Employment Purpose Considerations
The most recent FTC report issued in July 2011 (the “Staff Report”) provides that the term “employment purposes” is interpreted liberally to effectuate the broad remedial purpose of the FCRA. As a result, it may apply to situations where individuals are not technically employees, such as contractors or volunteers. In addition, a consumer report used in connection with security clearances of a government contractor’s employees would be for “employment purposes” under the FCRA, according to the Staff Report. In its other guidance, the FTC indicates that traditional employee case law does not apply—instead, in each case, the substance of the relationship and in particular whether the job being performed has traditionally been an employee function determines an independent contractor relationship. The FTC provides little or no guidance regarding partners or directors, and there is no definitive authority, although one case (Hoke v. Retail Credit Corp., 521 F. 2d 1079) suggests that partners are consumers entitled to FCRA protections.
There is no single or simple answer as to the application of the FCRA to these positions—the end-user of the report must examine the substance of the relationship and decide accordingly. As noted above, when looking at independent contractors, the FCRA treats many independent contractors as employees if the particulars of the relationship suggest that the subject is in the class entitled to the protection of the FCRA. In the case of partners and directors, this analysis becomes more complex and the focus may be on whether the person is an employer or an employee. Is the advancement of an employee to a partnership position a “promotion” which makes the report a consumer report relating to employment? It appears so, as an evaluation relating to a promotion is subject to the FCRA–substantively these are the individuals that the FCRA is meant to protect, especially when there are hundreds of partners, as is the case with large accounting and law firms. But consideration for becoming a partner in an investment transaction does not fall under the FCRA’s permissible purpose of employment, as such partners have control and personal liability and, therefore, are “employers” and not “employees” within the protected class. To make this all the more difficult, this complexity is veiled with uncertainty resulting from the fact that the applicable legal principles are essentially unresolved.
Obligations of Employers Before Procuring a Consumer Report
Before procuring a consumer report or an investigative consumer report (an investigative consumer report is essentially a subset of a consumer report, whereby the CRA obtains information through personal interviews (e.g., an in-depth reference check)), the employer must certify to the CRA that:
- it has a permissible purpose for procuring a report from the CRA;
- it has provided the required disclosures to the applicant/employee (described below);
- it has obtained the requisite written authorization from the applicant/employee;
- it will not use the information contained in the report in violation of any federal or state equal opportunity law or regulation; and
- it will, if any adverse action is to be taken based on the report, provide the applicant/employee with a copy of the report and a summary of the consumer’s rights under the FCRA.
The employer is not required to make this certification each time it orders a consumer report [15 U.S.C. § 1681b(b)]. Rather, a blanket certification to the CRA is permissible in most circumstances. Only the CRA can be liable for a violation of this portion of the FCRA, rather than an employer because the FCRA places this duty on the CRA [1681b(b)(1)(B)].
Credentialing of Employer by the CRA
A CRA is legally required to take “reasonable steps” to ensure that the employer is a legitimate business entity and will use the background information provided by the CRA in a legal manner. This typically includes performing due diligence on the employer and its key principals to ensure that the employer has correctly represented its type of business and that it is a legitimate business entity.
If the background check will include or consist of a consumer credit report or obtaining certain employment information from a national consumer reporting agency (i.e., TransUnion, Equifax or Experian) additional credentialing is required, which in most instances includes an inspection of the employer’s facilities to further substantiate that the employer is a valid business, has a true business identity, and meets privacy and security requirements in connection with receiving the reports.
Before a CRA agrees to furnish a consumer report, the CRA is required to provide to the employer a “Notice to Users of Consumer Reports” (issued by the Consumer Financial Protection Bureau) which explains the employer’s obligations under the FCRA.
Disclosure and Authorization Requirements
Before procuring a consumer report, an employer must provide to the applicant/employee a disclosure that a report may be obtained for employment purposes, and obtain his/her authorization. Guidance from the Staff Report and/or other FTC’s advisory literature indicate that:
- Disclosure must be in a clear and conspicuous, standalone document, which means that it cannot be part of a printed employment application, and may contain only minor additional items, such as the type of information that may be obtained, so long as the description does not confuse the applicant/employee or detract from the mandated disclosure. The document may not include extraneous or contradictory information, such as a request that the individual waives his/her rights under the FCRA.
