Adverse action is a requirement of the Fair Credit Reporting Act, or FCRA. The FCRA governs how the information for consumer reports is collected and the steps employers must take if they make an adverse decision based on information gathered by a third party background screening company. These companies are known as Consumer Reporting Agencies (CRAs).

What is Adverse Action?

Adverse action is the series of steps an employer must take if they make a decision to not hire, not promote, or to fire someone based on negative information on their consumer report. It also points out the applicant’s right to dispute the contents of their consumer report.

Along with the FCRA, the Equal Employment Opportunity Commission (EEOC) also comes into play when making adverse employment decisions. Guidance issued by the EEOC in 2012 recommends that employers conduct “individualized assessments” when negative information shows up on a consumer report.

The Commission says employers should consider the nature and gravity of the offense, how much time has passed since the offense or the completion of the sentence, and if the offense has any relevance to the job that is being sought. Only then should they decide to take adverse action.

Taking Adverse Action: Three Steps

Step 1: Pre-Adverse Action Letter

Before making any employment decision based on the contents of a consumer report, you must do something called pre-adverse action. Pre-adverse action involves informing the applicant or employee that information in their report may be used to make an adverse employment decision.

In addition to this notification letter, you must:

1. Give the applicant or employee a copy of the report.
2. Give the applicant or employee a “Summary of Your Rights Under the FCRA”.
3. Allow a reasonable amount of time for the person to correct any mistakes and to file a dispute if necessary.

Step 2: Waiting Period

It’s absolutely essential that you give the applicant adequate time to make sure they receive your pre-adverse action notification and have time to contact the CRA to dispute and/or correct any inaccuracies on their consumer report. The Federal Trade Commission (FTC) recommends giving an applicant 5 business days, though that is not required by law. Some local jurisdictions have requirements or recommendations, often times in accordance with ban the box laws or fair chance ordinances.

With the prevalence of email taking over where traditional mail used to be the standard, there have been discussions about shortening the window of time between sending out the notice and moving on to Step 3. This is something you would want to discuss with your legal counsel.

During this time, the applicant will have the chance to contact the CRA that prepared the report as well as any court of organization that has reported negative information.

Step 3: Take the Adverse Action and Follow Through

If the applicant doesn’t dispute the report, or if there are not corrections made as the result of a dispute, the employer may then take the adverse action.

1. Send the final adverse action notice telling the applicant or employee that you are taking the action because of information discovered in their background screening report. Make sure everything is clearly stated. Some local jurisdictions may have laws or recommendations that you share what item(s) in the report caused the adverse decision to be made.
2. Provide another copy of their “Summary of Your Rights Under the FCRA”.
3. Provide the name, address and toll-free phone number for the CRA that furnished the report. You must let the consumer know they can contact the CRA to get a copy of the report and to correct any mistakes, but you also need to let them know that the CRA did not make the employment decision.

Why is an Adverse Action Notice Important?

Adverse action is not voluntary. It’s an absolute requirement for employers who use background reports from a CRA. If you do not do every step properly you could find yourself in court. Attorneys are building careers by finding companies making mistakes and violating the FCRA. When they find one thing out of place, they haul employers, big and small, into court.

Usually it makes more sense for the employers to just settle instead of facing years of class action litigation. Those that do go into court often face fines of up to $1,000 for each member of the class on top of punitive damages.

Hopefully this has helped you understand what adverse action means. It’s an essential piece of the hiring puzzle that cannot be skipped or skimped on. It’s critical that employers have a solid system in place because there are several steps and many ways for an employer to get into trouble if adverse action is not handled properly.

We can help simplify the process by automating it through our employment screening platform. You can either use the system to generate required notices, or you can have us manage the entire process.

For more information download our full Employer’s Guide to Adverse Action: