FTC Flexes Muscles on "Consumer Rights" Affecting All Employers
by Barry J. Nadell

Companies who background screen job applicants or employees (obtaining public records, references, etc. on job applicants or current employees) must be aware of the amended Fair Credit Reporting Act! Penalties on those who do not comply include actual damages, punitive damages, costs, and attorneys fees. In addition, civil and criminal penalties may apply. (15 U.S.C. 1681n, 1681o, 1681s).

The Consumer Credit Reporting Reform Act of 1996, (CCRRA) became effective on September 30, 1997. The CCRRA affects all employers by amending the Fair Credit Reporting Act (FCRA), 15 U.S.C. 600-624, which governs the use of consumer reports for employment purposes. Do not be fooled and think that this new law only deals with credit issues. The law makes serious changes in the procedures every employer must use to screen applicants or investigate current employees.

Definitions of key terms. 603:

• A consumer report is a report of any information provided by a consumer reporting agency bearing on a consumers credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part for employment purposes.

Any background report from a consumer reporting agency offering public record information or where the information is obtained through personal interviews provides insight into the consumers character or personal characteristics. Unless an employer is not obtaining information from a consumer reporting agency, there are very few exceptions to what the CCRRA considers a consumer report. The following would be considered consumer reports: criminal history report, credit history, motor vehicle report, social security identification, education, license verification, military record verification, or workers compensation history.

Credit reports fall under the definition of consumer reports. When credit reports are sought for employment purposes, the user of the report must adhere to additional requirements outlined in the CCRRA and in state law.

• The term "investigative consumer report" means a consumer report or portion thereof in which information on a consumer's character, general reputation, personal characteristics, or mode of living is obtained through personal interviews with neighbors, friends or associates.
Investigative consumer reports are a form of a consumer report. The difference is the information in the report is obtained through talking to people. When an investigative consumer report is used, the user of the report must conform to additional requirements not required if requesting a consumer report.

Employers seeking an investigative consumer report must clearly and accurately disclose to the consumer that an investigative consumer report including information as to his character, general reputation, personal characteristics and mode of living, whichever are applicable, may be made. 606(a)(1). The disclosure must also indicate that the information may be obtained through personal interviews with neighbors, friends, or associates of the consumer reported on, or with others with whom he/she is acquainted or who may have knowledge concerning any such items of information. 603(3). The disclosure must be provided in writing not later than three days after the date on which the report was first requested. 606(a)(1)(A). The disclosure must also include a statement informing the consumer of their right to request additional disclosures of the nature and scope of the investigation. 606(a)(1)(B). The language required for an investigative consumer report need not be on the disclosure for a consumer report or consumer credit report. Finally, the employer must include the summary of consumer rights. 609(c).

• A consumer reporting agency is an organization which, for monetary fees, engages in whole or in part in providing information on consumers for the purpose of furnishing consumer reports to third parties.

Consumer reporting agencies are defined very broadly. They include any company who obtains information on a consumer and charges a fee to the user of the report for the information. They also include companies who charge fees for services rendered, and in order to provide the service, obtain background information on a consumer that may or may not be given directly to the employer. Included in the CCRRAs definition of a consumer reporting agency is a public records provider, licensed private investigator, detective agency, on-line database company, or the like. In addition, a government agency like a state Department of Motor Vehicles, who sells public information is a consumer reporting agency.

• Employment purposes are when reports are used for the purpose of evaluating a consumer for employment, promotion, reassignment or retention as an employee.
• Adverse action is a denial of employment or any other decision for employment purposes that adversely affects any current or prospective employee.
• The term "consumer" means an individual. Therefore, a background check of an organization does not fall into the purview of the FCRA.

Certification: Before requesting a report an employer must sign and have on file a written certification form with the consumer reporting agency they use. The certification form requires the employer (user of the report) to certify as to the permissible purpose intended and that they will comply with proper disclosure and adverse action requirements. Finally, the employer must certify that the information from the consumer report will not be used in violation of any applicable Federal or state equal employment opportunity law or regulation. 604(b).

Notification: Prior to an employer requesting any consumer report or an investigative consumer report the employer must make a disclosure to the consumer. This notification is required in all instances except for an investigative consumer report (talking to people) where the consumer did not initiate the cause for the report. 604(b)(2)(B).

The notification must be a clear and conspicuous written disclosure that consists solely of the disclosure, and must be provided prior to requesting any consumer report. The disclosure must include the name, address, and toll-free telephone number of the consumer reporting agency. 615(a)(2)(A). A separate disclosure designed for credit reports must be used if the employer seeks a credit report. Federal law specifically states the disclosure must indicate that a consumer report may be obtained for employment purposes. 604(b)(1), 606(a)(1).

