What Every HR Needs to Know About the Fair Credit Reporting Act

As an HR professional, you are likely familiar with the Fair Credit Reporting Act (FCRA), as it affects how employers can use consumer credit reports in their hiring processes.

It is important to understand the requirements of the FCRA so that you don’t inadvertently run afoul of federal regulations and end up facing costly penalties or other legal actions. Here’s a quick overview of what every HR needs to know about the FCRA.

Background and Purpose of FCRA

The Fair Credit Reporting Act, enacted in 1970, is a United States federal law that aims to ensure the accuracy, fairness, and privacy of consumer information held by consumer reporting agencies (CRAs).

The FCRA is enforced by the Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB). Over the years, the FCRA has undergone several amendments to address emerging concerns related to consumer data privacy and security.

The primary goal of the FCRA is to protect consumers from the misuse of their personal information and to provide them with certain rights to access and correct their credit-related information.

This law is designed to strike a balance between the needs of businesses, such as employers and creditors, to make informed decisions based on consumer reports and the privacy rights of individuals.

In the context of employment, the FCRA plays a crucial role as it regulates the use of consumer reports for employment purposes. Employers often rely on background checks and credit reports to assess a job applicant’s qualifications, character, and financial stability.

Therefore, HR professionals must understand and comply with the FCRA requirements when using consumer reports to make employment decisions. Non-compliance with the FCRA can lead to legal consequences, including fines, penalties, and potential lawsuits.

Key Components of the FCRA

Several components make up the FCRA. Explore each section below to gain a thorough understanding of all that the act entails in relation to HR.

Consumer Reporting Agencies and Their Role

Companies that collect and disseminate consumer information, including credit bureaus, background check providers, and tenant screening services.

The CRA is responsible for ensuring the accuracy and privacy of consumer information, responding to consumer disputes, and following the guidelines set forth by the FCRA.

Types of Consumer Reports

Credit Reports: Records of an individual’s credit history, including payment habits, outstanding debts, and creditworthiness.

Background Checks: Reports that include information on an individual’s criminal history, employment history, education, and other relevant public records.

Investigative Consumer Reports: In-depth reports that gather information through personal interviews with associates, neighbors, or friends, often used for high-level positions or sensitive job roles.

Permissible Purposes for Obtaining Consumer Reports

Pre-employment screening, promotion decisions, and employee retention.
Insurance underwriting, credit, and lending decisions.
Other legitimate business purposes as outlined in the FCRA.

Accuracy and Dispute Resolution Procedures

CRA Obligations: Ensure that the information in consumer reports is as accurate as possible and correct any errors that are brought to their attention.
Consumer Rights: Consumers have the right to dispute inaccuracies in their reports and request investigations into disputed information.

Privacy and Information Security Requirements

Limited Access to Consumer Reports: CRAs are required to provide consumer reports only to entities with a permissible purpose.
Confidentiality of Information: Employers and other entities that receive consumer reports must maintain the confidentiality of the information and dispose of it properly when no longer needed.
Safeguarding Consumer Data: Both CRAs and employers are required to implement reasonable security measures to protect consumer information from unauthorized access, use, or disclosure.

The FCRA is a complex yet comprehensive law, and it pays to know the rules. Ignorance is not an excuse, and violations can be costly. The best thing you can do as an HR professional is to make sure you are informed and up-to-date on the requirements of the FCRA.

Knowing the law can help protect your organization and ensure that your background check policies are compliant.

HR Responsibilities Under the FCRA

Obtaining consent from job applicants and employees is a critical responsibility for HR professionals under the FCRA. Before requesting a consumer report for employment purposes, HR must secure written consent from the job applicants or employees.

This authorization should be presented in a standalone disclosure, separate from other application documents, to ensure that the individual is aware of the request. It is essential to inform the applicants or employees about how the information from the consumer report may be used in making employment decisions.

Pre-Adverse Action and Adverse Action

Another crucial aspect of HR’s responsibilities under the FCRA is adhering to the pre-adverse action and adverse action procedures. When an employer plans to take adverse action based on information from a consumer report, they must first provide the individual with a pre-adverse action notice.

This notice should include a copy of the consumer report, a summary of their rights under the FCRA, and information on how to dispute any inaccuracies in the report. The individual should be given a reasonable amount of time, typically at least five business days, to review the report and respond.

If, after considering any disputes or additional information provided by the individual, the employer decides to proceed with the adverse action, they must send an adverse action notice.

