Avoiding Class Action Litigation Under Fair Credit Reporting Act

The Fair Credit Reporting Act (FCRA) is a growing source of class action litigation, due to the high potential penalties that it provides for very technical violations. The statute imposes conditions, among other things, on obtaining “consumer reports,” e.g., information on a consumer’s credit worthiness, character, or mode of living, for employment purposes. It is easy to commit technical violations that may sustain nationwide class action claims, making it vital for employers to understand FCRA requirements before procuring credit or background checks on prospective or current employees.

The FCRA applies to employers when they retain “consumer reporting agencies,” e.g., companies that compile or evaluate consumer credit information or other information on consumers for the purpose of providing consumer reports to third parties in exchange for a monetary fee, to provide consumer reports regarding employees and prospective employees. It generally requires employers to make certain disclosures to the employee and reporting agency, to obtain authorization from employees before obtaining a consumer report, and to take specific action in the event that an adverse employment decision is made as a result of information contained in the credit or background report.

The statute provides for statutory damages of up to $1,000 per violation to any affected consumer, punitive damages, and attorney’s fees for willful violations.  If the employer negligently fails to comply, it can be liable for the actual damages incurred by employees or prospective employees, as well as attorney’s fees.

Disclosure to Employees and Prospective Employees

The disclosure requirements prohibit employers from obtaining consumer reports unless, before the report is procured:

• A “clear and conspicuous disclosure has been made in writing” to the employee or prospective employee that a consumer report may be obtained for employment purposes;
• The disclosure is made “in a document that consists solely of the disclosure” (the “stand-alone disclosure” requirement); and
• The employee or prospective employee has authorized, in writing, the procurement of the consumer report.

Class actions frequently rely upon the “stand-alone disclosure” requirement to construct claims alleging that the employer’s disclosure improperly contains extraneous language or information, and, thus, does not consist “solely of the disclosure.” While the case law on this issue is far from unanimous, courts often construe the “stand-alone disclosure” provision narrowly. Consequently, in order to avoid this type of litigation, the employer should use an obviously stand-alone disclosure in a separate document that does not include a release of liability and does not cross reference additional information or documents.

When the “stand-alone disclosure” requirement is litigated, some district courts have concluded that the provision is too ambiguous to sustain claims for willful violations of the FCRA, or that a small amount of extraneous language does not create a violation. At the same time, however, many district courts have allowed consumer class action claims seeking damages for willful noncompliance of the FCRA to continue beyond the pleadings stage where plaintiffs can point to a disclosure containing information beyond the disclosure and requested employee authorization. For example, in Harris v. Home Depot U.S.A., Inc., Case No. 15-cv-01058, the Northern District of California recently denied Home Depot’s motion to dismiss claims that it willfully violated the stand-alone provision by including language in the disclosure releasing it from liability for information obtained through the consumer report. District courts have even denied motions to dismiss “stand-alone disclosure” claims based upon allegations that the disclosure, albeit contained in a document separate from the allegedly offending extraneous information, was presented to plaintiff at the same time and read in conjunction with extraneous information. Speer v. Whole Food Mkt. Grp., Inc., No. 8:14-cv-03035 (M.D. Fla. March 30, 2015). Thus, while questions of willfulness and a lack of damages on the part of employees may prove to be viable defenses for employers, many of these cases cannot be dismissed at the outset and are allowed to proceed into discovery. 

Notice of Potential Adverse Action

Before taking an adverse action, e.g., denying employment or making other employment decisions that adversely affect current or prospective employees, as a result of information contained in the consumer report, employers must notify employees or prospective employees. The notice must include a copy of the consumer report, as well as a written description of the employee’s rights under the FCRA. 

Employers should provide as much advance notice as possible, but at least five business days, using a delivery method that would allow them to prove, if necessary, that advance notice was given. The statute does not specify a minimum amount of time for this notice period, but courts have interpreted the provision to require a reasonable amount of time to allow the employee to respond, and some have even specified a minimum of five business days. See Reardon v. Closetmaid Corp., Civ. No. 2:08-1730, 2013 WL 6231606, at *12 (W.D. Pa.  Dec. 2, 2013) (quoting legislative history as stating: “a reasonable period for the employee to respond … is not required to exceed 5 business days” following receipt). Plaintiffs are quick to attempt to create class action claims based on any arguable failure to comply with these requirements, alleging that the required materials were not provided or were not given sufficiently in advance of the adverse action. 

Additional Information to Employees and Prospective Employees Upon Taking Adverse Action

If, after sending the pre-adverse action notice, the employer takes adverse action against the employee based upon information contained in his or her consumer report, the employer must provide a follow up notice to the employee that the adverse action was indeed taken. The required contents of the post-adverse action notice include:

• Identification of the consumer reporting agency, including its contact information;
• A statement that the agency did not make the adverse action decision and is unable to provide the specific reasons why adverse action was taken; and
• A summary of the consumer’s right to challenge the accuracy or completeness of the report and to obtain a free additional report from the agency within 60 days.

Additional disclosures, including the employee’s numerical credit score, may be necessary depending on the basis of the adverse action. Class action claims arising from alleged failures to provide this information are generally less successful, but they are still routinely asserted.

State and Local Laws

Employers should also be aware of state and local laws governing employment decisions based on credit reports and consumer background checks.  Washington, for example, has a state Fair Credit Reporting Act, RCW Chapter 19.182, which largely mirrors the requirements imposed under the federal statute. However, in Washington, an employer may not obtain consumer credit information unless (1) the information is substantially job related and the employer’s reasons for using the information are disclosed in writing, or (2) the information is required by law. California also imposes additional requirements for conducting background checks on job applicants, many of which are aimed at providing applicants and employees greater access to the background check results.

Before obtaining background checks or credit reports in a specific location, employers must research state and local requirements to ensure compliance.