Prior to the CCRRA, the only requirement imposed upon the employer was to notify the consumer. Where an employer wishes to obtain public records or obtain an investigative report, they must now obtain authorization from the employee to do the background check.

The requirement for the consumer to authorize the disclosure with their signature places a substantial burden on employers. What is an employers responsibility and authority should a consumer refuse to authorize the background check? In this regard, a background screening can be analogous to drug screening. There is ample authority that if an applicant refuses to authorize a drug screen, the employer can terminate the employment application process and the employer is under no obligation to hire the consumer. Therefore, any applicant who refuses to authorize the background check immediately disqualifies himself or herself from the employment process. Likewise, if an employee refuses to authorize a background screen required by the employer prior to a potential promotion or reassignment, the employee automatically removes his or her candidacy.

Unfortunately, the employers rights are not clear when the employer is in the process of an investigation and, due to the nature of the investigation, requires an employee background search. Where employees have signed only an employment application and refuse to sign a disclosure form authorizing a background check, employers may not be able to take any adverse action against the non-complying employee. If the employee however, previously agreed in writing to provide any support requested by the employer in an investigation and had agreed to all remedies available to the employer including termination if the employee refuses to help in the background investigation, the employer may be able to terminate the employee.

Where an investigative consumer report is to be prepared on a current employee, and to be used for employment purposes for which a consumer has not specifically applied, section 606(a)(2) provides that the notice otherwise required by section 606(a)(1) need not be sent. This is the only exception to disclosure of the background check. For example, if an employer hires an outside agency to perform an investigation, and such investigation is on a current employee who has not applied for a promotion or reassignment, and the agency only obtains information through personal interviews with co-workers, disclosure is not required.

Information within the report: Information must be up to date. Records are considered up to date if they are the current public record status of the item at the time the report is reported. 613(2). Information from public records (i.e. arrest, conviction, judgment, etc.) shall not be furnished unless the consumer reporting agency verifies the accuracy of the information during the 30 day period (which ended on the date on which the report is furnished) that the source of the information is the best possible. 606(d)(4)(A). Information obtained from a CD-ROM or on-line service generally provides only hearing dates and may not indicate if the consumer was convicted, or whether the conviction was expunged or dismissed. Therefore, provisions in the CCRRA which require the reporting of timely information indicate that employers must be very careful and only use agencies which provide direct research at the Superior or Municipal Court (hand searches). Anything less than a hand search will not qualify due to timeliness and/or accuracy.

The most accurate and up to date criminal information available resides in the physical records of each counties’ Superior and Municipal Courts. On-Line access to these records by Consumer Reporting Agencies is not available. Some states allow on-line access to records through their state repository; however, records are generally not up to date and some are up to a year old.

In order to offer records on-line some companies transcribe court microfiche records. Companies using these services experience very high error rates. In addition, microfiche records only offer hearing or filing dates. These dates provide arrest information and the consumer may never have been convicted. If sought pre-offer, knowledge of this data is unlawful. Where a consumer had been convicted, microfiche data does not reveal if the case has been expunged or dismissed. Finally, due to the time it takes to input this information into a computer, it is not timely and up to date, a new requirement under provisions of the CCRRA.

Time Limit on Reporting Information: Information provided in reports is generally limited to seven years (ten years for bankruptcies). This limit is based upon the type of report and may have an exception for state laws in existence prior to September 30, 1996, if there is no conflict with California’s Investigative Consumer Reporting Agencies Act (ICRAA). Suits, judgments, and paid liens are reportable for seven years for both the CCRRA and in California. The ICRAA allows unsatisfied judgments to be reported for ten years while the CCRRA has no time limit as the section only addresses paid liens. 605(a)(3), 1786.16. The CCRRA limits the reporting of records of arrest, indictment, or conviction of a crime to only seven years from the date of the disposition, release, or parole. Under the ICRAA, there was an exception to this time period based on an income of $30,000. 1786.16(b)(2). This exception for California employers will no longer be applicable.

In order to compute the reporting time period for a crime, the reporting agency must analyze whether the conviction of the crime includes a sentence of confinement. If the consumer was convicted of a crime, but the sentence does not include confinement, the reporting period of seven years is controlled by the date of the disposition.