The notice should contain the contact information of the CRA that provided the report, a statement that the CRA did not make the decision and cannot provide reasons for the adverse action, and information on the individual’s right to obtain a free copy of their report and dispute any inaccuracies.

State and Local Compliance

HR professionals must also ensure compliance with applicable state and local laws that may impose additional requirements or restrictions on the use of consumer reports in employment decisions.

These laws can vary by jurisdiction, so it is essential to be familiar with the specific regulations that apply to your organization.

Record-keeping

Proper record-keeping and disposal of consumer report information are essential to maintain privacy and security. HR professionals should retain consumer reports and related documents for a reasonable period, typically at least five years, to comply with potential audits or legal requirements.

When disposing of consumer report information, HR must take appropriate measures to prevent unauthorized access or disclosure, such as shredding paper documents or securely deleting electronic files.

Ongoing Training

Lastly, training HR staff and staying up-to-date with FCRA requirements is crucial for maintaining compliance. Regular training sessions and policy reviews can help ensure that all HR personnel understand the proper procedures for handling consumer reports and are aware of any changes in the law or best practices.

FCRA Violations and Legal Consequences

FCRA violations can lead to significant legal consequences for employers who fail to comply with the requirements of the act. Understanding the types of violations and their potential ramifications is essential for HR professionals to avoid costly mistakes and maintain compliance.

Some common FCRA violations include failing to obtain proper consent from job applicants or employees before obtaining consumer reports, neglecting to provide pre-adverse action or adverse action notices, and not following appropriate procedures for record-keeping and disposal of consumer report information.

Additionally, employers may violate the FCRA if they use consumer reports for impermissible purposes or do not maintain the confidentiality of the information they receive.

Both the FTC and the CFPB have the authority to investigate complaints, conduct audits, and take legal action against employers found to be in violation of the FCRA.

Legal consequences for FCRA violations can be severe and include fines, penalties, and even lawsuits. Employers may be held liable for statutory damages ranging from $100 to $1,000 per violation, as well as actual damages, which cover any financial harm suffered by the individual due to the FCRA violation.

In cases where the violation is found to be willful or negligent, employers may also be responsible for punitive damages, attorney’s fees, and court costs.

Moreover, class action lawsuits can be filed on behalf of multiple individuals affected by an employer’s non-compliance with the FCRA, leading to significantly larger damage awards and legal fees. The negative publicity associated with such lawsuits can also harm an organization’s reputation, making it even more crucial for HR professionals to prioritize FCRA compliance.

How HR Professionals Can Ensure Optimal Compliance

In order to ensure compliance with the FCRA and protect their organizations from legal consequences, HR professionals should follow several best practices:

Develop Clear and Compliant Policies

Establish and document your organization’s policies and procedures for obtaining, using, and disposing of consumer reports. These policies should comply with the FCRA requirements and any applicable state and local laws.

Regularly review and update these policies to ensure they remain current with any changes in legislation or best practices.

Communicate with CRAs and Job Applicants

Maintain open lines of communication with consumer reporting agencies and job applicants or employees involved in the background check process. Ensure that all necessary consents and disclosures are obtained and that individuals are aware of their rights under the FCRA.

Implement a Consistent Process

Use a consistent process for obtaining consent, providing pre-adverse action and adverse action notices, and handling disputes related to consumer report information. Consistency helps ensure that all steps are followed correctly and reduces the risk of unintentional violations.

Train HR Staff

Regularly train HR personnel on FCRA compliance, including the proper procedures for obtaining and using consumer reports and the rights of job applicants and employees. This training should cover both the basics of the FCRA and any recent updates or changes to the law.

Stay Up-to-Date with FCRA Requirements

It is vital to stay up-to-date with the most recent updates of the FCRA and other pertinent laws. To make sure that your establishment stays compliant, sign up for newsletters in this field, take part in informational seminars or webinars, and talk to a lawyer if needed. Doing so can help protect you from any legal repercussions.

Seek Legal Counsel When Necessary

When in doubt or faced with a complex situation, consult with legal counsel experienced in FCRA matters. An attorney can help you navigate any potential pitfalls and provide guidance on how to maintain compliance.

By implementing these best practices, HR professionals can help ensure that their organizations comply with the FCRA, minimize the risk of legal consequences, and maintain a fair and transparent employment process.

Get in Touch with Fair Credit for Expert Guidance

If you need help understanding the Fair Credit Reporting Act or need assistance with a consumer dispute, get in touch with Fair Credit. We specialize in helping clients fight errors on their credit reports, background checks, and tenant screenings.

Our team of experts will review your case and provide the best course of action to resolve any issues. Contact us today for more information.