The Fair Credit Reporting Act: Why background checks are fueling the latest wave of class actions

Many employers have third-party services run background checks on applicants, new hires, or existing employees. Many of these employers utilize these services to minimize the risk of claims of negligent hiring or discrimination. Even if a reputable service is used, there are challenges and significant legal risks involving the failure to comply with the federal Fair Credit Reporting Act (FCRA). Employers that violate the FCRA may be liable for actual damages sustained by individual applicants, statutory damages ranging between $100 and $1,000 per individual violation, punitive damages, and plaintiffs’ attorneys’ fees and costs. As a result, the FCRA is the source of one wave of class actions sweeping the country, a wave fueled by statutes that favor both plaintiffs (who need not even show they were harmed by a violation in order to file a lawsuit) and their attorneys, and recent headlines announcing million-dollar settlements.

Background

The FCRA has very specific requirements that employers must follow when obtaining consumer reports from third-party services and using those consumer reports to make decisions regarding applicants and employees. A “consumer report” can include a wide variety of information, including things like motor vehicle reports, credit checks, general reputation or personal characteristics, and criminal background checks.

The FCRA requires that an employer provide a written, “clear and conspicuous” disclosure to an individual that a consumer report may be obtained and used for employment purposes. The notice must be in a stand-alone format. The FCRA requires that the individual provide written authorization for a consumer report to be obtained. Only after proper disclosure and authorization may an employer obtain a consumer report.

The FCRA also has procedures that must be followed if an adverse action (such as a refusal to hire, denial of a promotion, or termination) is going to be taken against an individual based in whole or in part upon the results of the background check. Before the adverse action is taken or finalized, the employer must provide the individual with a pre-adverse action notice, a copy of the consumer report obtained, a “Summary of Rights” form (which can be obtained from the Federal Trade Commission website), and a reasonable amount of time to dispute any inaccurate information in the report with the reporting service. Only after this step can the employer provide a notice of adverse action to the individual, informing him or her of the action taken and the basis for the action taken. This notice must also include additional information to enable the individual to learn more about the information contained in the report. FCRA violations – and resulting lawsuits – often arise because of problems with the employer’s online application process, its paper application form, the absence of adequate communication prior to an adverse hiring decision, undetected inaccuracies in the reports, and a host of other pitfalls.

The class action landscape

In the last few years, there has been a dramatic increase in the volume of litigation filed under the FCRA, particularly class actions. And because defendants’ violations tend to be systemic and easy to prove, the number of settlements and dollars paid has likewise escalated incredibly. The “club” of employers recently resolving class or collective actions includes Swift Transportation ($4.4 million), Dollar General ($4.08 million), K-Mart ($3 million), Domino’s Pizza ($2.5 million), U.S. Xpress ($2.75 million) and Home Depot ($1.8 million).

Just this month, Dollar Tree Stores, Inc. was named as a defendant in an FCRA class action in Florida federal court. The lawsuit includes a proposed nationwide class based on allegations that applicants failed to receive proper disclosures and the disclosures provided were not proper stand-alone disclosures. Specifically, the plaintiff alleged the disclosures included waivers of liability, which, if true, would amount to a clear violation of the FCRA and its regulations. The lawsuit seeks to proceed as a class of all applicants over the past five years who were subjected to consumer reports. This case is just the latest in a line of many similar cases, including cases against companies such as Michaels Stores Inc. and Whole Foods Market Group Inc.

What employers should do:

If you contract with a third-party service to obtain pre-employment background checks on applicants or course-of-employment reports on existing employees, we urge you to conduct an audit (preferably under the direction of counsel) to be sure you are fully in compliance with the FCRA. Here are some tips and things to look for:

  1. Know your background check company and background check them
    Make sure you hire a reputable company and don’t assume the forms they provide you are compliant with the law. Double check them and ensure they are. Absent a contractual obligation from the third-party service, employers remain liable to the applicant/employee for any violations of the FCRA.
  2. Make sure your disclosure is a stand-alone document
    The disclosure must be in a document that consists solely of the disclosure and the authorization. Countless “form” FCRA disclosures include waivers of liability that violate the law. Employers also routinely include them on applications for employment, which is also a violation of the FCRA. As an additional requirement in Oklahoma, the form must have a box that applicants or employees can check to receive a copy of their consumer reports if they want to do so.
  3. Train your personnel
    The FCRA requires that certain steps and actions be taken prior to terminating an employee or rescinding a job offer to an applicant. It is imperative that employers train their employees on FCRA requirements. Keep in mind that the Equal Employment Opportunity Commission and various states agencies are very active in ensuring that employers aren’t using background reports to discriminate unlawfully.