An Employer’s Guide to Understanding the Fair Credit Reporting Act (FCRA)
- myHRscreens Expert
- Sep 23
- 3 min read
The Fair Credit Reporting Act (FCRA) is a federal law designed to promote accuracy, fairness, and privacy in the use of consumer information. Enacted in 1970 and enforced by the Federal Trade Commission (FTC) and Consumer Financial Protection Bureau (CFPB), the FCRA governs how consumer reporting agencies (CRAs) and employers handle credit and background information. For businesses, especially those involved in hiring or conducting background checks, compliance with the FCRA is critical to avoid penalties and maintain trust with candidates.
What Is the Purpose of the Fair Credit Reporting Act (FCRA)?
The FCRA protects consumers by regulating the collection, dissemination and use of consumer information contained in credit reports and other background screenings. It ensures individuals have the right to access their information, dispute inaccuracies, and know when their information is being used against them.
For employers, the FCRA provides a clear framework to follow when using consumer reports for employment purposes, striking a balance between business needs and employee rights.
Key Requirements for Employers Under the Fair Credit Reporting Act
Employers who use consumer reports for hiring, promotion, retention or reassignment decisions must comply with specific FCRA requirements. These include:
1. Disclosure and Authorization: Before requesting a consumer report, employers must provide applicants or employees with a clear and standalone disclosure. Written authorization from the individual is required before obtaining the report.
2. Pre-Adverse Action Notice: If an employer intends to take an adverse action (such as denying employment) based on the contents of a consumer report, they must first provide the individual with:
A copy of the consumer report.
A summary of rights under the FCRA.
This step allows the individual an opportunity to review the report and dispute inaccuracies.
3. Adverse Action Notice: After finalizing the decision, the employer must send an adverse action notice that includes the CRA’s contact information, a statement that the CRA did not make the decision and information on the individual’s right to dispute the report.
Key Steps in the Adverse Action Process
It is imperative employers following the prescribed Adverse Action process. The federal process requires the following three steps.
Providing a Pre-Adverse Action Notice: Before making a final decision, the employer must provide the applicant with a pre-adverse action notice. This notice includes a copy of the consumer report and a summary of the applicant’s rights under the FCRA.
Waiting Period: After issuing the notice, the employer must allow a reasonable amount of time (typically at least five business days) for the applicant to review the report and dispute any inaccuracies.
Final Decision: If the employer decides to proceed with the adverse action, it must then send an adverse action notice to the applicant, explaining the decision and providing information on the consumer reporting agency that supplied the report.
It is important to note that in addition to federal requirements, some states and municipalities have additional regulations regarding background checks and the pre-adverse action process.
Employee and Applicant Rights Under the Fair Credit Reporting Act
The FCRA grants individuals several protections, including:
The right to know what is in their consumer file.
The right to be notified if information in a report has been used against them.
Penalties for Non-Compliance
Non-compliance with the FCRA can lead to significant consequences for employers. Violations may result in statutory damages, actual damages, punitive damages and attorney’s fees. Class action lawsuits are also a possibility, making strict adherence to the law essential.
Best Practices for Employers
To ensure compliance, employers should:
Work with reputable background screening providers that understand FCRA requirements.
Provide disclosures and obtain written authorization before ordering any report.
Establish internal policies and training for handling consumer reports.
Stay updated on federal, state, and local laws that may add additional requirements beyond the FCRA.
Building Trust Through FCRA Compliance
The Fair Credit Reporting Act plays a vital role in protecting consumers while giving employers the tools to make informed hiring decisions. By understanding and adhering to the FCRA’s requirements, employers can mitigate legal risks, build trust with candidates and create a fair and transparent hiring process.
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