The growing list of companies subject to Fair Credit Reporting Act (FCRA) class-action lawsuits is a cause for concern. Originally enacted in 1970 to protect consumers privacy from Consumer Reporting Agencies (CRAs), the FCRA can also apply to any company conducting background checks on potential new employees

[§604 (a)(3)(B)]. In recent years, the Federal Trade Commission (FTC) has filed more than 100 cases against companies for credit-reporting problems and has collected more than $30 million in civil penalties. Now more than ever, employers are being held to strict FCRA guidelines to safeguard the privacy and rights of potential employees. Despite the lengthy legal guidelines, it is still imperative for businesses to conduct background checks on all prospective hires.

According to a 2012 survey conducted by the Society for Human Resource Management (SHRM), only 69 percent of employers conduct background checks on every new job applicant. Inadequate pre-employment due diligence can have a potentially damaging impact on a business; one related statistic notes that 30 percent of small businesses fail due to employee theft (Benefit Companies). To prevent such losses and to sustain business practices, employers must conduct background checks to aid in the vetting of appropriate new hires.

A background check requires expressed, written consent from the prospective employee. According to FCRA, the disclosure of, and authorization for a background check must be a standalone document. Additionally, it must be signed by the applicant prior to the commencement of the check [§604 (b)(2)(A)]. A number of large companies have recently been cited for non-compliance with this statute.

In 2013, a large international fast food franchise fell victim to an FCRA class-action suit. According to the complaint, the franchise obscured its disclosures deep within the job application, leaving many employees unaware that they had authorized a background check (Leagle). The FCRA §604 (b)(2)(A)(i) specifically states that the disclosure must be œclear and conspicuous and cannot have any other information included; therefore, this company violated the FCRA (Federal Trade Commission, 2012). Several other similar FCRA class action suits against large companies alleged that these companies used broad waivers and release of liability clauses as the means of consent to a background check, both of which are FCRA violations. FCRA §604 (b)(2)(A)(ii) says that employers must obtain direct authorization in writing to run a background check.

Another significant misstep usually occurs when taking Adverse Action against the prospective employee. FCRA defines Adverse Action as, œa denial of employment or any other decision for employment purposes that adversely affects any current or prospective employee¦ [§603 (k)(B)(ii)]. By law, companies are required to follow a two-step process: Pre-Adverse Action and Final Adverse Action.

The first step is a Pre-Adverse Action notice, which provides the potential employee with a copy of the background report and a copy of their Summary of Rights under the FCRA. The purpose of the Pre-Adverse Action notice is to give the potential employee an opportunity to dispute the accuracy of the report, although many times companies fail to attach the background report or the Summary of Rights.

If no corrections are made, or the corrections are still deemed insufficient, the employer is required to provide the employee with a Final Adverse Action notice “ informing the employee of a decision not to hire. The Final Adverse Action notice should also include the contact information of the company that performed the background check, notice of the right to dispute the report with the investigators, and a reminder that the investigators had no impact on the ultimate decision not to hire.

There are many simple solutions to help your company avoid a class-action suit, all of which can be distilled to: know your company’s rights and compliance guidelines under the FCRA. Do your research, become a thought-leader on the subject, and routinely educate your personnel on new (and old) developments.