The FCRA: A Battle on Two Fronts for Employers

25 June 2014 Labor & Employment Law Perspectives Blog

As if employers were not already faced with enough headaches from employment-specific federal statutes, such as the Occupational Safety and Health Act or the Fair Labor Standards Act, they also have to consider the effect of other statutes, including the Fair Credit Reporting Act (“FCRA”).  The FCRA applies to any entity that uses “consumer report[s]” for “employment purposes.”  15 U.S.C. § 1681b(b).  “Employment purposes” means use of the reports for hiring decisions on job applicants, as well as for promotion or termination decisions on current employees.  See 15 U.S.C. § 1681a(h).  And the term “consumer report” includes such routine investigative documents as credit reports, criminal checks, and even motor vehicle background checks.  See 15 U.S.C. § 1681a(d)(1)(B).

Given this broad application of the FCRA in the employment context, navigation of the risks and requirements associated with the FCRA is often difficult and dangerous for employers—especially without experienced legal assistance.  For example, employers are required to follow certain multi-layered, written authorization and notice procedures before obtaining and using “consumer reports.”  See, e.g., 15 U.S.C. §§ 1681b(b), 1681m(a).  To make matters worse, employers increasingly have to fight the FCRA battle on two fronts in court—one against the EEOC and one against plaintiffs’ attorneys on behalf of private individuals.

For example, the EEOC currently provides the following guidance to employers regarding credit checks on job applicants: “Inquiry into an applicant’s current or past assets, liabilities, or credit rating . . . generally should be avoided because they tend to impact more adversely on minorities and females . . . .”  U.S. Equal Employment Opportunity Comm’n, Pre-Employment Inquiries and Credit Rating or Economic Status, available here (last visited June 24, 2014) (emphasis added).  That is, the EEOC believes that an employer’s use of credit checks on job applicants may disparately impact legally protected classes and therefore should be avoided, unless the employers can show that such information is “essential to the particular job in question.”  Id.

But the EEOC’s position regarding what is “essential” is less than clear.  Specifically, the EEOC has noted in a past informal discussion letter the argument that credit checks are not “valid measure[s] of job performance,” even while recognizing that some courts have found credit checks to be appropriate and lawful “for certain positions, such as where an employee handles large amounts of cash.”  U.S. Equal Employment Opportunity Comm’n, Informal Discussion Letter to Member of the Public, available here (last visited June 24, 2014) (citing EEOC v. United Va. Bank/Seaboard Nat’l, No. 75-166-N, 1977 WL 15340 (E.D. Va. 1977).

What’s more, last Fall, the EEOC put its money where its mouth was, so to speak, and filed suit, under a disparate impact theory, against an employer who was in the business of providing integrated services for expositions, conventions, and other events.  EEOC v. Freeman, No. 09-cv-2573, 2013 WL 4464553, at *2 (D. Md. Aug. 9, 2013).  The employer utilized both criminal background checks and credit checks—which fall under the purview of the FCRA—due to ongoing problems with embezzlement and theft, among other things.  Id.  The EEOC in Freeman did not challenge “any of the specific criteria or procedures” utilized by the employer, but instead “merely alleged that [the employer’s] policy of conducting criminal and credit background checks, as a whole, produce[d] a disparate impact on protected classes.”  Id. at *4.

Luckily for employers, the district court prominently stated at the beginning of its opinion that “[e]mployers have a clear incentive to avoid hiring employees who have a proven tendency to defraud or steal from their employers . . . or who otherwise appear to be untrustworthy and unreliable.”  Id. at *1.  As the employer pointed out to the district court in Freeman, “even the EEOC conducts criminal background investigations as a condition of employment for all employees, and conducts credit background checks on approximately 90 percent of its positions.”  Id. at *1.  Further, the court found that the employer’s policy “appears reasonable and suitably tailored to its purpose of ensuring an honest work force.”  Id. at *3 n.3.  While the Freeman case represents a clear victory for employers against the EEOC, it was not the first of its kind—nor will it be the last in all likelihood.  See, e.g., EEOC v. Kaplan Higher Ed. Learning Corp., No. 10-cv-2882, 2013 WL 322116, at *2-3 (N.D. Ohio Jan. 28, 2013) (dismissing an EEOC complaint against an employer for using credit checks during the hiring process when the EEOC ran into proof problems because the employer did not keep any records showing the races of job applicants).  So employers are well advised to proceed with caution when using “consumer reports.”

This is especially true in light of the potential for damages in private causes of action filed by plaintiffs’ attorneys on behalf of classes of individuals.  Specifically, the FCRA provides a private right of action for employees to sue employers for “negligent” and/or “willful” violations of the FCRA.  15 U.S.C. §§ 1681n, 1681o.  Willful violations may lead to employer liability for actual damages or statutory damages of between $100 and $1,000 per violation, punitive damages, and reasonable attorneys’ fees and costs.  15 U.S.C. § 1681n(a).  Similarly, negligent violations may lead to actual damages and reasonable attorneys’ fees and costs.  15 U.S.C. § 1681o(a).  For obvious reasons, plaintiffs’ attorneys are drawn to allegations of willful violations in class action lawsuits because of the potential for higher overall recoveries.

To reduce the risk of EEOC lawsuits and/or private class actions, an employer should carefully analyze the positions and associated job duties it currently has in place, as well as those it may create in the future.  It should determine whether those positions and job duties are what the Freeman case called “credit sensitive.”  If not, employers can reduce the risk of lawsuits by the EEOC and individuals by foregoing the use of credit checks for those non-credit sensitive positions.  Nevertheless, as the Freeman court also pointed out, some positions and job duties give rise to the potential for fraudulent or dishonest activity on the part of employees.  That is, employers are likewise well-advised to make hiring, promotion, and firing decisions in light of the individuals’ honesty and integrity in the workplace.  If the employer determines that a consumer report will assist in those decisions, the law allows such use, provided the requirements of the FCRA are met.  Thus, in using consumer reports, employers need to be familiar with the written authorization and notice requirements, among other things.  In this way, employers can reduce their risks while still utilizing consumer reports for employment purposes.

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