Keep Potential Employees Informed with an Adverse Action Notice

As an employer, you know it's important to hire people with excellent skills and unblemished backgrounds. You also want to look for employees you can rely on for their honesty and trustworthiness.

Although you may likely want to refuse giving a bookkeeper job to someone who committed perjury or fraud, for example, you can't perform this adverse action without following procedures listed in the Fair Credit Reporting Act (FCRA) if one of the reasons for not hiring is the credit report's contents. While the FCRA was originally intended to protect individuals from denials of loans and other credit, the act also applies to denial of employment.

Types of adverse action

Adverse employment action refers to an employer's decision not to hire, promote, or even continue to employ an individual based on information found in an individual's background check. Such an action could also consist of denying a transfer or limiting where the applicant can work.

Based on a background check, employers cannot fail to hire or promote an employee or job candidate without following certain procedures under the FCRA—otherwise, you're opening yourself up to a potential lawsuit. Well-known companies have paid millions of dollars to applicants who lost jobs without being informed that they were:

• Agreeing to a background check
• Being considered for termination or denial of employment
• Denied employment, promotions, or transfers without written notice explaining why
• Allowed to dispute the information found in the background check

Procedures for following the FCRA

All companies, large and small, must follow FCRA procedures in employment situations. The FCRA, some states, and even certain individual cities require employers to get a potential employee's signature before allowing an agency to perform a background check.

If the background check discovers a criminal history that would impact job performance or the company, you must inform the applicant with a pre-adverse action letter. After you send that letter, if the company decides against hiring the potential employee, the employer must then send an adverse action notice.

Performing a background check

Getting a background check is often the first step in the hiring process, and the outcome may affect the decision as to whether to hire the applicant. For some jobs, employers want to look into a potential employee's background, while for other jobs, such as hiring for a federal agency, a background check is required.

Once the potential employee signs an authorization form, the employer sends identifying information about that applicant to a third-party consumer reporting agency (CRA). For a fee, the CRA researches the potential employee's background, including credit history and any possible criminal activity.

Pre-adverse action

When the background check comes back, it may contain information about the potential employee that makes you want to consider not hiring them. For example, if you're hiring a host for your restaurant, that person should interact well with the public; having an assault on their record suggests that this potential employee is not the best person for the job. You can't just ignore their application or simply inform them they're not being hired. You must take the second step, which is to send a pre-adverse action letter, which states that the company may issue them an adverse decision based on the results of the background check. The letter should include the following:

• A copy of a document entitled A Summary of Your Rights Under the Fair Credit Reporting Act
• Notification that the employer is deciding whether to hire the potential employee
• A copy of the consumer report and background check
• Notification that the potential employee may dispute the contents of the reports by contacting the CRA directly, with the name, address, and phone number of the CRA
• That the CRA is not involved in any hiring decisions

After you send the pre-adverse action letter, the applicant must have a reasonable amount of time—usually five to ten business days—to dispute the reports and to provide the correct information. The employer can then determine whether to hire the applicant.

Adverse action letter

If the decision is made not to hire the applicant, the employer must send an adverse action notice, which includes another copy of A Summary of Your Rights Under the Fair Credit Reporting Act.

An adverse action notice states that:

• The employer has decided not to hire them based on the background reports.
• The applicant has 60 days to request another copy of the background report from the CRA, along with the CRA's name, address and phone number.
• The applicant can dispute the information contained in the reports.
• The CRA had nothing to do with the hiring decision.

Performing these actions are necessary under the FCRA and to prevent potential lawsuits for noncompliance. Check to see how much time your state requires before sending an adverse action letter.