Business owners and HR professionals who have ever applied for a mortgage loan are probably familiar with the complex forms provided by banks in connection with obtaining a credit report. To the great surprise of many employers, the federal Fair Credit Reporting Act (“FCRA”) often requires employers to utilize similar types of notices, forms, and disclosures when obtaining criminal or other background check reports on job applicants and employees.
Because many employers inadvertently violate the FCRA when conducting background checks of job applicants and employees, they have become easy targets for class action litigators who are able to bring these cases on behalf of large numbers of job applicants and employees on a “class action” basis. This article will walk through the FCRA’s requirements as applied to employers and also discuss Minnesota’s state law counterpart to the FCRA. By updating their hiring practices with the assistance of a Minnesota employment law attorney, Minnesota employers can greatly reduce the risk of becoming a target for FCRA class action litigation.
What Is the FCRA?
The FCRA is a federal law, codified at 15 U.S.C. § 1681 et seq., governing the use of consumer information obtained by consumer reporting agencies (“CRAs”), employers, and other entities. Although the Federal Trade Commission (“FTC”) was initially responsible for enforcing the FCRA, the newly created Consumer Financial Protection Bureau (“CFPB”) has since become the primary enforcer of the FCRA.
How Does the FCRA Apply to Employers?
In the employment context, the FCRA becomes particularly important during the hiring process if the employer relies upon a third party to conduct a criminal, credit, financial, or personal background check of a job applicant. Many employers rely upon third party background check firms to conduct a background check and prepare what constitutes a “consumer report” under the FCRA, thereby triggering the FCRA’s requirements. As a result, employers who rely upon third parties to conduct pre-employment background checks are subject to certain FCRA requirements. The FCRA also applies to employers who obtain such consumer reports for current employees.
What Is a “Consumer Report” Under the FCRA?
The FCRA defines a “consumer report” as “any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used . . . in establishing the consumer’s eligibility for . . . employment purposes.” 15 U.S.C. § 1681a(d).
As is apparent from the definition, a “consumer report” is not limited to consumer-related information. Thus, the term “consumer report” may be somewhat of a misnomer. When employers request a consumer report from a CRA, they often request information such as criminal and civil records, driving records, bankruptcy filings, and civil lawsuits. Because such information often bears on the individual’s credit worthiness, character, and general reputation, these reports often fall under the FCRA.
What Is an “Investigative Consumer Report” Under the FCRA?
In addition to seeking a written report based on court, government agency, and other public records, some employers may request that the CRA obtain information about an applicant’s character, general reputation, personal characteristics, or mode of living through personal interviews with the applicant’s acquaintances. When this is the case, the report the CRA provides to the employer is referred to as an “investigative consumer report.” 15 U.S.C. § 1681a(e). Because of the somewhat intrusive nature of personal interviews with an applicant’s friends, neighbors, and acquaintances, employers have additional obligations under the FCRA when requesting and using investigative consumer reports.
What is a “Consumer Reporting Agency” in the Employment Context?
The FCRA defines a “consumer reporting agency” or a “CRA” as “any person which, for monetary fees, dues, or on a cooperative nonprofit basis, regularly engages in whole or in part in the practice of assembling or evaluating consumer credit information or other information on consumers for the purpose of furnishing consumer reports to third parties . . . .” 15 U.S.C. § 1681a(f) (emphasis added).
The definition of a CRA is incredibly broad. Because the definition of a CRA includes third parties who furnish not only credit information, but any “other information on consumers,” and because third party background firms typically assemble and evaluate such information for a fee, most third party background check firms are covered by the FCRA’s definition.
Prior to engaging a background check firm or agency to prepare reports on job applicants and employees, employers should determine if the entity is a CRA as defined under the FCRA and proceed accordingly.
What are the Employer’s Obligations Before Obtaining a Consumer Report?
Due to the breadth of information included in consumer reports and the potential impact such information can have on hiring decisions, employers are obligated to take the following steps before obtaining a consumer report:
First, the employer must certify to the CRA that it will:
- Use the information for employment purposes only;
- Not use the information in violation of any federal or state equal opportunity law;
- Obtain all necessary disclosures and consents from the applicant;
- Provide the applicant with the appropriate notices in the event that adverse action is taken against the applicant based, in whole or in part, on the contents of the consumer report; and
- Provide additional information required by law if an investigative consumer report is requested.
