Fair Credit Reporting Act (FCRA) Compliance: What You Need to Know
If you plan to evaluate a candidate’s past as part of your pre-employment screening process, you need to be aware of the requirements of the FCRA. This federal law dictates how employers can execute any pre-employment check, whether it’s a criminal background search for criminal records, a credit record check, or a verification of past employment.
Learn about the FCRA, how it affects employers, the importance of FCRA compliance, and the consequences if an employer fails to observe proper compliance.
What is the Fair Credit Reporting Act (FCRA)?
What is the FCRA? This act passed in 1971 to ensure that consumer screening agencies exercised their responsibilities with fairness, impartiality, and respect for the consumer’s right to privacy. The FCRA protects the subject of a screening by putting limits on what a reporting agency can report.
The FCRA officially became law in 1971 and has since been the key landmark for consumer, employee, and job seeker rights. It was the first law in the United States to regulate how private businesses could access and use someone’s personal information. Many additional laws on the subject have been passed in the years since, particularly since the internet and social media have created new avenues for encroaching into the privacy of citizens.
When the FCRA passed, the growing privacy-related trend in the U.S. wasn’t the expansion of online life but rather the growth of the credit reporting industry. The end of the 19th century birthed Retail Credit Co., the first significant credit reporting agency in American history. Retail Credit grew considerably over the first half of the 20th century, acquiring smaller agencies and expanding its size, reach, and influence.
The growth of Retail Credit and the credit reporting industry started to inspire controversy and backlash. Consumers were alarmed at how credit reports could deny them key opportunities, from loans to housing—especially since there was no mechanism in place for consumers to review their own credit reports, dispute their accuracy, or explain a lapse in credit to a creditor.
These concerns were well-founded: not only did consumers have no rights in credit reporting, but there was also a practice in the industry in which the investigators charged with assembling consumer credit reports had to hit “quotas” for adverse information on their reports. To hit those quotas, some investigators compiled reports based on incomplete information to cast a negative light on a consumer and their credit history.
In other cases, investigators fabricated negative information. Sometimes, they departed from credit history information with what they reported on credit reports, highlighting private information—such as race, national origin, sex, religion, disability, genetic information, marital status or sexual orientation—under the pretense of revealing details about a person’s “character.”
This rampant abuse of power ultimately led Congress to launch an inquiry into the credit reporting industry, which led to the passage of the FCRA.
The law took effect on April 25, 1971. While it has been revisited, amended, and improved several times in the years since, it remains the primary regulation for the reporting industry. It applies to entities ranging from the three major credit reporting bureaus (Equifax, Experian, and TransUnion) to screening companies such as ours.
The simplest way to describe the purpose of the FCRA is that it exists to protect the rights of consumers. In the past, consumers had no way to protect themselves from unethical, inaccurate, or overly intrusive reports. The FCRA is an in-depth, multi-layered law that defends these rights and lays out mechanisms for their protection.
Even though it mentions “credit reporting” in its title, the FCRA applies to much more than credit reports. The background reports regulated under the FCRA include the consumer’s credit standing, but they can extend to matters of character, general reputation, personal characteristics, mode of living, and similar information—all of which can determine a person’s eligibility for credit, insurance, or a job.
By these standards, screening companies qualify as a “consumer reporting agency” under the FCRA, and employee background screenings are considered consumer reports. Both are subject to the regulatory measures in the FCRA.
Within the FCRA, there are rules about what can be reported as part of consumer reporting agencies’ checks. For instance, bankruptcy cases can be no older than 10 years, and all other adverse information—except criminal convictions—can be no older than seven years. Reports cannot share medical information unless they are for insurance purposes.
Because other types of legislation can limit or restrict the information that employers can use to make hiring decisions, some employers experience confusion regarding employment background check regulations. The FCRA’s “seven-year rule,” for instance, features in discussions about how far back an employment investigation can go, even though the main type of information that most employers are seeking with background searches—criminal history—is not limited in this respect by the law. Some states have established their own laws to extend the seven-year rule to criminal history, but this restriction is not enforced at the federal level.
It is worth noting that, while states often have their own laws to supplement the FCRA, no state can pass a law that precludes or supersedes the FCRA. As a federal law, the FCRA must be obeyed by all reporting agencies and all employers throughout the U.S. and its territories.
In addition to protecting the consumer once the check is initiated, FCRA requirements also demand that an employer disclose certain information and obtain the consumer’s permission before their investigation can legally begin.
FCRA Compliance for Employers Running Background Checks
Any employer using past information obtained through a reporting agency such as ours for employment purposes must follow the FCRA to the letter. These requirements apply whether you are hiring for a full-time position or a part-time job, whether you are vetting contractors or temporary employees, and even if you are screening volunteers.
All these individuals have rights regarding their personal information, and employers are obligated to respect those rights under federal law.
Proper Disclosure & Consent
The first FCRA requirements that employers must follow apply before they run a check.
First, an employer must disclose to the candidate, in writing, that they intend to obtain a report for employment purposes. They must present this disclosure form as either a standalone document or coupled with only an authorization and consent form.
