What is Adverse Action Under the FCRA?

What happens when a background check on an applicant or employee uncovers something that would negatively impact that person’s employment? Under the Fair Credit Reporting Act (FCRA), an employer must take specific steps before and after you can take an ‘adverse action’ based on the report.

Let’s back up and look at two key definitions:

Employment background check: Also known as a consumer report and can include information from a variety of sources such as credit history and criminal records.

Why this matters: Consumer reports are subject to federal nondiscrimination laws enforced by the Equal Employment Opportunity Commission (EEOC) and the Fair Credit Reporting Act (FCRA), which is enforced by the Federal Trade Commission (FTC).

Adverse Action: Refers to an employer’s decision to not hire an applicant or to fire or demote an employee based on background information obtained from an employment background check (consumer report).

Why this matters: When considering taking adverse action on the basis of a background report you received from a company in the business of compiling background information, you must comply with FCRA guidance.

How to Explain Adverse Action to Your Applicants and Employees

Sometimes the person you are considering for employment gives you a reason to reconsider. When this is due to information found on a background check you’ve ordered from a third-party provider and you decide you may make a decision that would negatively impact the individual’s employment, you must follow adverse action guidelines.

In doing so, it’s important to guide individuals negatively impacted by a background check through the adverse action process. They need to understand their rights, your rights, and how a final decision will be made.

Here are some key points to communicate:

Background checks are done only with the subject’s permission.

Assuming you’ve followed FCRA pre-background check disclosure and authorization requirements, you can remind your applicant or employee (the subject of the background check) that they have already given their permission for you to obtain a background check, which the FCRA calls a consumer report.

Applicants/employees will receive a copy of the consumer report.

Before you take adverse action, you will provide the applicant or employee a notice that includes a copy of the background check/consumer report you used to make your decision and provide them with a summary of their rights under the FCRA. This is commonly referred to as a “Pre-Adverse Action Notice.”

Applicants/employees will be given time to review, confirm, or refute the findings in the consumer report.

Assure your applicant/employee that you will give them time to review the report and respond to confirm or refute what was found in the report. Where applicable, you will perform an individualized assessment that takes into account their individual situation. This is especially important in the case of a candidate with a criminal record.

A final adverse action notice will be provided.

Finally, if you ultimately decide to take adverse action (e.g., denying employment opportunity, terminating employment, or any other action which negatively impacts employment or potential employment), you will give the applicant an “Adverse Action Notice” that includes:

  • The name, address, and phone number of the consumer reporting agency (background screening provider) that supplied the report.
  • A statement that the company that supplied the report did not make the decision to take the adverse action and can’t give specific reasons for it.
  • A notice of their right to dispute the accuracy or completeness of any information the consumer reporting agency furnished, and to get an additional free report from the company if the person asks for it within 60 days.

Adverse action is unfortunate for both the candidate who hoped to be hired and the employer who hoped to gain a valuable employee. It’s important to remember that employers have a duty to build a safe, productive workforce and employees have a duty to serve the interests of the organization. Striking the right balance sometimes means employers have to difficult decisions based on a background check.

Need help with your adverse action process?

Proforma can help administer your adverse action process to meet FCRA and applicable state or local regulations. We can administer initial notices to applicants/employees, manage the review/dispute waiting period, and send final adverse action letters in accordance with your employment decisions. Reach out to us to learn more about these services.