For example, a report provided on September 1, 1997, may not include a crime where the date of the disposition was before August 31, 1990. However, if the consumer was imprisoned, the date of release or placement on parole controls the reportable time frame and the crime may be reported until seven years after parole or confinement is terminated. 605(a)(5). For example, if the consumer was released from confinement on January 15, 1993, and the disposition for the crime was on June 15, 1988, the crime could be reported as the release date is within the normal reportable period of seven years. Information indicating a date, which may be found later from another source like newspaper or interview, does not serve to extend the reporting period. Only the date of disposition, release or parole determines a reporting period. Employers should review their employment application, paying close attention to language that limits the time period an applicant should report a conviction for a crime.

Federal law exempts the time limit on credit reports if the employee earns or is expected to earn $75,000 per year. However, at least one credit reporting agency has advised our firm that they will not produce an extended credit report based on the exceptions in the CCRRA. The information will only extend back seven years (ten for bankruptcies).

Credit Reports: Employers, when seeking a credit report for employment, must obtain a report that has been designed only for employment as the permissible purpose. This type of report is different than one obtained for the purpose of borrowing money. Credit reports which are designed specifically for employment purposes provide everything a normal credit report provides including bankruptcy, liens, judgments, past dues, collection accounts, etc. However, these reports omit date of birth, account numbers, and do not place an inquiry that a lender may see if the applicant applies for credit.

The California Consumer Credit Reporting Agencies Act requires employers who seek a credit report to place a box on the disclosure form that the consumer can check if he or she wants a copy of the credit report. If the box is checked, the consumer must receive a copy of the report at no charge along with their rights concurrently with the employer who requested the credit report. 1785.20.5.

Employers should exercise caution when requesting credit reports on consumers. The August 1997, BNAs Policy and Practice Series, published by the Bureau of National Affairs, Inc., indicates employers should be able to establish a business necessity for using credit checks to avoid the risk of being sued for a Title VII violation, and he or she should inform applicants if hiring is contingent on the results of the checks. PM:201:3416, pg. 20. An employer should only seek credit information if the job description would place the consumer in a position which can potentially affect the company financially (i.e. employees handling cash, in the accounting department, or handling company credit cards or credit card transactions).

Adverse Action Requirements: Taking adverse action is now a two step process. Prior to actually taking adverse action, an employer must provide a copy of the report and a copy of the consumers rights as indicated by the FTC to the consumer. The CCRRA does not place a time period between the time of providing a copy of the report, including the consumers rights notice and the time the employer may advise the consumer of the adverse action taken. Notwithstanding, the employer must perform these functions in the specified order. Official commentary indicates that the employer must wait reasonable time prior to actually denying employment or taking other adverse action.

Once the employer has properly provided a copy of the report and the consumers rights, the actual adverse action must be disclosed with specific language. 615(a). This disclosure must provide (1) oral, written, or electronic notice of the adverse action to the consumer, (2) the name, address, and telephone number of the consumer reporting agency (including a toll-free telephone number established by the agency if the agency compiles and maintains files on consumers on a nationwide basis) that furnished the report to the person, (3) a statement that the consumer reporting agency did not make the decision to take the adverse action and is unable to provide the consumer the specific reasons why the adverse action was taken, (4) a statement of the right of the consumer to obtain a free copy of a consumer report on the consumer from the consumer reporting agency, (5) notice of the sixty day period for obtaining such a copy, and (6) notice of the consumers right to dispute the accuracy or completeness of any information in a consumer report furnished by the consumer reporting agency.

The person who procures or causes to be prepared an investigative consumer report, must upon the written request made by the consumer within a reasonable period of time after the initial disclosure, make a complete disclosure of the nature and scope of the investigation that is requested. 606(b). This disclosure must be in a written statement that is mailed, or otherwise delivered, to the consumer no later than five days after the date on which the request was received from the consumer, or the report was first requested, whichever is later in time. 606(b).

Summary: Job applicants and employees are quick to seek legal remedies should their consumers rights be violated. Failure, ignorance or noncompliance on the part of an employer or the consumer reporting agency to comply with the provisions of the Consumer Credit Reporting Reform Act of 1996 will be costly. Employers must seek and use a competent and detail oriented consumer reporting agency that understands this new law and complies with all of the acts provisions.

This enclosed article is not intended to provide legal advice regarding the Consumer Credit Reporting Reform Act of 1996, the Fair Credit Reporting Act, or state laws. This article represents the authors interpretation of the changes mandated by the CCRRA. Prior to making any changes in your screening of job applicants or current employees, please consult your legal counsel for verification and more detailed information regarding the CCRRA’s impact on your company.