Federal Courts Increase Scrutiny Of Employer Compliance With The FCRA's Adverse Action Requirements

In the last two years, the number of employment class actions under the federal Fair Credit Reporting Act (FCRA) has ballooned. Most of the cases reported in the media have involved challenges to an employer's compliance with the FCRA's disclosure and authorization requirements. However, recent class action filings show that the plaintiff's bar also is bringing class claims that call into question employer compliance with the FCRA's adverse action requirements, including allegations that the employer has failed to provide any pre-adverse action notice, or if notice has been provided, to wait an appropriate amount of time before taking final adverse action against an individual (holding the job open in the meantime). Two recent federal court decisions tackling "pre-adverse action" notices demonstrate that compliance with the FCRA is indispensable for all employers that use background reports to make hiring and employment decisions.

The FCRA Requires a Two-Step Adverse Action Process

Employers must follow certain requirements if they intend to take "adverse action" against an individual, including a job applicant or a current employee, based in whole or in part on the contents of a consumer report, before the adverse action is taken.1

In the context of a consumer report used for employment purposes, an adverse action includes "a denial of employment or any other decision for employment purposes that adversely affects any current or prospective employee."2 The FCRA also defines the term "adverse action" to broadly extend to "any action taken or determination that is made in connection with an application that was made by . . . any consumer" and that is "adverse to the interests of the consumer."3 In prior guidance, the Federal Trade Commission (FTC) has expressed an expansive view of the FCRA's definition of the term "adverse action" and opined that the term extends beyond decisions to disqualify a job applicant from further consideration for an available position.4

Before the employer implements the adverse action against the applicant or employee, the employer must provide a "pre-adverse action" notice to the individual, which must include a copy of the consumer report and the Consumer Financial Protection Bureau's Summary of Rights.5 This requirement affords the applicant or employee with an opportunity to discuss the report with the employer before the employer takes adverse action.

Once the employer is prepared to take the adverse action against the applicant or employee, it must then provide an "adverse action" notice to the individual.6 The adverse action notice, which can be in writing or delivered orally or by electronic means, must contain the following information:

The name, address and telephone number of the consumer reporting agency (CRA) that provided the report to the employer; A statement that the CRA did not make the adverse decision and is not able to explain why the decision was made; A statement setting forth the applicant's or employee's right to obtain a free disclosure of his or her report from the CRA if the applicant or employee makes a request for such a disclosure within 60 days; and A statement setting forth the applicant's or employee's right to dispute directly with the CRA the accuracy or completeness of any information contained...