Is Your Company FCRA Compliant? 5 Ways To Avoid Costly Lawsuits

Business.com / HR Solutions / Last Modified: February 22, 2017

Before your company is taken to court, make sure you are FCRA compliant. This will help you to avoid costly lawsuits for your business.

Non-compliance with the Fair Credit Reporting Act (FCRA) can be extremely costly.

Just ask the folks at Whole Foods Market Group Inc.

The company recently paid $803,000 to settle a class action lawsuit.

Around 20,000 people filed a class action lawsuit accusing the company of violating FCRA background screening laws.

Whole Foods is only the latest company to feel the pinch of FCRA lawsuits. Other recent victims include Chuck E. Cheese (which paid a $1.75 million settlement), Home Depot (which paid $1.75 million) and Delhaize America (which paid $3 million). Of course, none of these even come close to the $6.8 million paid by Publix Supermarkets in October 2014.

These companies chose a wise route. They chose to settle these FCRA related lawsuits rather than go to court. For instance, if Whole Foods had been found guilty of violating the FCRA, the financial penalty would have been a minimum of $20 million.

Rather than fight in court, the smartest companies avoid FCRA lawsuits altogether. They do so by complying with FCRA requirements when conducting background checks using a third party screening provider. The good news is that FCRA compliance is quite easy. It is a matter observing these five principles.

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1. Give Proper Disclosure

The Whole Foods lawsuit arose from the company’s failure to issue proper disclosures. A “disclosure” is a document informing an applicant of the intention to conduct a background check. Its goal is to inform applicants of the scope of the report and their rights.

The FCRA provides strict requirements for issuing disclosures. Whole Foods got into hot soup because it violated these guidelines. According to the lead plaintiff, the company issued a disclosure statement “that wasn’t clear or conspicuous about ongoing background checks.” 

So, what are the FCRA guidelines about disclosures? Well, here are the main highlights:

  • The disclosure must be written—no verbal disclosures allowed

  • The disclosure must be a stand-alone document—not part of the application or other documents

  • The disclosure must inform the applicant of the intention to conduct a background check

  • The disclosure must inform the applicant of the reason for conducting the background check and the type of information that could be collected

  • The disclosure must also include the background check agency’s contact information

These are just the main highlights. There are many other details. The point here is that before conducting a background check, the proper disclosure must be issued. Failure to do so will set you up for a costly lawsuit.

2. Get Written Authorization

written authorization FCRA

The Home Depot lawsuit emanated from improper usage of authorizations. An authorization is a document which indicates that an applicant or employee consents to a background check. The FCRA requires employers to obtain authorizations before conducting a background check for pre-employment purposes.

In the case of Home Depot, the company failed to follow FCRA authorization guidelines. According to the FCRA, the authorization should contain only two things. First, is a statement which states that an applicant is giving their informed consent to the background check. The second is the name and signature of the applicant.

The Home Depot added a third thing—a release of liability for the company from background check related lawsuits. In a cruel twist of irony, it was the release of liability which got them sued. To avoid falling in a similar trap, get proper authorizations.

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3. Send Pre-Adverse Action Notices

The Delhaize America lawsuit was partially as a result of failing to send pre-adverse action notices (the other part was issuing improper disclosures). An adverse action is a negative employment decision which results from information obtained in a background check. Examples include not hiring an applicant, firing an employee or demoting an employee.

Under FCRA regulations, adverse actions based on information obtained from a consumer report cannot be carried out arbitrarily. There are certain steps an employer must take. One of these is sending a “pre-adverse action notice.”

The purpose of this notice is to inform an applicant or employee of the intention to conduct an adverse action and to give them a chance to dispute possible inaccuracies in the report.

The FCRA outlines a strict criteria under which a pre-adverse action notice be sent. Here is a summary of the major criteria:

  • The notice must state the intended adverse action (e.g. not getting hired) and the reason why it will be carried out
  • It must include a copy of the background check report
  • It must contain the name and contact details of the company which conducted the background check
  • It must include a copy of a document which outlines the applicant’s FCRA rights

All these requirements have to be followed to the letter. Failure to do so makes any adverse action illegal. That is exactly what happened in the case of Delhaize America. The company’s affiliate—Food Lion LLC., conducted a background check on an employee, and fired her after it revealed a felony conviction. Before firing, Food Lion did not send the employee a pre-adverse action notice.

The employee contacted an attorney, who then brought an FCRA class action lawsuit on behalf of 2,500 former Food Lion LLC applicants. The company opted to settle rather than face a protracted legal battle.

To avoid getting into such a scenario, make sure to follow the required pre-adverse action procedures. Also, ensure that notices follow the FCRA guidelines. You will save yourself a lot of unwanted stress and probably millions of dollars.

4. Offer An Opportunity To Challenge Background Check Results

The Delhaize America lawsuit actually started with a mistake in the background check results. The felony conviction reported in the background check was misreported. The employee had never even been arrested—let alone convicted. The situation may have been avoided had Food Lion given the employee an opportunity to challenge the results.

The FCRA requirements offer employers a great way to avoid such scenarios.

First, send employees or applicants a copy of the background check report and follow adverse action procedures.

Second, give them a minimum of 5 working days to challenge the contents of the report. In the meantime, keep the position open and offer them an opportunity to challenge the results.

5. Send Adverse Action Notifications

In April 2014, trucking conglomerate Swift Transportation Co. paid $4.4 million to settle a class action lawsuit. The lawsuit had been brought against Swift for, among others, failing to send adverse action notifications. This was deemed a violation of FCRA background checking rules – an allegation which the court agreed with.

According to the FCRA, after carrying out an adverse action, an employer should send an adverse action notification to the applicant or employee. The major purpose of the notification is to inform the applicant/employee of the adverse action.

To be considered compliant, an adverse action notification should contain certain kinds of information. These include the reason for the adverse action, contact details of the background checking company, and clarification that the screening company did not make the decision.

In the case of Swift, the company didn’t inform the applicant of their right to dispute the results. In fact, it didn’t even let him see the background report. The applicant contacted a lawyer, who then brought a class action against the company. In the end, the company had to cough $4.4 million to settle the class action.

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In Summary

There are five simple ways to avoid costly FCRA compliant lawsuits:

  1. Provide proper disclosures

  2. Obtain proper authorizations

  3. Send pre-adverse action notices

  4. Give applicants or employees an opportunity to dispute background check results

  5. Send adverse action notifications.

If you observe these recommendations, then you don’t have to fear FCRA lawsuits. Just remember one thing, with FCRA, the devil is in the details. Therefore, make sure you implement each of FCRA guidelines to the letter. Do this and you won’t have to pay millions to settle FCRA compliant lawsuits.

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