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. 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. 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 all this 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 candidate (described below);
- it has obtained the requisite written authorization from the candidate;
- 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 candidate 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. Rather, a blanket certification to the CRA is permissible in most circumstances.
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’s representations are truthful.
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 candidate a disclosure that a report may be obtained for employment purposes, and obtain their authorization. Guidance from the Staff Report, other FTC advisory literature and case law indicate that:
- The 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 candidate or detract from the mandated disclosure.
- The disclosure language and request for authorization may be combined in a single document; however, the FTC’s formalistic reading of the FCRA is that the statute literally commands the use of separate documents.
Additional disclosure requirements apply to employers in California, New York, Minnesota and Oklahoma, and many states and localities have yet additional notice requirements if criminal record or credit checks are being obtained.
Most CRAs, including Scherzer, provide model disclosure and authorization forms as a curtesy for their clients to use; however, employers can use their own forms. Providing compliant forms to the candidate is ultimately the employer’s responsibility.
Electronic authorization is permitted by the text of the FCRA for DOT-regulated employers in certain specified circumstances. The FTC’s general acceptance of electronic signatures reasonably would appear to extend to employment-purpose reports.