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A Better Partnership


Mar 2014
March 13, 2014

The Biggest Employment Litigation Risk You Aren’t Worrying About (But Should Be)

Many people believe the federal Fair Credit Reporting Act (FCRA) applies to them only when taking out a loan or obtaining a copy of their credit report. And many employers, even human resources professionals, are unaware of the important rules governing the hiring process that are contained in the FCRA. But as demonstrated by a nationwide class action filed recently against Whole Foods Markets, failure to understand and strictly comply with the FCRA’s rules governing background checks can lead to high risk and costly litigation. The employment provisions of the FCRA generally apply to any employer who pays an outside agency to provide background checks on employees or applicants. Employers must notify applicants in advance, and in writing, that they will conduct a background check. This must be done in a document that consists solely of this notice. The employer must also get the individual’s written authorization to conduct the background check before it proceeds.

Employers must follow a two-step process if considering any adverse action as a result of the background check (such as rejecting a job applicant, or terminating or disciplining a current employee). First, before actually taking the adverse action, an employer must give the individual in question a “pre-adverse action disclosure.” This disclosure must inform the individual of the pending adverse action  and inform them that it is based, at least in part, on the information obtained in the background check. It must be accompanied by a copy of the actual background check report that was relied upon, as well as a copy of “A Summary of Your Rights Under the Fair Credit Reporting Act” (a document published by the federal government). This notice should also inform them who to contact if the information in the background check is not accurate, and provide them with a reasonable time for correcting any such errors.

Next, assuming there were no errors identified in the background check and the employer still intends to implement its adverse employment decision, the employer must give the individual an “adverse action notice.” This written notice must include:
  • The contact information for the agency that supplied the background check;
  • a statement that the agency did not make the employment decision and cannot explain the reasons for it;
  • a statement that the individual has a right to obtain a free copy of the report from the agency upon request within 60 days;
  • and a statement that the individual has the right to dispute directly with the agency the accuracy or completeness of any information that the agency furnished.

If the employer misses any of these steps or fails to meet all of the technical requirements at any step, it could face a lawsuit in federal court. A successful FCRA plaintiff can recover economic damages such as lost wages or other monetary losses for emotional distress, humiliation, or similar non-economic damages. The law contains automatic statutory damages of $100 to $1,000 per violation, attorney’s fees and court costs and punitive damages. Often the statutory damages and attorney’s fees are the driving force in these cases – they can amount to much more than any actual damages anyone has suffered. This risk is often multiplied because FCRA litigation is often class action litigation. Employers who failed to follow the FCRA requirements with respect to a particular applicant often did so because they lacked proper policies and procedures and were committing the same FCRA violations with respect to all of their applicants.

Employers sometimes get sued under the FCRA because they are simply not doing the things the FCRA requires at all – they were simply not aware of the requirements. In other instances, employers face litigation because they were meeting some, but not all, of the FCRA requirements. This often happens over time, especially if there is turnover in the employer’s human resources department or some employees are not properly trained in the importance of these requirements. In still other instances, employers are making a good faith effort to meet all the requirements, but the forms that they are using are inadequate or contain technical violations. Sometimes this involves failure to include all of the required language in the notices. In other instances, as alleged in the recently filed Whole Foods case, it involves including too much information in the initial notice (violating the requirement that employers provide a document consisting “solely” of this notice). In still other cases, employers may be using outdated forms. Lawsuits have been filed, for example, against employers for using forms that do not contain the correct current address or phone number for the government agencies to contact with FCRA inquiries.

There are several important steps that an employer can take to avoid the high risk of FCRA litigation:
  • Employers and human resources professionals must be aware of the FCRA’s application to the hiring process;
  • they must ensure that the employer has a good process in place to properly conduct background checks;
  • and ensure that recruiters or others involved in hiring or promotion decisions are trained regarding these matters and understand the consequences of failure to comply.

Employers must also ensure that they have the right forms in place for every step in this process, including the most up to date legal requirements and including neither too much nor too little information. Finally, employers with the correct forms and processes should audit their compliance. They should ensure that they are routinely using these forms and retaining copies of them to prove compliance should litigation arise. Employers need to ensure that all involved in hiring or promotion decisions are in compliance and that compliance is occurring at all company locations. Employers who fail to comply with these FCRA requirements could face costly class action litigation.  

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