The FTC Staff Report On '40 Years Of Experience With The Fair Credit Reporting Act' Illuminates Areas Of Potential Class Action Exposure For Employers

I. INTRODUCTION

Earlier this year, the Federal Trade Commission (FTC or "the Commission") staff published a report entitled, 40 Years of Experience with the Fair Credit Reporting Act: An FTC Staff Report with Summary of Interpretations.1 The Fair Credit Reporting Act (FCRA)2 regulates the scope and flow of information between "users"3 of "consumer reports,"4 "furnishers" of consumer information,5 and "consumer reporting agencies" or "CRAs."6 The FCRA is widely known as the federal law that regulates the exchange of consumer credit information between the credit bureaus (e.g., Experian, Trans Union and Equifax) and creditors in connection with mortgage lending and other consumer credit transactions (e.g., credit reports). By its terms, however, the FCRA also regulates the exchange of consumer information between employers and CRAs that provide background reports.7 Further, the obligations that the FCRA imposes on employers are not only triggered when an employer orders a credit report from a CRA. Generally speaking, employers must comply with the FCRA when they order virtually any type of report from a CRA, including reports derived from public record sources (e.g., criminal and motor vehicle records checks).8

For many years, it was relatively uncommon to see lawsuits or FTC enforcement actions against employers for alleged violations of the FCRA. The plaintiffs' bar and the FTC regularly targeted the credit bureaus, merchants and lenders, but did not target employers. Now, times have changed. In the past few years, there has been an unprecedented spike in class action and single-plaintiff lawsuits against employers for alleged violations of the FCRA. As a result, compliance with the various provisions of the FCRA is essential for all employers that use background reports even in part to make hiring and employment decisions.9

This Littler Report highlights critical portions of the FTC's Staff Report, which summarizes and expounds on the interpretations offered by the Commission and the Commission's staff since the enactment of the FCRA in 1970. The Staff Report states outright that the "staff opinion letters do not represent the formal policy or views of the Commission and are not binding," but also notes they "provide important guidance on issues of statutory interpretation," and that "[s]ome courts have cited to staff letters to support their findings."10

Developing familiarity with the Staff Report also may help employers take measures to minimize the risk of class action FCRA lawsuits. The FCRA has two remedy provisions. Section 617 provides a remedy for "negligent" noncompliance with the FCRA.11 Section 616 provides a remedy for "willful" noncompliance with the FCRA.12 An important difference between Sections 617 and 616 is that the former requires the plaintiff to prove actual damages to state a viable cause of action, but the latter does not. For a willful violation, the plaintiff can recover statutory damages of at least $100 and up to a maximum of $1,000.13 The need for individualized proof of actual damages and causation can preclude class certification under Federal Rule of Civil Procedure 23(b)(3). For that reason, the plaintiffs' bar regularly tries to mount class action claims against employers for alleged willful violations. To do so, however, the plaintiff must prove that the employer acted knowingly or "recklessly" in violation of clearly established law.14

To be clear, nothing stated herein should be construed as endorsing or in any way directly or indirectly confirming any position articulated by the FTC staff in the Staff Report or the FTC's prior advisory guidance. This Littler Report summarizes the Staff Report so that employers can familiarize themselves with its substance and leaves for another day whether any of the views expressed by the FTC staff are entitled to deference of any kind. As noted by the Staff Report, some courts have expressly refused to extend any deference to the advisory opinion letters issued by the FTC staff.15

Several states have also enacted state fair credit reporting laws. Some of these state laws impose state-specific obligations on employers that use consumer reports for employment purposes. Although this report does not discuss those state law considerations, employers must be sure to comply with the federal FCRA and applicable state law. This is especially true in California, which has two comprehensive statutes that separately regulate the use of credit reports and background reports with all other types of information (e.g., criminal and motor vehicle records).16

