LEGAL
The swelling tide of class-action litigation against employers under the Fair Credit Reporting Act (FCRA)1 is unmistakable. It cuts across all industries, including retailers, restaurant chains, theater chains, manufacturers, financial institutions and transportation companies. To illustrate how the threat to employers is concrete, not merely hypothetical, close to a dozen nationwide class actions were filed in plaintiff-friendly venues during just June and July 2014. Three suits were filed by one firm on the same day in July.
These lawsuits can be frustrating for employers because typically they allege hyper-technical non-compliance with the FCRA (e.g., supposed defects in the employer's pre-employment forms and template notices). That is, the lawsuits appear to be lawyer-contrived cash grabs because no job applicant or employee possibly could have suffered any real harm. Nonetheless, prudent employers should be mindful of recent developments, including: (1) wide-spread publication of several significant seven-figure class action settlements; (2) the entry into the market of firms versed in wage and hour class actions; (3) pro-plaintiff outcomes in some federal courts; and (4) the lure of statutory damages awards to the plaintiff's bar when the U.S. Supreme Court has demonstrated a healthy measure of hostility towards class actions.
To be clear, the FCRA is widely known as the federal law that regulates the exchange of consumer credit information between the credit bureaus (e.g., Experian, Trans Union and Equifax) and creditors in connection with mortgage lending and other consumer credit transactions (e.g., credit reports). By its terms, however, the FCRA regulates also the exchange of information between employers and "consumer reporting agencies" (CRAs) that provide "consumer reports"2 (i.e., background reports).3 Further, the obligations that the FCRA imposes on employers are not only triggered when an employer orders a credit report from a CRA. Generally speaking, employers must comply with the FCRA when they order virtually any type of report from a CRA, including criminal and motor vehicle records checks.
For decades, it was uncommon to see lawsuits or government enforcement actions against employers under the FCRA. The plaintiff's bar and Federal Trade Commission (FTC) instead targeted the credit bureaus.4 Now, times have changed. Compliance with the FCRA is indispensable for all employers that use background reports to make hiring and employment decisions. This Littler Report summarizes litigation trends and provides practical insights for mitigating class action risk.
The FCRA imposes requirements on employers who use "consumer reports" or "investigative consumer reports" for employment purposes.5 A consumer report is known as a credit report or a background report prepared by a CRA, whereas an investigative consumer report is a special type of consumer report whereby the CRA obtains information through personal interviews (e.g., an in-depth reference check).6 Broadly speaking, the FCRA's requirements on employers may be divided into two categories: (1) requirements that employers must follow before they obtain a consumer report from a CRA, and (2) requirements that employers must follow if they take "adverse action" against an individual based even in part on information contained in the consumer report.
Before an employer may obtain a consumer report from a CRA, typically it must make a "clear and conspicuous" written disclosure to the consumer in a document that consists "solely" of the disclosure that a consumer report may be obtained.7 The applicant or employee must provide written permission for the employer to obtain a consumer report.8
The employer must also make a certification to the CRA regarding its "permissible purpose" for the report and its compliance with relevant FCRA provisions and state and federal equal opportunity laws.9 If the employer procures an "investigative consumer report," additional disclosures are necessary, the employer must allow the employee to request information about the "nature and scope" of the investigation, and the employer must respond in writing to any such request within five days.10
After the employer obtains the consumer report or investigative consumer report on an employee or applicant for employment, the employer must follow certain requirements if it intends to take "adverse action" against the applicant or employee based even in part on the contents of the report. An adverse action broadly includes "a denial of employment or any other decision for employment purposes that adversely affects any current or prospective employee."11
First, before the employer implements the adverse action against the applicant or employee, the employer must provide a "preadverse action" notice to the individual, which must include a copy of the consumer report and the statutory Summary of Rights.12 This requirement affords the applicant or employee with an opportunity to discuss the report with the employer before the employer takes adverse action.13
If the employer ultimately intends to take the adverse action against the applicant or employee, it must then provide an adverse action notice to the individual.14 The adverse action notice, which can be made in writing, orally or by electronic means, must contain the following information:
The text of the FCRA does not dictate the minimum amount of time an employer must wait between mailing the pre-adverse action and adverse action notices. One fairly accepted standard is five business days.16
The FCRA allows an applicant or an employee to pursue a private right of action against an employer for "negligently" or "willfully" failing to comply with any of the FCRA's requirements.17 A lawsuit must be brought by the earlier of two years after the date of the plaintiff's discovery of the violation, or five years after the date on which the violation occurred.18
The remedies vary in important ways. A negligent employer is liable for actual damages and reasonable attorneys' fees and costs.19 An employer found to have willfully failed to comply with the FCRA is liable for actual damages or statutory damages (ranging between $100 and $1,000), punitive damages and attorneys' fees and costs.20
The U.S. Supreme Court has held that to prove a "willful" violation of the FCRA, a plaintiff must demonstrate that the company either "knowingly" or "recklessly" acted in violation of the FCRA. The Court noted also that "a company subject to FCRA does not act in reckless disregard of it unless the action is not only a violation under a reasonable reading of the statute's terms, but shows that the company ran a risk of violating the law substantially greater than the risk associated with a reading that was merely careless."21 Thus, the Supreme Court has ruled that where the defendant acted consistent with a "reasonable interpretation" of the FCRA (for instance, where the FCRA's statutory language is ambiguous), the plaintiff will not be able to prove a "willful" violation of the FCRA – even if the court disagrees with the defendant's interpretation.22
View the full report, including mitigating measures, online.
