Fair Credit Reporting Act and Employee Background Checks

A recent case out of the 9th Circuit under the Fair Credit Reporting Act (“FCRA”) makes it appropriate for Employers to carefully examine their procedures when conducting employment background checks.

Background checks of an applicant or employee’s financial condition, credit history, driving history, employment history, criminal record, professional licensure or the like are “consumer reports” for purposes of the FCRA; and it does not matter if the check is conducted by the Employer in-house or by a third-party vendor. In either case, a consumer report may not be used for any employment purpose unless: “(i) a clear and conspicuous disclosure has been made in writing to the [employee or applicant] at any time before the report is procured or caused to be procured, in a document that consists solely of the disclosure, that a consumer report may be obtained for employment purposes;  and (ii) the [employee] has authorized in writing (which authorization may be made on the document referred to in clause (i)) the procurement of the report by that person.”
What some employers fail to recognize is that the required notice must be in a stand-alone document. It may not be included in other information provided by the employer such as an offer letter, employer policies or job application. Further, if an adverse employment decision is to be made on the basis of a consumer report, the employee must be given notice and an opportunity to refute or explain any negative information the report contains.

In Syed v. M-1, LLC, 846 F.3rd 1034 (9th Cir. 2017), in what appears to be a case of first impression, the Employer used a third-party vendor to conduct its employment background checks. The vendor gave to the job applicant a document entitled “Pre-employment Disclosure Release,” which contained notice of the consumer report being obtained. The document also contained language releasing the vendor and its employees, as well as all those who might rely on the release or the information obtained from the background check, from liability arising “…by reason of the use of this release and dissemination of information that that is false and untrue if obtained from a third party without verification.”

The Court ruled that including the release language in the notice form violated the requirement of the FCRA that such forms consist solely of the disclosure that a consumer report may be obtained, and the employee’s authorization to obtain the report. More importantly, the Court found the violation to be willful, which brought into play statutory damages between $100 and $1,000 per violation. As the plaintiff sued on behalf of a class of 65,000 job applicants, total damages were potentially staggering and the Employer is on the hook even though a third-party conducted the background check and prepared the release. Ultimately, the third-party vendor settled for $1.6 million with plaintiffs’ attorneys reaping a $400,000 fee.  

The takeaway for our Employer clients is that they must recognize that employment background checks constitute “consumer reports” under the FCRA and they must be intimately familiar with the requirements of the FCRA if they are going to obtain such reports.  Moreover, they cannot relieve themselves of exposure to liability by assigning the task to third-party vendors.  If an Employer contracts out the work it must assure itself that the vendor is FCRA compliant and secure appropriate indemnification. That entails assuring itself that the vendor has either deep pockets or adequate insurance. 

For questions, comments or additional information, please contact Robert Small, Partner in our Employment Practice Group, at rsmall@regerlaw.com or via phone at 215.495.6541.