and state laws. Certain states (such as California) have requirements in addition to those imposed by the FCRA. In addition, certain states restrict an employer’s use of the results of a background check. For example, Pennsylvania law only permits employers to consider criminal convictions “to the extent to which they relate to the applicant’s suitability for employment in the position for which he has applied.”

Employers should consult with legal counsel before implementing any type of background check program.

–Lee Tankle

Employers Must Utilize New Fair Credit Reporting Act (FCRA) Summary of Rights Form

Q: My company uses a third-party vendor to conduct background checks on prospective employees.  We heard there is a new model for the “A Summary of Your Rights Under the Fair Credit Reporting Act” notice.  Should we be using it?

A: Yes.

The Fair Credit Reporting Act (FCRA) establishes strict procedures that employers must follow when obtaining background check reports on applicants or employees from a third party “consumer reporting agency.” The FCRA requires employers to provide written disclosures to and seek affirmative consent from applicants and employees before procuring these types of background check reports.

The FCRA also imposes requirements on employers to provide notices to applicants and employees whom the employer intends to not hire, terminate, or demote based upon the results of a background check report. In complying with these notice requirements, employers are required to give applicants and employees a description of their rights under the FCRA.

The Consumer Financial Protection Bureau (CFPB) is responsible for enforcing certain aspects of the FCRA, and publishes a model notice entitled “A Summary of Your Rights Under the Fair Credit Reporting Act” that most employers utilize to comply with the FCRA.

Earlier this year, Congress adopted legislation called the Economic Growth, Regulatory Relief, and Consumer Protection Act. This law requires nationwide consumer reporting agencies to provide “national security freezes” free of charge to consumers, which restricts prospective lenders from obtaining access to a consumer’s credit report, thereby making it harder for identity thieves to open accounts in the consumer’s name.

The newly enacted law requires that whenever an applicant or employee (“consumers” for purposes of the FCRA) is provided a summary of their rights under the FCRA, they must also be informed of the new right to a security freeze.

Earlier this month, the CFPB released a new model “A Summary of Your Rights Under the Fair Credit Reporting Act” notice, which incorporates information about consumers’ right to a security freeze. The new form (“Summary of Consumer Rights”) can be found here. As this new form went into effect on September 21, 2018, employers should begin utilizing the new form immediately.

If you have any questions or concerns about the new form or your business’s compliance with the Fair Credit Reporting Act, please contact any member of the Pepper Hamilton Labor and Employment team.

–Lee Tankle

Important Additions to NYC’s Fair Chance Act Limit Employers’ Ability to Perform Background Checks

Q: What do I need to know about the recent additions to New York City’s law about the use of criminal history in employment decisions?

A: While the New York City Fair Chance Act (“FCA”) has been in effect since October 2015, the New York City Commission on Human Rights (“Commission”) recently enacted final rules, which clarify many aspects of the law.  The final rules went into effect on August 5, 2017.

The key provision of the FCA prohibits employers from inquiring about an applicant’s criminal history until after a conditional offer of employment has been made. The final rules explain the meaning of a conditional offer, and clarify the steps an employer must take before revoking a conditional offer or taking an adverse employment action.

A conditional offer is defined as an offer of employment, promotion, or transfer. It is essential for employers and all relevant decision makers to understand that the FCA’s provisions cover far more than just an initial offer of employment – they also cover promotions and transfers.  The FCA provides that a conditional offer can only be revoked based on one of the following:

  • The results of a criminal background check (in which case the “Fair Chance Process” must be followed); or
  • The results of a medical exam, as permitted by the American with Disabilities Act; or

Other material information the employer could not have reasonably known before making the conditional offer if, based on the material information, the employer would not have made the offer.If an employer wishes to rescind a conditional offer based on a criminal background check, the employer must follow the “Fair Chance Process,” which is described in section 8-107(11-a) of the New York City Administrative Code. This includes providing the applicant with a copy of the background check report and an analysis of the factors that went into the decision (the list of acceptable factors is in Article 23-A of the New York State Correction Law), and allowing the applicant to address the criminal history at issue before the offer is rescinded. A sample notice approved by the Commission is available here:

http://www1.nyc.gov/assets/cchr/downloads/pdf/FairChance_Form23-A_distributed.pdf.

The final rules also added a number of per se violations. Engaging in such action is considered a violation regardless of whether the employer takes an adverse action against an employee. Fines for per se violations range from $500 to $10,000, depending on the facts and whether the employer has previous FCA violations. Per se violations include making any inquiry or statement about an applicant’s criminal history before a conditional offer is made, and using applications that require applicants to consent to a background check and/or provide information about criminal history. The use of such applications is a violation even if the application contains a disclaimer that states New York City applicants should not answer certain questions. This prohibition is quite unusual and runs counter to many employers’ practices of using nationwide or multi-state employment applications.To ensure FCA compliance, employers should review their existing policies and practices, and ensure key personnel are up to date with the FCA requirements. Employers should consult a labor and employment law attorney with any questions.

— Jessica Rothenberg