HR Management & Compliance, Recruiting

How the Fair Credit Reporting Act Affects Hiring and Firing

Employers that engage third-party agencies for assistance in conducting background checks on employees or job applicants or gathering information for workplace investigations must strictly adhere to the Fair Credit Reporting Act’s (FCRA) notice and authorization requirements.FCRA

FCRA Notice and Disclosure Requirements

The FCRA generally requires employers to provide notice and obtain authorization from an individual before engaging a third party to gather and provide a consumer report or an investigative consumer report.
Regular background and reference checks conducted through a third party generally meet the definition of “consumer report.” An “investigative consumer report” involves interviews to assess someone’s character, general reputation, and personal characteristics.
Before obtaining a consumer report or an investigative consumer report, you must provide the person who is the subject of the report a notice of his rights and obtain his authorization. If an investigative consumer report is sought, you must provide a disclosure that specifies an inquiry into the individual’s character, general reputation, personal characteristics, and mode of living may be conducted, and he must be notified that he has a right to request more information about the specific nature and scope of the report.

Additional FCRA Notices

If you decide to take adverse action based on a consumer report or an investigative consumer report, you must provide the employee or job applicant a copy of the report and a summary of her rights under the FCRA, which gives her a reasonable opportunity to dispute the information contained in the report.
Later, if you follow through with your decision to take adverse action, you must also provide her an adverse action notice, along with another copy of the summary of rights under the FCRA.

Investigations of Current Employees

The Fair and Accurate Credit Transactions Act (FACTA), which amended the FCRA, includes a provision that exempts certain investigations from the regular preauthorization, notice, and disclosure provisions.
The exemptions include (1) investigations of suspected misconduct relating to employment, (2) investigations regarding compliance with federal, state, or local laws and regulations, or the rules of self-regulatory entities, and (3) investigations of potential violations the employer’s preexisting written policies. The exemption applies only if the reports were not ordered for the purpose of investigating an employee’s general creditworthiness, credit standing, or credit capacity.
If you decide to take adverse action based on information obtained by the third-party consumer reporting agency, you must provide the employee a summary of the “nature and substance” of the report. The FACTA also prohibits the disclosure of the report to anyone except (1) the employer or an agent of the employer, (2) federal, state, or local officers, departments, or agencies, (3) organizations with regulatory authority over the activities of the employer or the employee, or (4) as otherwise allowed by law.

Bottom Line

Be sure to meticulously adhere to the FCRA’s notice, preauthorization, and disclosure requirements. If you believe an investigation falls under the FACTA exemption, be sure to examine whether the information is being sought for an exempt purpose and adhere to the FACTA disclosure requirement if you decide to take adverse action based on the information contained in the report.
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
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