SC Bar's Employment and Labor Law Newsletter: Winter 2013 - February 15, 2013

Effective January 1, 2013, there was a new form that employers must provide prospective or current employees when conducting background checks subject to the Fair Credit Reporting Act (FCRA). The main change in the form directs employees to contact the Consumer Financial Protection Bureau (CFPB) or visit its website at www.consumerfinance.gov/learnmore for further information about their consumer protection rights, versus contacting the Federal Trade Commission (FTC), the agency that has traditionally had responsibility for interpreting the FCRA. The CFPB has not, at this time, imposed additional substantive requirements on employers.

The deadline resulted from the transfer of rulemaking authority from the FTC to the CFPB pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. The CFPB will now have primary responsibility for interpreting the FCRA. The CFPB regulations require employers and consumer reporting agencies to modify one form, and consumer reporting agencies to modify two additional forms required by the FCRA; these modifications are addressed below. The new forms reflect the administrative transfer of authority, but do not impose substantive changes to the notification requirements on employers.

There is no per se penalty within the FCRA for failing to use the new form. However, employers that fail to comply with any of the Act’s requirements may be subject to penalties and fees, as well as lawsuits from applicants or employees.

When are employers subject to the FCRA?

Employers often verify information provided by a prospective employee on a job application or resume by calling references or former employers or by verifying education and experience. Some also conduct criminal background checks. Often, however, because of the time and resources involved, employers retain a third party to conduct background checks of applicants. When doing so, the FCRA imposes certain requirements for these third-party background checks.

Under the FCRA, an employer using a credit-reporting agency to gather a “consumer report” must notify the prospective employee, on a separate document, of its intent to do so, and obtain the applicant’s written consent before conducting the background check. As a general matter, criminal records, credit reports and driving records are all considered consumer reports. Therefore, such reports gathered from a credit-reporting agency trigger the notification requirements under the FCRA. Criminal records checks gathered directly from a law enforcement agency by an employer, not a third party, do not normally trigger the requirement.

Also covered under the FCRA are “investigative consumer reports” conducted by a third party. These include components of consumer reports, but may also include personal interviews with friends, neighbors or associates of the applicant. The notice and consent requirements under the FCRA are somewhat more elaborate for investigative consumer reports.

What forms have been modified?

The new regulations require the adoption of modified versions of the following three forms, the first of which is most significant for employers:

• “A Summary of Your Rights Under the Fair Credit Reporting Act.” If an employer relies on information in a consumer report or an investigative consumer report to make an adverse decision about a prospective or current employee, the employer must follow strict guidelines in notifying the individual of the decision. The employer must provide the individual with a copy of the consumer report and written information describing the individual’s rights under the FCRA, known as the General Summary of Consumer Rights. This form must be provided to the subject of a consumer report in two scenarios:

• Along with a “pre-adverse action” notice, and

• Along with disclosure notices when obtaining any “investigative consumer report.”

It is advisable for employers to include this form with “adverse action” notices, as well. The newly updated form is available here.

Additionally, the following two forms have also been modified:

• “Notice to Users of Consumer Reports: Obligations of Users Under the FCRA.” This is a form that consumer reporting agencies must provide to those who use their services, such as employers.

• “Notice to Furnishers of Information: Obligations of Furnishers Under the FCRA.” The FCRA requires consumer reporting agencies to provide this notice to providers of information in certain situations, such as re-investigations triggered by a prospective employee’s dispute of the information.

Why conduct a background check?

While there may be rigorous requirements mandating how to conduct a criminal background check rather than whether to conduct one, many employers find it prudent to undertake them. Taking such appropriate initial steps in screening prospective employees can go a long way toward 1) verifying that employees are qualified and do not have a propensity to cause harm, thereby mitigating risks of negligent hiring claims; and 2) minimizing potential liability.