An Adverse Action Guide for Employers

January 20 2021
4 min read

If your organization uses background checks to qualify candidates for employment, chances are you will eventually find yourself dealing with adverse action notices. As background checks have become more widespread among companies screening job candidates for employment, the plaintiff's bar has begun targeting employers and issues related to employers and their responsibilities under the federal Fair Credit Reporting Act (FCRA).

What is adverse action? 

Adverse action refers to any action taken which will negatively affect someone's employment due to a background report's results.  

Adverse Action Checklist

Why do employers need an FCRA-compliant adverse action process? 

The FCRA allows job candidates to sue employers for damages, and a claimant who successfully sues is entitled to recovery of court costs and reasonable legal fees. The law also permits claimants to seek punitive damages for deliberate violations. The Consumer Financial Protection Bureau (CFPB), Federal Trade Commission (FTC), other federal agencies, and individual states may likewise sue employers for non-compliance and seek civil penalties. Companies found to violate the FCRA due to non-compliant employment screening practices can quickly rack up hefty fines and penalties.

The plaintiff's bar has begun aggressively pursuing these cases. Many cases have assumed an aggressive posture relative to its compliance mandate, making it critical for businesses to follow the law on employment background checks.

What are the correct steps for delivering an adverse action letter?

The FCRA outlines a 3-step process for companies to follow when conducting background checks, including what to do when checks result in a decision that negatively impacts a hiring decision – an event known as an adverse action under the FCRA.

STEP 1. Before Taking Adverse Action 

Before you reject a job applicant, reassign or terminate an employee, deny a promotion, or take any other adverse employment action based on information in a consumer report, you must give the applicant or employee:

  • Notice that your company is considering taking an adverse action, based in whole or part on the contents of the background report. This is typically referred to as the adverse action letter or FCRA letter. 

  • A copy of the consumer report.

  • The name, address, and phone number of the consumer reporting company that supplied the information. 

  • A statement that the company providing the report does not make the decision to take the unfavorable action and cannot give specific reasons for it.

  • A copy of A Summary of Your Rights Under the Fair Credit Reporting Act.

  • Notice that the consumer may request a free copy of the report and may dispute directly with the consumer reporting agency if any information in the report is inaccurate or incomplete.

  • Any state-specific disclosures.

Giving the candidate the notice in advance provides them the opportunity to review the report and tell you if it is correct and/or to initiate a dispute and reinvestigation directly with the background screening company.

STEP 2. Wait a Reasonable Amount of Time After Sending the Pre-adverse Notice

Employers must wait a reasonable amount of time after sending the pre-adverse notice to the candidate before making the final decision. As a general rule, employers should wait at least five business days. Note that in some states, the amount of time to wait may be a matter of state law or local ordinance. 

If you have been notified of a dispute, you should hold the position open pending completion of the dispute and reinvestigation process.

STEP 3. Take Adverse Action

After sending the pre-adverse notice and waiting a reasonable time, you decide to take an adverse action based on information in a consumer report. You must give the applicant or employee a written notice that the adverse action decision has been finalized.

You must provide them another copy of the A Summary of Your Rights Under the Fair Credit Reporting Act and provide information about their right to dispute and receive a copy of their report.

How Orange Tree Can Help

If you decide not to hire a candidate based on the results of a consumer background report, Orange Tree can help you manage the adverse action process from start to finish. For example:

  • We can help you customize adverse action letters for your business.

  • Orange Tree performs the administrative tasks of preparing and delivering the adverse action letters and associated notices.

  • We annotate each step of the process so your organization has full visibility into the process from start to finish.

Schedule a free consultation today to learn how we can help you be FCRA compliant with your Adverse Action Process.

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