Watch Your Back: The Growing Threat of FCRA Background Check Class Actions

Class action suits against employers alleging a violation of the Fair Credit Reporting Act when using background checks performed by a credit reporting agency have more than tripled in 2014, with new cases continuing to be filed this month. There have also been numerous settlements during the year, with some ranging from $2 million to $7 million, which surely has encouraged prospective litigants and their counsel. While approximately half of these cases have been filed in plaintiff-friendly California, several other states (including Florida, Georgia, and Missouri) have each seen more than one, and many more employers can expect to be implicated if this trend continues into 2015.

The FCRA requires that, when hiring, employers who use virtually any background check procedure give notice to the applicant that they intend to use a “consumer report” and obtain the applicant’s written authorization on a stand-alone document. If the employer plans on taking an adverse action based on the report, such as not hiring the applicant, it must give the applicant written notice, the report, information on the credit reporting agency, and a summary of the applicant’s rights. Then, after a reasonable time, the employer must inform the applicant orally, in writing or electronically, that the adverse action was based on the report; that he or she can dispute its accuracy or completeness; that the credit reporting agency did not make the decision and cannot explain it; and that the applicant is entitled to another free report within 60 days. Notably, these same requirements apply to an employer’s background check on current employees as well, with some limited exceptions. Failure to comply with these requirements can expose an employer to recoverable damages, including either the actual financial damages suffered by the applicant plus attorneys’ fees and costs or, for a wilful violation, statutory damages between $100 and $1,000, punitive damages, plus attorneys’ fees and costs.

Most of the FCRA plaintiffs assert that applicant authorization was not obtained on a stand-alone document but, instead, was combined with other extraneous material, e.g., a waiver. Others recent cases contend the applicant or employee did not have a reasonable time to dispute the report after he or she received the contemplated adverse action notice to receipt of the adverse action notice. One of these two types of claims is included in all, or nearly all, cases, sometimes along with other miscellaneous claims of violation. Rarely, if ever, would the employer’s compliance with the FCRA have altered the actual hiring decision outcome for the applicant or employee, making these cases almost always about hyper-technical compliance with the FCRA and not about any employer’s decision to refuse to offer a job to an applicant because of what the background check process reveals.

A few preventive measures can help reduce potential employer exposure to these kinds of FCRA background check claims. One is using a compliant stand-alone authorization. If the employer intends to use background checks on a post-hire basis, language to that effect should also be in the authorization. If an adverse action is based on something other than the report, the basis should be documented in writing and retained because in that case the FCRA will not apply. The statute of limitations is two years from the discovery of the violation, or five years from the violation, so five years of retention is advisable. In those instances when a report is the basis for an adverse action, it is prudent to take a minimum of five days between giving notice of contemplated adverse action and the notice of adverse action, to allow a reasonable time for the applicant or employee to dispute the report.

Many state and local laws have been adopted regarding background checks, particularly criminal background checks, so it is essential to be familiar with the state and local laws where the employer does business. Similarly, the U.S. Equal Employment Opportunity Commission (EEOC) has taken the stance that criminal background checks can have a disparate adverse impact on African Americans. While the EEOC has not had much success in the cases brought on that basis, it is nonetheless important to remember that when using a background check process, employers must do so in a legitimate, non-discriminatory manner.

Many state and local laws have been adopted regarding background checks, particularly criminal background checks, so it is essential to be familiar with the state and local laws where the employer does business. Similarly, the Equal Employment Opportunity Commission has taken the stance that criminal background checks can have a disparately adverse impact on blacks. While the U.S. Equal Employment Opportunity Commission has not had much success in the cases brought on that basis, it is nonetheless important to remember that when using a background check process, employers must do so in a legitimate, non-discriminatory manner.