- The disclosure/authorization form must include checkboxes for California, Minnesota and Oklahoma applicants or employees to expressly request a copy of his/her consumer report from the employer. (A best practice is to include a checkbox for all applicants/employees, regardless of the particular state’s requirement.)
Additional requirements apply to California employers, since a consumer report, as defined under the FCRA is considered an investigative consumer report under California law. Accordingly, the disclosure must state that an “investigative report” may be obtained, which may include information on the consumer’s character, general reputation, personal characteristics and mode of living obtained through any means. The scope of the report also must be provided, as well as the name, address, telephone number and website address of the investigative consumer reporting agency.
The Staff Report provides that the disclosure language and request for authorization may be combined in a single document, and certain identifying information may be included. But the Staff Report also emphasizes the FTC’s formalistic reading of the FCRA, i.e., that the statute literally commands the use of a stand-alone document.
If an applicant/employee refuses to consent to the background check, the FTC takes the position that the FCRA “does not prohibit an employer from taking adverse action but it does not specifically authorize to take such action.”
Most CRAs, including Scherzer International, provide model disclosure/authorization forms for their clients to use; however, employers can use their own forms providing that the content is compliant with FCRA and state and local requirements. The content of the disclosure/authorization forms is ultimately the employer’s responsibility.
One-time blanket disclosure
The FCRA permits a one-time blanket disclosure if it states “clearly and conspicuously” that the employer intends for the disclosure and authorization to cover consumer reports obtained as part of the application process, and any additional consumer reports obtained while the individual is an employee.
Notably, California law is not clear about an evergreen provision, and therefore, providing notice to the applicant/employee and obtaining his/her authorization each time a background report is requested should be considered. However, since the last revisions to California’s Investigative Consumer Reporting Agencies Act (the “ICRAA”) were designed to follow the FCRA, there is at least a viable argument that the disclosure and authorization request need only be made once in the employment relationship. For reference purposes, below is the relevant language comparison:
- CA Civil Code Section 1786.12(B) states “. . . at any time before the report is procured or caused to be made in a document that consists solely of the disclosure . . . “
- FCRA Section 604(B) states: “. . . at any time before the report is procured or caused to be procured, in a document that consists solely of the disclosure . . .”
Combined disclosures for consumer reports and investigative consumer reports
The FCRA permits combined disclosures, but employers that intend to obtain both types of reports must provide the disclosures required by Section 604(b) for consumer reports and by Section 606(a) for investigative consumer reports.
- The latter notice must be provided to the applicant/employee within three days of the request for the investigative consumer report, and clearly and accurately disclose that an “investigative consumer report” may be obtained and that such a report involves personal interviews with sources that may include neighbors, friends or associates.
- The employer must further disclose to the applicant/employee the right under Section 606(b) to “request complete and accurate disclosure of the nature and scope of the investigation.”
- If the applicant/employee requests a disclosure from the employer, Section 606(b) requires that:
a) [the employer] make a complete and accurate disclosure of the nature and scope of the investigation requested, and include a complete and accurate description of the types of questions asked, the types of persons interviewed, and the name and address of the CRA;
b) the disclosure be made in writing and mailed, or otherwise delivered, to the applicant/employee not later than five days after the date on which the request for such disclosure was received or such report was first requested, whichever is the later.
Pursuant to the federal Electronic Signatures in Global and National Commerce Act (“ESIGN”), an applicant or employee may provide a general (rather than employment-related) authorization in an electronic format. Electronic authorization is permitted by the text of the FCRA for DOT-regulated employers in certain specified circumstances [15 U.S.C. §§ 1681b(b)(2)(B),(C)]. The FTC Staff Report’s general acceptance of electronic signatures reasonably would appear to extend to employment-purpose reports.