FCRA Compliance: What You Need to Know

FCRA Compliance: What You Need to Know

By Jennifer Gladstone

“FCRA” is the abbreviation for the “Fair Credit Reporting Act”. This federal law was enacted in 1970 and was originally designed to help consumers resolve inaccuracies in their credit reports.

In 1996, the scope of the FCRA was expanded to include other reports about consumers, including background reports prepared for employment screening purposes. FCRA Compliance is mandatory for any employer using a third party to conduct background checks.

What is FCRA Compliance?

FCRA compliance is designed to protect consumers. The FCRA regulates employers that use background reports and the Consumer Reporting Agencies (CRAs) (aka background screening companies) that provide the information.

The FCRA applies anytime an employer obtains a background check for employment purposes from a third party. These reports could include criminal history, employment and education verifications, motor vehicle reports, health care sanctions and professional licenses. It is important to note that while the word “credit” appears in the name of the law, it applies to background reports regardless of whether or not the report includes credit information.

Compliance with the FCRA is the responsibility of both the employer and the background screening company.

Employers must make sure they disclose that they are going to conduct a background check and get written authorization. They must also follow strict adverse action procedures if they make an employment decision based on negative information in the report.

Compliance from the CRA’s point of view means having procedures in place to make sure the reports are as accurate as possible while following all state and federal reporting guidelines.

Note: The FCRA also applies in other situations, such as background reports for tenant screening. This blog addresses the FCRA only in the employment context.

To understand the FCRA, one needs to know some of its jargon. Among the most important terms:

  • Consumer Report – The background report, which is often called a “background check.” A Consumer Report contains only factual information such as dates of employment, criminal records, and driving history.
  • Investigative Consumer Report – Also a background report, but unlike a Consumer Report, includes information obtained through personal interviews. Discussing employment performance, for example, is a personal interview. A personal or professional reference check is another example of a personal interview.
  • Consumer Reporting Agency – The background screening company preparing the background report; often referred to as a “CRA.”
  • Consumer – The person who is the subject of the background report. In the employment context, this could be an applicant for employment, a current employee, a contractor, temporary worker, or even an unpaid volunteer.
  • User – The person requesting and using the background report. The user is the typically the employer or prospective employer. The user could also be an organization, such as a non-profit or a school district.
  • Disclosure – The document used to inform the consumer s/he may be the subject of a background report.
  • Authorization – The document signed by the consumer in which s/he authorizes preparation of the background report.
  • Adverse Action – The process that must be followed when an employer is considering a negative employment decision based, in whole or part, on the background report.

Why do Employers Need to be FCRA Compliant?

Not following FCRA Compliance can be a costly mistake. The FCRA requires an employer (when obtaining background reports from a third party) do very specific things during the initial employment process. Employers are frequently sued in federal court for alleged failure to meet these FCRA requirements. In June of 2016 alone, 409 FCRA lawsuits were filed.

Litigation is costly to employers in terms of time, legal fees, financial settlements, brand damage, and distraction from business goals. Examples of financial settlements include:

FCRA Compliance Graphic

Another reason for caring is competition for talent. A compliant background check process from start to finish is a positive experience for the candidate or employee. It demonstrates the employer is serious about its legal responsibilities and places value on individuals. It also helps prevent the inadvertent loss of a valuable prospect or employee.

How to Perform an FCRA Compliant Background Check

FCRA compliance is required for any employer that partners with a background screening company to conduct pre-employment checks.

Ironically, some of the simplest requirements of the FCRA are most often mishandled and become the basis of litigation. Here are the top compliance issues employers should be aware of:

Disclosure – Before requesting a background report from a CRA, the employer must inform the subject a background report may be obtained. The content and format of the disclosure is extremely important. The disclosure must be written, in a standalone document, and include only disclosure language. It should not, for example, be part of an employment application or buried in an information packet.

Furthermore, the language of the disclosure should include only the disclosure; meaning, it must not contain any extraneous information. “Extraneous” may cover a wide range of topics such as company benefits, on-the-job conduct, and drug-free workplace. Especially problematic – and the basis of much class action litigation – is including a waiver of liability in the disclosure language.

Authorization – Before requesting a background report from a CRA, the employer must obtain the subject’s written consent. (Electronic signatures in compliance with E-SIGN requirements are acceptable.)

The FCRA does not require specific language, only specific content and format. Whether separate documents or combined, the language of the disclosure and authorization must be clear and conspicuous. It should be very, very obvious to the reader that s/he may be the subject of a background report and s/he is authorizing preparation of the background report.

Note: Some states have specific content requirements in addition to those of the FCRA.

Adverse Action – Any time an employer is considering a negative employment action – not hiring, not promoting, not retaining – based in whole or part on information in a background report, the employer must follow the multi-step FCRA adverse action process.

  1. Notify the applicant that an adverse decision is being considered. Then, provide the federal summary of rights as well as a copy of the report. Inform them that they may dispute the report. Be sure to give a specific and reasonable amount of time to initiate the dispute.
  2. Wait. You should not make any decisions during the time allotted to the applicant to contact the CRA and dispute the report.
  3. After the allotted time has passed, if you make an adverse decision, you must notify the applicant again. This time you will explain the action being taken, provide the contact info for the CRA that did the report, a statement that the CRA did not make the decision, as well as statements informing them they can get another copy of the report and may still dispute its contents.

Compliance in background screening is complicated, and the FCRA is the “elephant in the room.” Employers cannot afford to ignore it. The good news is the highest risk elements of the FCRA are the easiest with which to comply. Employers need a well-crafted screening program, ongoing auditing, and an expert screening partner.

About the Author

Jennifer Gladstone

Jennifer Gladstone

Jennifer Gladstone is a news anchor and journalist with more than 20 years of experience in front of the camera. She's worked in several markets, large and small, and has performed nearly every task needed in a newsroom. As EBI’s Screening News Editor, she keeps EBI’s customers and blog subscribers up to date on the latest screening news and legislative alerts affecting companies of all sizes.

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