The Fair Credit Reporting Act Part 1: How the Right Procedures Can Protect Your Organization

Before we dive in, a quick disclaimer. Praesidium does not provide legal advice. This information is for educational purposes only. Do not misconstrue this content as legal advice, express or implied. Obtain legal counsel as appropriate regarding your HR practices and compliance with state and local law.

This introduction to the FCRA will cover your obligations as an employer regarding background checks. It is not comprehensive and should not be used as your only source of information.

What is the FCRA?

The Fair Credit Reporting Act (FCRA) was enacted in 1970 to protect “consumers.” A “consumer” in the FCRA is the subject of a background or credit check, not just someone who purchases or consumes goods or services.

The purpose of the FCRA is to protect said “consumers” by regulating reporting agencies and the people who use those reports. It covers consumer credit reports, loans and extensions of credit, and employment background checks.

Enforcement

The FCRA is enforced by the Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB). These federal bodies can impose penalties for non-compliance in consumer-related behavior.

Violations of the FCRA can bring statutory penalties of $100 to $1000 for each violation. Penalties can be imposed up to five years from the date of occurrence or two years from the date the offense is known.

On top of those fines, the FCRA allows victims of violations (consumers) to recover punitive and compensatory damages. Those damages can easily reach millions of dollars in class action suits.

Roles

Other than consumers (the subjects of the background and credit checks), there are end users, credit reporting agencies (CRAs), and background check companies.

End users are the employers or other entities who are requesting and using consumer reports. CRAs and background check companies are the organizations that perform credit checks and background checks for their clients, the end users.

End User (Employer) Obligations

In this article, we’ll address the obligations of the employer regarding the FCRA, specifically regarding the background screening process for potential hires and employees.

Permissible Purpose

The first thing you must do before requesting any consumer report is establish a permissible purpose. You must have a reason for the request permitted under the FCRA, and you cannot request consumer information outside of your permissible purpose.

Employment purposes, like recruiting and retaining, are permissible for current applicants and employees. Ensure your rosters are up to date when requesting updated background checks on staff. Running a background check on a former employee could land you in hot water.

Just like the term “consumer,” the term “employment” covers more than the traditional definition. In this context, it covers independent contractors, agents, volunteers, staff, and applicants. The FTC says the term “is interpreted liberally” and “may apply to… individuals who are not technically employees.”

FCRA Disclosure and Authorization

Now that you have a permissible purpose, you need authorization, which requires a particular disclosure.

These disclosures are the most litigated aspect of the FCRA because the regulations are so specific and often disregarded.

• You must provide a CLEAR and CONSPICUOUS written notice.
• The written notice must consist SOLELY of the disclosure to the applicant.
• You must retain the written authorization of the subject of the report before requesting.

Many related lawsuits focus on extraneous information on disclosure forms, like waivers and notices. These extra bits of information have spurred class action suits with settlements in the millions. Most recently, in February 2023, O’Reilly Auto Parts paid a settlement of just under $1 million.

State Disclosure and Authorization

As an employer, you’re on the hook for more than FCRA regulations.  Some states have their own requirements regarding background check disclosure. Even if your state doesn’t have additional regulations, including all notices is a good idea. Your candidates could be located in areas with additional requirements.

Update your forms regularly to stay in sync with new regulations and interpretations.

Ban-the-Box Laws

Over the past decade, a movement has gathered steam across the US seeking the removal of the criminal history question from the initial job application. By pushing the question to a later point in the application process, advocates hope to eliminate biases against candidates with a criminal history.

Ban-the-Box laws at state, county, and city levels are all unique. In some places, you can’t ask about criminal history until an offer of employment is made, some after the initial job interview and areas in-between. You might even be prohibited from mentioning the criminal background check in job listings. Depending on your location, the format of your question might also be dictated.

The Equal Employment Opportunity Commission recommends that you only ask about convictions that would exclude the applicant from the specific position.

You can get an idea of your local regulations from the National Employment Law Project’s overview. Consult a legal specialist for confirmation.

Rejecting an Applicant Based on a Background Check

If you turn down an applicant for employment, promotion, retention, or raise based on background check results, you have to be very careful in handling the situation.

Check out Part 2 of our FCRA coverage to learn your obligations regarding adverse decisions as well as tips on how you can establish a procedure that protects your business.