Employers are prohibited from bundling the disclosure and consent agreements with any other employment or application-related materials, including an initial job application or liability release. Each candidate must know exactly what they are agreeing to when they sign a consent form for a check.
To move forward with obtaining a report about a candidate, the employer must have a signed authorization form in hand from the candidate. If the candidate refuses to sign the consent form, the employer has the right to disqualify that candidate from employment consideration, but they cannot proceed with the screening without that consent.
These disclosure and consent forms serve multiple purposes:
1) They comply with the FCRA;
2) They notify the candidate that they are going to be subject to a check;
3) They observe the candidate’s right to refuse to give permission for the check if they so choose;
4) They give the screening company permission to conduct background checks; and
5) They can act as verification for the entities that will be contacted as part of the screening process—such as past employers or schools—that they can disclose information about the candidate.
In an employment check, this term refers to an employment decision that negatively affects a job candidate, such as choosing to disqualify a candidate from job consideration because of a red flag on the criminal report.
Per the FCRA, employers are required to provide a candidate with a notice if they are considering making an adverse decision about the candidate based on background findings. Employers must provide this notice to the applicant before they finalize their decision, providing a “reasonable” amount of time for the candidate to review the decision and respond to it.
In addition to a pre-adverse notice, the employer must provide the candidate with a copy of the report that led to the decision, as well as a copy of the Consumer Financial Protection Bureau’s summary of consumer rights under the FCRA. The employer must then wait a reasonable amount of time before making the adverse decision official and moving on with the hiring process.
How long is a reasonable amount of time for the pre-adverse decision stage? According to the Federal Trade Commission, employers should provide their candidates with at least five business days. This length of wait allows for the notice and other required documents to be delivered to the candidate via first class mail.
The waiting period also provides time for the candidate to dispute the report. Perhaps the candidate wishes to challenge the accuracy of the report, or maybe they want to provide context for the screening report so that the employer has a fuller picture of what happened. In any case, if the candidate does dispute the report, the FCRA forbids the employer from finalizing the adverse decision or moving forward with the hiring process until the dispute is resolved.
Any adverse hiring decision made by an employer after a report activates a checklist of FCRA requirements that the employer must follow exactly.
If an employer chooses to take action against a candidate because of something that they learned in a check, they must finalize the decision by taking the following steps:
- Notify the candidate of the adverse decision;
- Provide the candidate with information about the company that prepared the background reports, including the company name, address, and phone number;
- Include a disclaimer to the candidate that the investigation company prepared the report but did not make the adverse decision;
- Inform the candidate that they have the right to request another free copy of their report from the check company at any point within the next 62 days; and
- Tell the candidate that they can dispute any information on the report with the screening company, should they believe that information to be inaccurate, incomplete, or out of date.
Employers should check their state laws, which may stipulate additional requirements that apply to this adverse decision step.
Summary of Rights & Copy of Report
Find a full summary of consumer rights under the FCRA on the Consumer Financial Protection Bureau website. Employers must provide a copy of this document to all candidates during the pre-adverse process.
Once an employer has received the report from a check agency, they can copy and distribute it to the job candidate for their review.
At backgroundcheck.com, we can assist: an employer can provide us with email addresses for their candidates during the ordering process. If our reports lead to adverse decisions, we can send copies of the reports directly to the affected candidates.
Equal Employment Opportunity Commission (EEOC)
The FCRA is not the only word on legal compliance for investigations. The EEOC provides federal guidance that employers throughout the country should consider when devising their policies and protocols for vetting candidates.
Read our Learning Center page about the EEOC to find out more.
Common FCRA Violations
FCRA claims have increased in recent years. Employers that fail to comply with every nuance of the law can find themselves in the defendant’s chair for costly lawsuits.
We regularly cover major FCRA lawsuits on our blog. Some of the most common violations in pre-employment investigations are:
- Failing to provide disclosure and consent documents separate from other application materials
- Conducting checks without notifying candidates or obtaining written permission
- Not providing candidates with a reasonable amount of time to dispute their report before finalizing an adverse decision
- Failing to notify candidates in writing that negative action is based on a screening
- Not furnishing the candidate with a copy of the report, a summary of their rights, and other materials, documents, or information required by law
We strive to make compliance easy for our customers by providing access to a dedicated compliance area in our web-based background checks ordering system. Forms available through this portal include:
Frequently Asked Questions
Which steps must employers take when running a background check?
The key steps include offering a disclosure and securing applicant or employee consent, then following guidelines for notifying subjects of their rights for reviewing and disputing findings if negative action will follow the results of the report.
Which states follow the FCRA?
Because the Fair Credit Report is a federal law, all states must abide by it, as are territories such as Washington, D.C., Puerto Rico, and Guam.
What are the common FCRA background check violations?
Many of the most common FCRA check violations are process violations, such as a disclosure form bundled with the job application instead of presented as a standalone document, skipped steps before an adverse or pre-adverse hiring decision, and failure to provide the candidate with a copy of the history report.
While seemingly minor, these issues are violations of federal law and can lead to expensive lawsuits, including class-action suits.