By: Evan M. Rosen, Esq.
Jackson Lewis P.C.
Restaurant companies that conduct criminal background checks on prospective employees should audit their practices to ensure they are complying with the Fair Credit Reporting Act (“FCRA”). Failure to do so can lead to class action litigation, with damages ranging from $100 - $1,000 per applicant over a 2-5 year period, plus attorneys’ fees and potentially punitive damages. Indeed, it is not uncommon to see judgments or settlements in the millions for these types of cases. With the potential for such high amounts, it is not surprisingly that plaintiffs’ lawyers are increasingly focusing their attention on FCRA lawsuits, including here in Georgia.
Employers who collect consumer reports from third-party vendors, called consumer reporting agencies (“CRA”), must implement certain safeguards under the FCRA.
First, the employer should not run a background check unless the applicant has signed an authorization form permitting the employer and CRA to do so. The authorization form must be a separate and distinct document. Therefore, it should not be part of an employment application or other document. As one example of how plaintiffs have creatively interpreted this provision, they have argued that a release of claims invalidates the authorization form because it is extraneous information that renders the document not separate and distinct. At least two district courts have agreed with the plaintiffs in this regard.
Second, if an employer wants to deny employment based in whole or in part because of the results of the background check, the employer must provide three things to the applicant: (a) a copy of the consumer report; (b) a summary of rights form ; and (c) an explanation to the applicant that the employer may make a hiring decision based in whole or in part because of the consumer report and provide the applicant with at least five business days to contest the results of the consumer report. This is generally referred to as a pre-adverse action letter. The purpose for it is that an alarming number of consumer reports are erroneous, and the law wants applicants to be given an opportunity to prove that the crime indicated on the report relates to a different person, not them.
Third, if the employer ultimately decides not to hire an applicant in whole or in part because of the consumer report, the employer must send an additional letter to the applicant, which informs the applicant of the employer’s decision. This communication is known as the adverse action letter and should be sent at least five business days after the pre-adverse action letter.
Note that these are just the basic requirements of the FCRA. There are other requirements that also apply to employers. For example, the use of a consumer report must be limited to a permissible purpose, as defined by the FCRA, and if employers are running investigative reports, there are additional disclosures that need to be made. Likewise, if your company operates in states outside of Georgia, there may be state laws governing background checks and credit reports. Therefore, it is important that you consult with experienced employment counsel to ensure compliance with the myriad of laws that pertain to background checks.
The Perils of Litigation
Under the FCRA, a plaintiff can sue for actual damages for negligent violations or statutory damages for wilful damages. Typically, these lawsuits arise in one of two scenarios. In the first scenario, an applicant is denied employment based on an incorrect consumer report and the employer fails to follow the procedures required by the FCRA. In such instances, the applicant may sue for actual damages he or she suffered as well as reasonable attorneys’ fees and costs. Because these cases require an individualized analysis for each applicant, they do not lend themselves to class action allegations as easily as claims for statutory damages.
The second type of case is one for statutory damages. These cases are based on technical violations of the statute and usually apply to many applicants, thus making these claims ideal for class action litigation. For example, if an employer’s authorization form is incorrect, arguably all applicants who signed the form and had a background check run could be potential class members. Similarly, if an employer failed to send the pre-adverse action letter or provide an applicant with a copy of the consumer report or summary of rights, a plaintiff could argue that those individuals may be part of a class.
In order for liability to attach to the employer for a statutory violation, however, the plaintiffs must establish that the employer acted wilfully. Much of the litigation in this area surrounds what the word “willful” means. Courts and parties differ on this issue, but suffice to say that it is not as difficult a standard as a restaurateur might imagine. Unfortunately, some courts view the willfulness requirement as more of a “reckless” standard to suggest that employers should knew or should have known of its obligations under the FCRA, and therefore may be held liable.
While employers have some defenses to these types of allegations, if a violation is found under a statutory theory, the potential liability is $100 to $1,000 per class member, plus reasonable attorneys’ fees and potentially punitive damages. The more class members, the higher the damages a plaintiff may collect. The class size is dependent, in part, on the statute of limitations, which is the earlier of two years after the date of discovery by the plaintiff of a violation or five years after the date on which the violating that is the basis of the alleged liability occurred.
How to Avoid Liability
Employers should audit and revise their hiring procedures and background check policies to ensure compliance with the FCRA. Ideally, the audit should be conducted by counsel to preserve the attorney-client privilege. In addition, employers should review their service agreements with its credit reporting agencies to analyze issues like indemnification, assumption of risk, notification of rights, and responsibility for complying with the FCRA. Finally, employers should train their hiring managers on proper procedures for complying with the FCRA.
Evan Rosen is a Shareholder in the Atlanta, GA office of Jackson Lewis P.C. Mr. Rosen defends employers against litigation based on allegations of discrimination, harassment, wage and hour and the Fair Credit Reporting Act. He regularly counsels employers on a wide variety of workplace issues.