Rod Fliegel, co-chair of the Hiring and Background Checks practice group, has broad subject matter experience and expertise in class action defense and the intersection of the federal and state background check laws, such as Title VII and the Fair Credit Reporting Act. He has extensive experience defending employers in state, federal and administrative litigation, including matters with the Equal Employment Opportunity Commission, the Federal Trade Commission, and the New York Office of the Attorney General.
Jennifer Mora, a shareholder in Littler's Los Angeles office, advises employers and consumer reporting agencies on the intersection of federal and state background check laws. She also regularly defends employers and consumer reporting agencies in federal and state courts against claims brought under the Fair Credit Reporting Act and its state law equivalents.
William J. Simmons, an associate in Littler's Philadelphia office focuses his practice in a wide range of labor and employment matters, ranging from nationwide wage and hour class and collective actions to individual lawsuits. He regularly defends employers in connection with discrimination charges filed at the Equal Employment Opportunity Commission, state administrative agencies and handles cases involving employment claims, in connection with the Fair Credit Reporting Act.
2 15 U.S.C. § 1681 a(d) ("Consumer reports are any written, oral or other communication of any information by a consumer reporting agency bearing on a consumer's credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumer's eligibility for ... employment purposes."). "The term 'employment purposes' . . . means a report used for the purpose of evaluating a consumer for employment, promotion, reassignment or retention as an employee." 15 U.S.C. § 1681a(h).
3 In 1996, Congress passed the Consumer Credit Reporting Reform Act, an amendment that augmented the FCRA's specific protections for job applicants and employees. Appendix A sets out the primary employment-related provision.
4 The controversial Consumer Financial Protection Bureau (CFPB) now shares oversight of the FCRA with the FTC. See Rod M. Fliegel and Jennifer Mora, Employers Must Update FCRA Notices for Their Background Check Programs Before January 1, 2013, Littler ASAP (Sept. 4, 2012) available at http://www.littler.com/publication-press/publication/employers-must-update-fcra-notices-their-background-check-programs-jan.
5 For a detailed discussion of the FCRA's requirements, see Rod Fliegel and Jennifer Mora, The FTC Staff Report on "40 Years of Experience with the Fair Credit Reporting Act" Illuminates Areas of Potential Class Action Exposure for Employers, Littler Report (Dec. 12, 2011), available at http://www.littler.com/publication-press/publication/ftc-staff-report-40-years-experience-fair-credit-reporting-act-illumin.
6 15 U.S.C. §§ 1681a(d) and (e).
7 15 U.S.C. § 1681b(b). But see 15 U.S.C. § 1681a(y) (related rules for misconduct investigations). For employers regulated by the federal Department of Transportation (DOT), and where the applicant applies for employment by mail, telephone, computer or other similar means, the employer may provide the disclosure, along with a Summary of Rights under the FCRA, to the applicant or employee orally, in writing or by electronic means. 15 U.S.C. § 1681b(b)(2)(B)(i).
