Excerpted from a Pepper Hamilton LLP blog by Lee E. Tankle

Q: Are there certain rules an employer must follow when conducting background checks or employees and prospective employees?

A: The Fair Credit Reporting Act (“FCRA”) is an often overlooked federal law that imposes stringent technical requirements on employers wishing to procure a “consumer report” from a third party “consumer reporting agency” for hiring or other employment purposes. Individual FCRA lawsuits and class actions are on the rise and failure to comply with the FCRA can result in harsh financial penalties. This blog post provides a brief overview of the FCRA.

The FCRA’s definition of a “consumer report” is quite broad and includes, but is not limited to, credit reports, criminal history reports, and driving records obtained from a “consumer reporting agency.” Nearly every third-party background check provider will qualify as a “consumer reporting agency” under the FCRA. Before obtaining a consumer report to be used for employment purposes, employers are required to provide applicants and employees with a written disclosure stating that the employer plans to conduct a background check and employees/applicants must provide written authorization for the employer to obtain a consumer report prior to the employer actually obtaining the consumer report. The disclosure and authorization must be in a stand-alone document and cannot be part of the employment application.

After obtaining a consumer report, but prior to taking any adverse action based on the consumer report (e.g., not hiring an applicant because of her criminal record), the employer must provide an applicant with a “pre-adverse action” notice that includes a copy of the consumer report at issue and written notice of an applicant’s rights under the FCRA. The purpose of this requirement is to give the applicant the opportunity to correct any wrong information in a consumer report prior to the employer taking adverse action. Although the FCRA does not specify how long in advance the pre-adverse action notice must be given prior to taking adverse action, a period of at least five (5) business days generally is considered appropriate.

If an employer eventually decides to take adverse action, the employer must provide oral, written, or electronic notice of the adverse action and provide the applicant with certain information required by the statute. Although a written adverse action notice is not required by the FCRA, it is a good business practice to provide written notice so that documentation of compliance with FCRA requirements is available in the event of litigation.

A willful violation of the FCRA can result in statutory damages of $100 to $1,000 per violation, punitive damages and attorneys’ fees. Even if an employer is merely negligent in violating the FCRA, an applicant can still sue for any actual damages plus attorneys’ fees.

Before conducting any employment-related background checks or taking any adverse action based on a consumer report, be sure to also consult local and state laws. Certain states (such as California) have requirements in addition to those imposed by the FCRA. In addition, certain states restrict an employer’s use of the results of a background check. For example, Pennsylvania law only permits employers to consider criminal convictions “to the extent to which they relate to the applicant’s suitability for employment in the position for which he has applied.”

Employers should consult with legal counsel before implementing any type of background check program.