August 18th, 2023 | Sterling

Adverse Action Best Practices Under the FCRA

HR and compliance teams have their hands full when trying to keep on top of the latest hiring and screening laws — not the least of which is adverse action. Adverse action is a federally-mandated process employers must follow under the federal Fair Credit Reporting Act (FCRA) when denying employment as a result of a background screen.

For many HR professionals, questions swirl around this complex area of the law. As a common example, let’s say a hiring manager in your company reviewed a candidate’s consumer report and found information which disqualifies them for the role according to your company’s hiring policies. How should your organization notify the candidate in order to remain compliant with the FCRA and to help prevent possible legal liability? Are there any new state or local laws that might apply to your organization’s adverse action policy?

Let’s explore the top questions Sterling has recently received about adverse action, along with answers from Sterling’s own Angela Preston, Associate General Counsel, Corporate Ethics and Compliance. Scroll to the bottom to download Sterling’s Adverse Action Checklist, designed to help you stay compliant with evolving FCRA laws when sending your candidates adverse action notices.

Q: When is adverse action required under the FCRA?

 A: Adverse action is required any time an adverse decision is based in whole (or in part) on a consumer report. Employers should avoid becoming complacent during the hiring process. Adverse action may seem simple in theory, but can be more difficult to implement in practice. Let’s say that your company has an employee or a recruiter who, instead of sending a pre-adverse notice immediately, may have inadvertently had a conversation with a candidate where they disclosed that your company won’t be able to hire them.

Unfortunately, if your organization tells the candidate that they’re not going to be hired, then you’ve already undermined the intention behind the notice, which is to provide due process to dispute. Avoid violating your own process by not having these kinds of sidebar conversations with your candidates. Likewise, you should not call your candidates and tell them that an adverse action notice is on its way. Instead, talk with your legal team to make sure that you’ve got clear processes in place for everyone interacting with your candidates so that you’re not undermining the completion of these regulatory requirements.

Q: When exactly does adverse action apply?

A: Adverse action applies to any type of information given in a consumer report (credit history, employment verification, motor vehicle record, etc.) – that is to say, any adverse information in the consumer report that might disqualify a candidate. However, adverse action only applies if the information was delivered in a consumer report, not in such cases where, for example, the employer gets the information directly from the source, does their own verification, or calls the DMV.

Note that adverse action pertains to anything found in a background screening report, so adverse action is required even if that information is not related to criminal history. For example, the background check may have revealed an employment or educational verification that was problematic. No matter the type of information, if it’s a reason for you not to hire the candidate, then you must start and complete the federal adverse action process. 

Our blog post, “Fair Chance Laws Expand Into Occupational Licensing and Regulated Industries,” has more information about the latest developments in fair chance laws, which regulate how to handle criminal history in the hiring process. We also have compliance resources available to help you address these requirements.

Q: What is the first step in the adverse action process?

A: The first step in the adverse action process is to send your candidate a notice. This initial step comes before you make an adverse hiring decision using information that you (as the employer) found in a background screening report. For example, you may find information which is potentially problematic, and which could potentially disqualify your candidate under your hiring policy.

Note that this first step only applies if you’re obtaining your background screening report from a third party, such as a Sterling background check.

The FCRA requires that employers follow a two-step process before denying employment as a result of adverse information found during a background check: 

1. Send a pre-adverse action notice, informing the candidate that an adverse employment decision may be made based on something in their report. Include a copy of the background check report for the candidate to review and address possible inaccuracies. Inform the candidate of their right to dispute possible inaccuracies.
2. If the candidate does not dispute their findings within a reasonable amount of time or the allotted days, or if their dispute doesn’t result in amendment or change, send the final notice of adverse action indicating that an adverse decision was made. 

You can find all of this compliance information — along with helpful Do’s and Don’ts — in our Adverse Action Checklist. Download the checklist as a helpful compliance tool to help ensure you’re following best practices.

Q: What do you need to include when sending a pre-adverse action notice?

