The Fair Credit Reporting Act Can Be a Trap If you're an employer performing a background check, be very, very careful.

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Employers commonly obtain criminal background checks or credit checks when deciding whether to hire an applicant or promote a current employee. Unfortunately, it is also common for employers to overlook the fact that, in most circumstances, the federal Fair Credit Reporting Act (FCRA) and various state and local laws impose specific, technical requirements that employers must follow.

Related: Red Flags and Red Herrings in Job Applicants' Credit Reports

This is true whether employers are newly obtaining such information or taking adverse action based upon it.

However, a spate of recent lawsuits has shown that employers who utilize "consumer reports" in making employment decisions but fail to comply with FCRA and related state law requirements do so at their peril.

Over the past year, there has been a substantial increase in lawsuits claiming that employers violated one or more consumer reporting laws, such as the FCRA. Such lawsuits are almost always brought as class actions and, in some cases, have resulted in settlements in the range of $2 million to as much as $7 million (due to the availability of statutory, i.e., automatic, damages under the FCRA of between $100 and $1,000 per consumer).

This means that plaintiffs may seek to recover up to $1,000 for every person on whom an employer ran a noncompliant background or credit check, even if those people cannot prove that they suffered any actual damages as a result.

Though large companies have been the target of most of the FCRA class actions to date, these cases will likely soon trickle down to smaller companies. Thus, compliance with the FCRA and related state and local laws should be on the minds of all employers, regardless of size. Here are some practical tips to bear in mind as you focus on minimizing your own legal risks in this area of employment law.

1. Use a simple and separate disclosure form.

The FCRA requires that, before obtaining a background or credit check on an applicant or employee, an employer must give the individual a "clear and conspicuous" written disclosure that a consumer report is being obtained for employment purposes. The document should consist solely of that disclosure. Many recent FCRA lawsuits are based, at least in part, on allegations that the employer's disclosure contained extraneous information, such as a liability release or an at-will employment disclaimer.

To satisfy the FCRA's freestanding disclosure requirement, disclosure forms should be short and simple and not contain any extraneous information. All other information -- including any additional disclosures required by state laws -- should be placed in an additional form completely separate from the FCRA disclosure.

Related: Using Credit Checks to Help in Hiring

2. Create a hiring process that complies with the FCRA's adverse action notification requirements.

The FCRA also requires that, before taking an adverse action (such as not hiring an applicant) based in whole or in part on information obtained from a consumer report, an employer must provide the individual with a copy of the report and a government-prescribed summary of the consumer's rights under the FCRA. The employer must then give the individual a reasonable amount of time to dispute the accuracy of the information before proceeding with the adverse action.

Five business days is generally accepted as a safe waiting period. In addition to this pre-adverse action notification, if the employer proceeds with the contemplated action, it must provide a second, post-adverse action notification containing certain required elements. Employers frequently grapple with the challenge of establishing a hiring process to facilitate compliance with these requirements and ensure that individuals have a reasonable amount of time to dispute information in a consumer report, while not unduly hampering the company's hiring efforts.

There are no easy solutions: The best process for a particular employer will depend in large part on its specific hiring needs and practices, and its own calculus for balancing the need to minimize impediments in the hiring process against the desire to minimize FCRA liability risks.

3. Don't rely on someone else's forms.

Many vendors that provide background check services also make available form documents -- including FCRA disclosure and pre-adverse action notification forms -- for their customers to use. Frequently, however, these forms do not comply with the FCRA or applicable state laws. They are too wordy and confusing, and many do not adequately address state law requirements.

As a result, employers should not blindly rely on form documents they obtain from other sources, even if those sources are in the business of providing consumer reporting services. Nor should they view FCRA compliance as a minor business issue that can simply be outsourced to a vendor without appropriate input and oversight by the company. Rather, employers should vet their forms (and their practices for implementing the forms) with experienced counsel.

4. Don't forget about state and local laws.

Many states, and an increasing number of cities, impose additional requirements on employers that obtain background or credit checks in connection with employment decisions. These additional requirements, which vary quite dramatically from state to state, can in some cases carry potential liability that is just as significant as the statutory damages available under the FCRA. Employers must therefore become aware of the laws in their jurisdictions and set up their form documents, policies and practices accordingly.

In conclusion, FCRA compliance is no longer something employers can afford to take lightly. Business owners should strongly consider seeking the advice of counsel in connection with compliance efforts, because this is an area where a small investment in legal advice upfront can significantly reduce the subsequent risks inherent in noncompliant background check practices.

Related: 17 Great HR Resources for Entrepreneurs

Wavy Line
Brett E. Coburn and Brooks A. Suttle

Attorneys, Alston & Bird LLP

Brett E. Coburn is a partner in Alston & Bird’s Labor & Employment practice group.  He frequently counsels clients of all sizes on compliance with the Fair Credit Reporting Act (FCRA) and related state and local laws.

Brooks A. Suttle is an associate in Alston & Bird’s Labor & Employment practice group. He has developed expertise in both the Fair Credit Reporting Act and state consumer reporting laws, and is currently assisting with his second defense of an FCRA class action lawsuit.

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