Pitfalls of Delegating the Employment Adverse Action Process to Consumer Reporting Agencies
In the complex landscape of employment background screening, compliance with the Fair Credit Reporting Act (FCRA) and state-specific laws is critical. One area that demands particular attention is the adverse action process, that is, the legal steps an employer must follow when deciding not to hire a candidate based on information in a background report. While some employers may be tempted to outsource this process to their consumer reporting agency (CRA), doing so can expose them to legal and regulatory risks.
The Employer’s Legal Responsibility Under the FCRA
The FCRA requires employers to follow a two-step process before taking adverse action:
- Pre-Adverse Action Notice: Along with this notice, the employer must provide the candidate with a copy of their consumer report and a summary of rights under the FCRA.
- Adverse Action Notice: After a reasonable waiting period–typically at least five business days, per Federal Trade Commission (FTC) guidance–the employer may send a final notice if they decide not to hire the candidate.
This process allows candidates to dispute inaccurate or incomplete information before a final decision is made.
Timing Matters: The Risk of Premature Decisions
The timing between the pre-adverse and adverse action notices is not explicitly defined in the FCRA, but courts and regulators have consistently held that five business days is the minimum acceptable waiting period. If a CRA sends both notices too close together or simultaneously, it undermines the candidate’s right to dispute the report and may be seen as a violation of the FCRA.
Who Is Making the Hiring Decision?
The most critical issue arises when a CRA appears to be making the hiring decision rather than the employer. If a CRA sends adverse action notices without the employer’s review or discretion, it could be construed that the CRA is deciding the candidate’s eligibility for employment. This is problematic because:
- Only the employer can assess job-relatedness and business necessity.
- CRAs are not equipped to perform individualized assessments, which are required under many state and local laws.
Fifteen states (California, Colorado, Connecticut, Hawaii, Illinois. Maine, Maryland, Massachusetts, Minnesota, New Jersey, New Mexico, Oregon, Rhode Island, Vermont and Washington) have “Ban-the-Box” laws, several of which require employers to conduct individualized assessments before taking adverse action based on criminal history. Additionally, cities and counties like Los Angeles, New York City, and San Francisco have their own ordinances that include more stringent requirements for these assessments. These assessments typically involve evaluating the nature and gravity of the offense, its relevance to the job, and the time that has passed, and must be documented and provided to the applicant. They cannot be delegated to a CRA.
Legal Precedent: When a CRA Crosses the Line
While there is limited case law directly holding that a CRA made the decision instead of the employer, courts have scrutinized situations where employers failed to retain control over the adverse action process. In Goode v. LexisNexis Risk & Information Analytics Group, Inc., the court emphasized that employers must make the final employment decision and cannot rely solely on automated decision tools provided by CRAs.
Additionally, in Henderson v. CoreLogic, the court found that the CRA’s automated scoring system used to filter candidates could be interpreted as making employment decisions, raising serious FCRA compliance concerns.
These cases underscore the importance of employer discretion and the legal risks of outsourcing the hiring decision.
Conclusion
Delegating the adverse action process to a CRA may seem efficient, but it can lead to serious compliance failures. Employers must remain actively involved in evaluating background check results, conducting individualized assessments, and making final hiring decisions. The stakes are too high to outsource this critical function.
Disclaimer: This communication is for general informational purposes only and does not constitute legal advice. The summary provided in this alert does not, and cannot, cover in detail what employers need to know about the amendments to the Philadelphia Fair Chance Law or how to incorporate its requirements into their hiring process. No recipient should act or refrain from acting based on any information provided here without advice from a qualified attorney licensed in the applicable jurisdiction.