8 15 U.S.C. §§ 1681b(a)(3)(B) and 1681b(b). For DOT-regulated motor carriers, and where the applicant applies for employment by mail, telephone, computer or other similar means, consent may be oral, written or electronic. 15 U.S.C. § 1681b(b)(2)(B)(ii). In addition, the Electronic Signatures in Global and National Commerce Act (ESIGN), 15 U.S.C. § 7001, generally gives legal force to electronic signatures, contracts, and other records. The FTC issued an opinion letter in 2001 indicating that it believed that a "consumer's consent is not invalid merely because it is communicated in electronic form" under the FCRA as a result of ESIGN. See FTC Opinion Letter May 24, 2001 (Brinckerhoff). Nevertheless, employers should consult with their counsel before making any changes to their FCRA procedures, including any contemplated transition to electronic records.
11 15 U.S.C. § 1681a(k)(l)(B)(ii).
12 15 U.S.C. § 1681b(b). If an individual contacts the employer in response to the pre-adverse action notice to say there was a mistake (inaccuracy or incompleteness) in the consumer report, the employer may exercise its discretion whether to move forward with the hiring decision or engagement; the FCRA does not dictate a course of action. However, by law, the CRA must, within 30 days, promptly investigate any dispute about the accuracy or completeness of the report from the individual. 15 U.S.C. § 1681i. If the CRA updates the consumer report, both the individual and the employer will receive notice. Please note, however, that related state and local laws may differ.
13 Obabueki v. IBM and Choicepoint, Inc., 145 F. Supp. 2d 371, 392 (S.D.N.Y. 2001).
15 Id. DOT-regulated motor carriers are not required to provide a "pre-adverse action" notice to applicants or employees if the applicant applied for employment by mail, telephone, computer or other similar means. 15 U.S.C. § 1681b(b)(3)(B). Rather, motor carriers must provide to the individual, within three days of taking adverse action, an oral, written or electronic notification that adverse action has been taken, which must include the same disclosures required in "adverse action" notices for non-trucking employers. Id.
16 See, e.g., Beverly v. Wal-Mart Stores, Inc., 2008 U.S. Dist. LEXIS 2266 (E.D. Va. 2008); see also Johnson v. ADP Screening and Selection Services, 768 F. Supp. 2d 979, 983-984 (D. Minn. 2011) (rejecting the plaintiff's argument the employer must wait at least as long as the CRA has to reinvestigate a consumer dispute, per § 611, because the plaintiff's interpretation "would create untenable constraints on employers. If adopted, each time an employer wanted to hire, it would be prevented from acting if the consumer report of any applicant – even one that it had no intention of hiring – contained information that reduced that applicant's competitiveness. The employer would then have to place the entire process on hold and leave the position unfilled until the reporting agency had 30 days to investigate.").
17 15 U.S.C. §§ 1681n and 1681o.
20 15 U.S.C. § 168ln. Some courts have ruled that statutory damages may be recovered notwithstanding the absence of any actual damages. See, e.g., Bateman v. Am. Multi-Cinema, Inc., 623 F.3d 708, 719 (9th Cir. 2010). Some courts have also ruled that the lack of any actual harm does not defeat the plaintiff's standing to proceed in federal court. See, e.g., Robins v. Spokeo, Inc., 742 F.3d 409, 412 (9th Cir. 2014).
21 Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 52, 69 (2007).
22 See id.; see also Fuges v. Southwest Fin. Servs., Ltd., 707 F.3d 241, 250-255 (3d Cir. 2012) (the defendant's interpretation of the terms "consumer reporting agency" and "consumer report" in § 1681a of the FCRA were not objectively unreasonable because the terms are ambiguous as applied to its real property-related reports, the defendant's reading had a foundation in the statutory text, and no circuit court or federal agency previously had opined on the issue); Long v. Tommy Hilfiger, U.S.A., Inc., 671 F.3d 371, 376-377 (3d Cir. 2012) (merchant's interpretation of the term "expiration date" in § 1681c(g)(1) of the FCRA was erroneous, but the violation was not willful, because the merchant's interpretation had a foundation in the statutory text and no circuit court previously had ruled on the issue); Shlahtichman v. 1-800 Contacts, Inc., 615 F.3d 794 (7th Cir. 2010) (merchant's interpretation of the term "print" in § 1681c(g)(1) of the FCRA was correct, but even if erroneous, would not support a willful violation because no circuit court or federal agency previously had opined on the issue); Levine v. World Fin. Network Nat'l Bank, 554 F.3d 1314, 1318-1319 (11th Cir. 2009) (the defendant credit bureau's interpretation of its obligations under § 1681e(b) of the FCRA was correct, but even if erroneous,
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