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Giving notification where it's due.

A recently enacted law designed to expand consumer access to credit reports creates new legal constraints for employers. Under the new law, employers can no longer rely on the simple authorizations contained in the employment application. Instead, separate disclosure and authorization forms must be developed. Adverse action forms and certification forms must be adopted as well and employment applications will require some revision. The company also needs to train managers and human resource personnel on how and when to use the new forms.

To come under the amendments to the Fair Credit Reporting Act (FCRA), which took effect on September 30, 1997, a report must be prepared by a consumer reporting agency, defined under the act as a business that assembles such reports for other businesses. Employers often request these reports as part of a background check on job applicants or existing employees. While some employers only want credit payment records, others want driving records and criminal histories. For sensitive positions, an employer may order investigative reports - documents that include interviews with an applicant's or employee's friends, neighbors, and associates. All of these types of reports are considered consumer reports if they are obtained from an agency that provides such information for a fee.

Job applicants are also typically asked to give business or personal references. Whether verifying such references is covered by the FCRA depends on who does the verification. A reference verified by the employer is not covered by the act; however, a reference verified by an employment or reference checking agency is covered.

Authorization. Under the original act, employers could obtain consumer credit reports and other investigative information without impediment, and simple disclosures in employment applications notifying applicants that the report would be obtained were sufficient to protect against claims of unauthorized use of credit information. With the new amendments, however, employers must provide a "clear and conspicuous disclosure" in writing "in a document that consists solely of the disclosure" stating that a consumer report may be obtained for employment purposes. The applicant must also authorize the employer's access to the consumer report in writing. Both the disclosure and authorization must be completed before an employer requests the report.

A business must certify to the consumer reporting agency that it has made the necessary disclosures and obtained written authorization to order a credit report. The company must also certify that the report is being used only for employment purposes and that the request is in compliance with employment laws. Further, the certification pledges that the company will follow all necessary procedures in the event that information in the report leads to adverse employment action such as discipline, discharge, or rejection of an application.

Employers' obligations are somewhat different with respect to investigative reports. A written disclosure must be used to inform the applicant or employee that an investigative consumer report is being obtained. The form must also state what sort of information will be collected. This disclosure must be mailed or otherwise delivered to the individual no later than three days after the investigative report is requested. The disclosure must also inform the individual that he or she may request additional information concerning the nature and scope of the investigation. Certification must be made to the credit reporting agency that the disclosures have been provided and that a complete written account of the investigation will be made to the individual on request.

Adverse action. Before taking adverse action based on the consumer report, even where the consumer report plays a minor role in the decision, employers must now provide the employee or applicant with a copy of the consumer report and a written explanation of their rights under the FCRA. After taking the adverse action, employers must advise the individual that the action has been taken and provide the name, address, and phone number of the credit bureau that supplied the credit report.

The adverse action notice must make it clear that the credit bureau did not make the decision to take the adverse action. Employers must also inform the individual that he or she can dispute the accuracy and completeness of any information contained in the report. If a consumer requests information, the reporting agency must disclose the contents of the report and the sources of each item.

Under the new law, the consumer reporting agency must correct inaccurate or incomplete information in the consumer report. Upon written request, consumer reporting agencies must reinvestigate the items in question and forward all relevant data to the intermediary who originally requested the information about the individual. When the reinvestigation is complete, the consumer reporting agency must give the consumer the written results and a free copy of any updated reports.

Penalties. Employers face legal consequences if they fail to get an applicant's permission before requesting a consumer report or fail to provide disclosures both before and after adverse decisions are made. The FCRA allows individuals to sue employers for damages in federal court. A person who successfully sues is entitled to recover court costs and reasonable legal fees.

The law also allows individuals to seek punitive damages for deliberate violations. The Federal Trade Commission, other federal agencies, and states may also sue employers for noncompliance.

Investigative firms. One issue that has received attention from industry professionals is whether the language of the new amendment affects criminal background, motor vehicle, and other public records checks often performed through private investigators. The statute's broad definition of an investigative consumer report suggests that it does.

Whether Congress envisioned such a far-reaching application of the law is not yet clear and may not be clarified until official regulations are published or the courts have the opportunity to examine the issue. However, to be safe, employers should follow the notice, disclosure, and authorization procedures when using credit reporting agencies to obtain such information until additional guidance is forthcoming.

The new amendments also affect private security service providers that perform criminal background and other public records searches and access certain investigative data for clients. Because a consumer reporting agency is defined as a company that gathers and sells information about consumers, companies researching lawsuits, arrests, and bankruptcies are covered under the new amendments.

That means that an investigative firm may not supply information about an employee to an employer without first receiving certification that the employee has been properly notified and has provided written consent. The firm must also obtain documentation that the employer will comply with the adverse action procedures if the report is used to make hiring decisions.

Workers' compensation. The broad language used to define an investigative consumer report is interpreted as encompassing routine workers' compensation investigations, which often involve interviews with coworkers and neighbors. Because the amended law requires advance notice to the subject of the inquiry, it could hinder these types of investigations by removing the element of surprise.

Since the Federal Trade Commission (FTC) has taken the position that the FCRA requirements do not apply when an employer directly obtains criminal background and other investigative information about employees, it is possible that the new law could give some large companies an incentive to bring these services in-house.

FTC guidance. The FTC has issued guidelines to shed light on employer duties under the amended FCRA. Following are a few of the hypothetical situations set forth by the FTC, with the commission's advice on how these situations should be handled.

An employer advertises vacancies for cashiers and receives 100 applications. The employer wants credit reports on each applicant and plans to eliminate those with poor credit histories.

The employer can get credit reports by notifying each applicant in writing that a credit report may be requested and obtaining the applicant's written consent. Before an employer rejects an applicant based on report information, it must disclose a copy of the report and the summary of consumer rights under the FCRA. Once the applicant has been rejected, the employer must provide an adverse action notice if the report information played a part in the decision.

An employer is considering a number of long-term employees for a major promotion. The employer wants to check their consumer reports to ensure that only responsible individuals are considered for the position.

The employer must first notify the employees that reports will be obtained, and it must then receive their written permission. If the employees gave written permission in the past, the employer need only make sure that the employees have received a notice in a separate document stating that reports will be obtained during the course of their employment. No additional notice or permission is required.

In each case where information in the report influences the decision to deny a promotion, the employer must provide the employee with a disclosure as described above. The employee must also receive an adverse action notice once the employer has selected another individual for the job.

A job applicant gives the okay to get a consumer report. Although the credit history is poor, the applicant's lack of relevant experience carries more weight in the company's decision not to hire that person. Does the employer have additional responsibilities?

In any case where information in a consumer report is a factor in a decision - even if the report information is not a major consideration - the employer must follow the procedures mandated by the FCRA.

The full text of the FtC guidelines, titled "Using Consumer Reports: What Employers Need to Know," along with other FTC documents relating to the FCRA, can be obtained through Security Management Online.

Daniel Cohen is a shareholder with the law firm Charfoos, Reiter, Peterson, Holmquist, and Pilchak, PC, of Farmington Hills, Michigan. He specializes in labor and employment law.
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Title Annotation:includes related article on timeliness of records; amendments to Fair Credit Reporting Act
Author:Cohen, Daniel
Publication:Security Management
Date:Mar 1, 1998
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