II. BACKGROUND FOR THE FTC STAFF REPORT

The FTC had no rulemaking authority until Congress passed the Fair and Accurate Credit Transactions Act of 2003 (the "FACT Act").17 Even before the FACT Act was enacted, however, the FTC played a role in the implementation, oversight, enforcement and interpretation of the FCRA. For example, according to the Staff Report, the FTC has brought 87 enforcement actions against CRAs, users of consumer reports and furnishers of information to CRAs.18

In 1990, the Commission issued its most comprehensive written commentary on the FTC ("Commentary").19 According to the Staff Report, the FTC staff had been working on an update to the 1990 Commentary because amendments to the FCRA had rendered some portions of the Commentary obsolete. The FTC staff decided to publish the Staff Report instead of drafting a replacement for the 1990 Commentary in light of the passage of the Consumer Financial Protection Act of 2010 (CFPA).20 Pursuant to the CFPA, the FTC will now share its traditional responsibility for overseeing the FCRA with the newly created Consumer Financial Protection Bureau (CFPB).

III. SUMMARY OF FCRA OBLIGATIONS ON EMPLOYERS THAT USE CONSUMER REPORTS FOR EMPLOYMENT PURPOSES

Employers must follow various requirements before they obtain a consumer report from a CRA, and if the employer intends to take "adverse action"21 against the individual based in whole or in part on the contents of the consumer report, before adverse action is taken. In addition, the FCRA imposes additional obligations on employers that obtain investigative consumer reports from a CRA. A consumer report is generally known as a "credit report" or a "background check report" prepared by a CRA whereas an investigative consumer report is a special type of consumer report whereby the CRA obtains information through personal interviews (e.g., an in-depth reference check).22

Employers typically must provide disclosures to and obtain authorizations from applicants or employees before obtaining a consumer report.

Before an employer may obtain a consumer report from a CRA, typically it must make a clear and conspicuous written disclosure to the consumer, in a document that consists solely of the disclosure, that a consumer report may be obtained.23 The applicant or employee must provide written permission for the employer to obtain a consumer report for employment purposes.24 Authorization to access reports during employment may be obtained at the time the employment relationship commences.25 In other words, a properly worded disclosure and authorization from an applicant will allow an employer to obtain a consumer report during employment without the need obtain a new authorization after the individual is hired.

Employers must certify to the CRA that they have a permissible purpose and will comply with the FCRA.

Next, the employer must certify to the CRA that it has a "permissible purpose" for procuring a report from the CRA.26 The employer also must certify to the CRA that it: (1) has provided the required disclosures to the applicant or employee (described above); (2) has obtained the requisite written authorization from the applicant or employee; (3) will not use the information contained in the report in violation of any federal or state equal opportunity law or regulation; and (4) will, if any adverse action is to be taken based on the consumer report, provide the applicant or employee with a copy of the consumer report and a summary of the consumer's rights under the FCRA.27

Employers must make additional disclosures for investigative consumer reports.

In addition to the disclosure obligations on employers that use consumer reports, the FCRA imposes additional disclosure obligations on employers that intend to use an investigative consumer report (i.e., a consumer report based on personal interviews by the CRA) for employment purposes. Specifically, employers must disclose to the applicant or employee that an investigative consumer report may be obtained.28 This disclosure must be provided in a written notice that is mailed, or otherwise delivered, to the individual at some time before or not later than three days after the date on which the employer first requests the investigative consumer report.29 The disclosure also must include a statement informing the applicant or employee of his or her right to request additional disclosures of the "nature and scope" of the investigation, as well as the FTC's Summary of Rights.30 The employer also must certify to the CRA that these disclosures have been made.31

If the applicant or employee requests disclosure of the "nature and scope" of the investigation, the employer must respond in a written statement that is mailed, or otherwise delivered, to the applicant or employee no later than five days after the date on which the request was received from the individual or the report was first requested by the employer, whichever is later in time.32

Additional notices are required when adverse action is taken based even in part on information contained in a consumer or investigative consumer report.

If the employer, upon receipt of either a consumer report or an investigative consumer report, takes any adverse action against the applicant or employee based in whole or in part on information contained in the report, the employer typically must...