Thinking About Adverse Action? Make a Plan!

If you use a third-party agency to provide you with background reports (which are also referred to as “consumer reports”), you may want to familiarize yourself with the Fair Credit Reporting Act (“FCRA”), a federal law that places certain obligations on users of consumer reports.

If you decide to take adverse action against an individual based, in whole or in part, on any information from a consumer report, you should be aware of additional obligations that you may have under the FCRA. Fortunately, the Federal Trade Commission (“FTC”), a federal agency tasked with enforcing the FCRA, has provided a brief overview of some of the obligations a user of consumer reports may have on their website.

According to the FTC, a user of consumer reports is required to provide notice of the adverse action to the consumer at the time the adverse action is taken. The notice can be provided orally, electronically, or in writing and “tells people about their rights to see information being reported about them and to correct inaccurate information.” The adverse action notice must include:

    • the name, address, and phone number of the consumer reporting company that supplied the report;
    • a statement that the company that supplied the report did not make the decision to take the unfavorable action and can’t give specific reasons for it; and
    • a notice of the person’s right to dispute the accuracy or completeness of any information the consumer reporting company furnished, and to get an additional free report from the company if the person asks for it within 60 days.

    This adverse action notice is required for any adverse action you may take, regardless of the reason why you obtained the consumer report.

    But, if you use consumer reports for employment purposes, you may have additional obligations before you can take adverse action (or even send out the adverse action notice)!

    Users of consumer reports for employment purposes are required to provide their employees and applicants with a pre-adverse action notice before taking adverse action. According to the FTC, before you reject a job application, reassign or terminate an employee, deny a promotion, or take any other adverse employment action based on information in a consumer report, you must give the applicant or employee:

      • a notice that includes a copy of the consumer report you relied on to make your decision; and
      • a copy of “A Summary of Your Rights Under the Fair Credit Reporting Act.”

      The FTC states that “giving the person the notice in advance gives the person the opportunity to review the report and tell you if it is correct.”

      Additionally, employers cannot take adverse action immediately after providing a pre-adverse action notice. Instead, employers must wait a “reasonable amount of time” before taking adverse action against an employee or applicant after providing a pre-adverse action notice.

      What constitutes a reasonable amount of time? The FCRA doesn’t provide an exact timeline. According to an FTC advisory opinion, the wording of the FCRA mandates that some period of time elapse between the pre-adverse action disclosure and the employment action that triggers the adverse action notice. The FTC’s best advice is that “employers may wish to consult with their [legal] counsel so that they develop procedures that are appropriate, keeping in mind the clear purpose of the provision to allow consumers to discuss reports with employers or otherwise respond before adverse action is taken.”

      To recap, if you’re an employer that is contemplating taking adverse action against an employee or applicant based, in whole or in part, on information from a consumer report, do the following steps: (1) Provide a pre-adverse action notice to the employee or applicant; (2) Wait a reasonable amount of time; and (3) Provide an adverse action notice to the employee or applicant, if applicable.

      Of course, this is just a broad overview of the FCRA’s adverse action process. The FCRA, and state and local laws, may place additional obligations on users of background reports. Be sure to talk with your legal counsel to make sure that your adverse action plan is compliant with all applicable laws.

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