A: In this step, you must notify your candidate that there’s something in their background check that could negatively impact your hiring decision. In the pre-adverse action notice, you must include all of the following: 

• Tell the candidate the above fact
• Include a copy of the report
• Give them notice of their rights under the FCRA
• Send information stating how the candidate can lodge a dispute and how they can contact the background screening company if they believe anything in the report is inaccurate or incomplete 

Also be sure to attach any other state or local notices that are required. Depending on where you are hiring and where the job or the employee are located, you may have additional requirements based on a state or a local ordinance. How should you incorporate different regulatory requirements into your candidate process?

First, you need to ask yourself questions such as: 

• Does a state or local law impact this hire?
• Is there a fair chance or “ban the box” requirement that requires me to add something additional to my notice?
• Do I have to give the candidate additional information? 

After sending your candidate that pre-adverse notice, the candidate now has a chance to take a look at the report and (as stated above) and determine whether or not there’s anything that they believe is inaccurate or incomplete. If so, they may dispute possible inaccuracies, which can result in amendment or change.

Q: Can employers have someone else (for example, a third party) send the notice?

A: You may hire a third party to administrate the required notices on your behalf, but you as the employer are still legally responsible for the form and content. You need to make sure the third party is following the law, since you (as the employer) are still responsible. If you are using a third-party agency, they should provide you with a copy of the report.

Q: If you don’t run a background check until after someone is hired, do you still have to follow adverse action laws?

A: Yes. Adverse action laws apply to any employment-related decision, pre- or post-hire, where adverse information is in a consumer report.

Q: Are employers allowed to email the candidate the notice?

A: Email is acceptable — employers don’t need to use the USPS.

Q: How long should we give the candidate to respond to our adverse action notice?

A: After you’ve sent your pre-adverse notice, you then need to wait a “reasonable amount of time” to allow the candidate their due process. This means it’s their right (if they choose) to be able to file a dispute.

How long should you wait? Generally, the best-practice guidance at the federal level is at least five days. However, some states and cities have their own notice requirements mandating a longer period of time. If that time passes and there is no dispute, you can now move forward to the last step in the adverse action process.

Q: At what point can we send the final notice?

A: Assuming that you don’t hear anything from your candidate, and they haven’t filed a dispute (or you don’t hear from your background screening company informing you that the candidate has filed one), then you’re free to provide your final notice of adverse action.

Q: Can employers also perform an individualized assessment?

A: Yes, if the background report includes criminal history (for example during criminal background checks), the employer can conduct an individualized assessment before making a hiring decision. The EEOC guidance defines individualized assessment to mean that an employer informs the individual that he or she may be excluded because of past criminal conduct; provides an opportunity to the individual to demonstrate that the exclusion does not properly apply to him or her; and considers whether the individual’s additional information shows that the policy as applied is not job-related and consistent with business necessity. In addition to the EEOC guidance in this area, some cities and states require an individualized assessment prior to making a decision about hiring when a person has a criminal record.

Takeaways: How to optimize your adverse action process

Adverse action is a very complex regulatory requirement for compliance professionals to meet, due to the many different state and local laws. Employers can best implement compliance best practices in their employee hiring program by first defining an adverse action policy if they haven’t already, and by conferring with their legal counsel to ensure the policy is accurate and up-to-date.

Are you following best practices? Download our Adverse Action checklist filled with recommended Do’s and Don’ts. Regarding the adverse action process, it can be challenging to keep on top of the latest regulatory developments at the federal, state, and local level. Sterling’s in-house compliance experts are uniquely well-placed to help you stay updated on these evolving regulations. Additionally, because it’s so challenging to stay updated on these evolving regulations, it’s helpful to partner with a background screening provider like Sterling that can provide global compliance expertise.

For ongoing compliance blogs, updates, webinars, and more, visit Sterling’s Compliance Hub and sign up for our Compliance Roundup newsletter.

Sterling is not a law firm. This publication is for informational purposes only and nothing contained in it should be construed as legal advice. We expressly disclaim any warranty or responsibility for damages arising out this information. We encourage you to consult with legal counsel regarding your specific needs. We do not undertake any duty to update previously posted materials.