Second, the employer must provide the applicant with clear and conspicuous written notice that a background report may be requested and used in employment decisions. The employer must also obtain the applicant’s written authorization. The notice and authorization form must be provided to the applicant in a document separate from the employment application.
What are the Employer’s Obligations After Obtaining a Consumer Report?
Employer Must Send Pre-Adverse Action Notice
If after obtaining a consumer report, the employer decides not to hire the applicant based—in any way—upon that report, then the employer has additional requirements under the FCRA. Prior to taking any adverse action, the employer must provide a “Pre-Adverse Action Notice” to the applicant consisting of the following:
- A copy of the consumer report that the employer used to make its decision; and
- A written description of the applicant’s rights as outlined by 15 U.S.C. § 1681g(c). The CFPB has created a form for this purpose—A Summary of Your Rights Under the Fair Credit Reporting Act.
See 15 U.S.C. § 1681b(b)(3)(A).
Once these documents are provided to the applicant, the applicant must be given sufficient time to review the report and contact the CRA to dispute or explain any inaccurate information contained in the report before the employer’s adverse action decision becomes final. Unfortunately, the FCRA does not specify exactly how long employers must wait before finalizing an adverse action decision.
In a fairly recent Minnesota case, Johnson v. ADP Screening & Selection Services, Inc. , 768 F. Supp. 979 (D. Minn. 2011), the Minnesota federal district court discussed how long an employer, after having sent a pre-adverse action notice to the applicant, must wait before actually taking the adverse action. While the court did not set a bright-line rule for every employer, it held that, on the facts of the case before it, an employer who waited 14 days before taking adverse action was in compliance with the FCRA. Id. at 984. The court further stated that 14 days provided the applicant “ample opportunity” to dispute the contents of the report. Id.
While 14 days was a sufficient amount of time to wait before taking adverse action under the particular facts of the Johnson case, there is no guarantee that 14 days will be deemed adequate in all situations. Thus, when possible, Minnesota employers should wait at least 14 days – but ideally longer – before taking adverse action after sending the adverse action notice. Employers who wait more than 30 days will be in an even better position, because this will give the job applicant or employee an opportunity to dispute the accuracy of the report and allow the CRA to respond to the individual’s objections, something the CRA must do within 30 days.
Employer Must Send Adverse Action Notice
If, after providing the applicant with the proper information and sufficient time to respond to the consumer report, the employer intends to make the hiring decision final, the employer must send the applicant a “Notice of Adverse Action” and inform the applicant that the employer has made a final decision.
The Notice of Adverse Action must include the following:
- An explanation that the decision not to hire was based in whole, or in part, on the information in the consumer report;
- The name, address, and telephone number (including a toll-free telephone number) of the CRA that provided the information to the employer;
- A statement that the CRA did not make the decision to take adverse action and cannot provide the applicant with specific reasons as to why adverse action was taken;
- A statement that the consumer may request a free copy of the consumer report from the CRA by requesting it within 60 days (pursuant to 15 U.S.C. § 1681j); and
- A statement that under 15 U.S.C. § 1681j, the consumer may dispute any information in the report with the CRA. If a copy of the consumer report is requested, a copy of the document, “A Summary of Your Rights Under the Fair Credit Reporting Act” must be included.
See 15 U.S.C. § 1681m(a).
What Additional Obligations Arise Under Minnesota’s Fair Credit Reporting Act?
In addition to federal law, employers must also be cognizant of any applicable state laws when conducting pre-employment background checks. Many states, like Minnesota, have enacted state versions of the FCRA.
Like the federal law, Minnesota’s Fair Credit Reporting Act requires employers to provide notice to applicants if the employer is going to obtain a consumer report as a part of the hiring process. The disclosure to the applicant must be in writing and be provided before the employer obtains the consumer report. Minn. Stat. § 13C.02, subd. 2.
One significant difference between the FCRA and Minnesota’s Fair Credit Reporting Act is that under Minnesota law, the notice must be included in or accompany the employment application and must include a box where the applicant can indicate whether or not he or she would like to receive a copy of the consumer report. Minn. Stat. § 13C.02, subd. 2.
