HR Management & Compliance

Fair Credit Reporting Act—Employment Law Basics

The Fair Credit Reporting Act (FCRA) does far more than regulate the exchange of consumer credit information. You need to understand how it applies to employees and applicants in order to ensure compliance. Below is a general summary of your FCRA obligations.

credit report

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‘Consumer Reports’ and ‘Investigative Consumer Reports’

In the employment context, a consumer report is any written, oral, or other communication of any information by a consumer reporting agency bearing on an individual’s employment. This usually includes any information about an employee or applicant gathered from third parties. Generally, when you use a third-party vendor to run background checks of any kind, the FCRA will apply.

An investigative consumer report in the employment context is information about an employee or applicant obtained through personal interviews with neighbors, friends, or associates.

Notice and Disclosure Requirements

Before obtaining a consumer report, you must make a “clear and conspicuous” written disclosure that a consumer report may be obtained, and the applicant or employee must provide written permission. The disclosure and release must be contained in a document that is solely used for FCRA disclosure and release purposes.

You also must certify to the credit reporting agency that it’s obtaining the report for a permissible purpose and certify its compliance with legal requirements under the FCRA and equal employment opportunity (EEO) law.

If you want an “investigative consumer report,” you must provide to the subject of the investigation information about its nature and scope upon request. This information must be given in writing within 5 days from either the date of the request or when the report was obtained, whichever was later.

After obtaining a covered report, you may decide to take adverse action based on the information in the report (e.g., not hire an applicant). However, before actually taking the adverse action, you must provide the applicant or employee with a “preadverse action” notice, which includes a copy of both the consumer report and the Consumer Financial Protection Bureau’s (CFPB) “Summary of Rights.”

Once you actually take the adverse action, you must provide a notice to the employee or applicant. The notice must contain:

  • The name, address, and phone number of the consumer reporting agency that provided the report;
  • A statement that the agency didn’t make the adverse decision and isn’t able to explain why it was made;
  • A statement setting forth the applicant’s or employee’s right to obtain a free disclosure of his report from the agency if a request is made within 60 days; and
  • A statement setting forth his right to dispute the report directly with the agency.

Bottom Line

The FCRA requires that you meet certain procedural hurdles before making and implementing an adverse employment action based on information obtained from a covered report. The failure to comply with the FCRA procedural requirements can result in serious consequences, including an award of actual damages such as back pay and benefits. Additionally, statutory damages, punitive damages, and reasonable attorneys’ fees and costs can be assessed.

If you are unsure whether your background-checking protocol complies with the FCRA, it’s important to audit your procedures to ensure compliance.

Gary Fealk, editor of Michigan Employment Law Letter, is an attorney and shareholder at The Murray Law Group, P.C., in Detroit. You can reach him at or 248-433-8708.

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