Understanding FCRA Compliance: Navigating the Adverse Action Process

The Federal Fair Credit Reporting Act (FCRA) imposes several obligations on users of consumer reports that are procured for employment purposes, such as the requirement to engage in what is known as the “adverse action process.” Katie Robinson, Senior Corporate Counsel, Global HR Research, a DISA company, recently presented a webinar for DISA covering the FCRA compliance steps and the adverse action process.

Here’s a quick summary of everything she discussed.

Basic Understanding of the Adverse Action Process 

Under this required process, employers must follow certain key steps prior to taking adverse employment action against a consumer based either in whole or in part on the contents of a consumer report. Before understanding the steps of the adverse action process, you must:

• Gain a thorough understanding of the obligations under the Federal Fair Credit Reporting Act (FCRA) for employers.

• Learn the specific steps of the adverse action process in compliance with the FCRA.

• Acquire practical strategies for ensuring FCRA compliance in your organization’s employment practices.

Who Must Participate in the Process? 

The consumer report must have been procured for an “employment purpose,” which is a “permissible purpose” under the FCRA. The employment purposes include traditional employment, volunteers, and independent contractors. Adverse actions also include any negatively impactful decisions that cover the denial of employment or promotion or termination of employment, amongst many others. The adverse action must be based on the contents of a consumer report in whole or in part.

Pre-Adverse Action Notices  

Pre-adverse action notices must be sent before you take adverse action. It must be in writing. There’s no specific text that’s required, but it must include a copy of the Consumer Report and Summary of Rights.

When to Send Adverse Action Notices  

Employers should give a reasonable amount of time between sending the two notices (approximately five business days). This time should be long enough for the consumer to review their report and decide whether to dispute its contents or provide the employer with mitigation or rehabilitation evidence.

It is highly recommended that the adverse action notice be provided in writing, though it’s not technically required by the FCRA. It is required that you include important information, such as the name, address, and phone number of the CRA that supplied the report. It should also include a statement that the CRA did not make the decision to take adverse action against the consumer and is unable to provide specific reasons for the decision and a notice of the right of a consumer to obtain a full file disclosure from the CRA and to dispute the accuracy or completeness of any information included in the report. Again, this must include a copy of the Consumer Report and Summary of Rights.

Potential Pitfalls  

There are a few pitfalls that employers should keep on the lookout for. The first is contracting with a third party to handle this process, which means you hire somebody to handle and send out the letters for you. Employers typically outsource this process to a CRA or a human resources agent, but it is important to understand that these obligations are non-delegable. This means employers can’t avoid liability simply by outsourcing the process, so it’s important to keep tabs on who handles these processes.

The second pitfall involves using a matrix to adjudicate or grade reports. Many employers use this process, but you shouldn’t base your decision solely on the matrix alone. It is highly recommended that you give the applicant an individualized assessment, don’t do pass/fail grading, and don’t use grading as a shortcut for reviewing background reports.

Consequences of Non-Compliance 

Non-compliance with FCRA regulations can lead to various consequences. The statutory damages available under the FCRA, which can include the failure to include certain information in the notice sent or not sending it at all, can lead to $100 to $1000 for each violation. The statute is consumer-friendly and provides damage compensation for the consumer that was due to the violation. The worst-case scenario includes punitive damages for what’s considered “willful violations.” This is when you know that you should be doing something and make the conscious decision not to do it or do it the wrong way. Finally, the statute is especially attractive to the plaintiff’s attorneys, as the statute shifts attorney’s fees if the case is resolved in favor of the plaintiff.

Key Takeaways  

Understanding and adhering to the FCRA's adverse action process is vital for maintaining compliance and treating candidates fairly.

• Sending pre-adverse action notices is vital before you take adverse action.

• Employers must give applicants a reasonable amount of time to review the notice and provide any relevant information to the employer or CRA.

• The adverse action notice can then be sent once you know you’re going to take the action itself.

• Never let your decision matrix give the impression that you collapsed or circumvented the adverse action process.

Make sure that you’re taking every step. By following these guidelines, employers can navigate the complex landscape of consumer reports while ensuring transparency and due process.

Are you an employer and still have questions regarding employment screening?  

DISA can help! Get answers directly from DISA’s subject matter experts with ‘Ask DISA.’

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