Further, under the Minnesota Fair Credit Reporting Act, if the applicant requests a copy of the report, the employer must notify the CRA, and the CRA must send a copy of the report to the applicant, free of charge, within twenty-four hours of providing the report to the employer. Minn. Stat. § 13C.02, subd. 2.
Minnesota’s law also provides the applicant with the right to make a written request to the CRA for additional information about the report. If the applicant makes such a request, the CRA must send written disclosure of the nature and scope of the report to the applicant within five days after receiving the applicant’s request or the consumer report was requested, whichever date is later. Minn. Stat. § 13C.02, subd. 3.
Lastly, like the FCRA, Minnesota law requires employers to provide applicants with notice of adverse action if the adverse action is taken “wholly or partly” based on information in the report. Minn. Stat. § 13C.03.
The notice must state that the applicant has a right to receive a copy of the report (if a copy was not received pursuant to Minn. Stat. § 13C.02, subd. 2). Minn. Stat. § 13C.03. If a copy of the report is requested, the CRA has to provide the applicant with a free copy of the report within five days. Id. The notice must also include the name and address of the CRA and an explanation of the applicant’s right to dispute and correct errors in the report. Id.
Why Are Employers Targets for FCRA Class Action Lawsuits?
Because of the nature of FCRA violations, FCRA lawsuits are particularly attractive to class action litigators. For instance, many class action FCRA cases are brought against large companies because these companies are likely to have more applicants, and thus, more people affected by hiring procedures that violate the FCRA. When these cases are filed as class action lawsuits, the amount of damages that an employer, if liable, would have to pay adds up rather quickly. As such, FCRA violations, when litigated on a large scale, can be extremely costly for employers.
Why Types of Damages Are Available to Plaintiffs Under the FCRA?
The types of damages available to plaintiffs vary depending on whether the employer’s conduct constituted “negligent noncompliance” or “willful noncompliance” with the FCRA. An employer who negligently violates the FCRA may be liable for actual damages and the plaintiff’s reasonable attorney’s fees. 15 U.S.C. § 1681o(a).
If, however, an employer’s violation of the FCRA is determined to have been “willful,” a plaintiff may recover actual damages of at least $100.00 but not more than $1,000.00, reasonable attorney’s fees, and punitive damages. 15 U.S.C. § 1681n(a).
Because willful violations allow a plaintiff to recover $100.00 to $1,000.00 for a violation, it is easy to see how a class action lawsuit alleging multiple willful violations could become rather costly for an employer.
What Is a “Willful” Violation of the FCRA?
In the case, Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007), the U.S. Supreme Court clarified what “willful” means under the FCRA. According to the Court, for the purposes of the FCRA, the “common law usage” of the term “willful” controls. Id. at 57. Thus, “willful” includes “actions in ‘reckless disregard’ of the law.” Id. Put another way, both “knowing violations” and “reckless ones” are considered “willful violations” under the FCRA. Id. As such, employers who recklessly disregard their obligations under the FCRA may be liable for actual damages, the plaintiff’s attorney’s fees, and punitive damages even if they did not actually know they were violating the FCRA.
The Takeaway for Employers:
When relying on third parties to conduct background checks for both job applicants and employees, it is imperative that Minnesota employers comply with all applicable federal and state laws including the federal Fair Credit Reporting Act and its state counterpart, the Minnesota Fair Credit Reporting Act. Due to the complexity of these laws, Minnesota employers may wish to have their background check forms and procedures reviewed by a competent Minnesota employment law attorney. For assistance with developing pre-employment screening procedures, updating your employment forms, or for additional information, please contact one of the Minnesota employment law lawyers of Trepanier MacGillis Battina P.A.
About the Author:
Minnesota employment law attorney Craig W. Trepanier regularly represents Minnesota employers and employees in their employment law matters, including job applications, pre-employment screening procedures, background checks, FCRA compliance, drug and alcohol testing, offer letters, and employment agreements. Craig may be reached at 612.455.0502 or firstname.lastname@example.org. Trepanier MacGillis Battina P.A. is a Minnesota employment law firm located in Minneapolis, Minnesota.