What Does Adverse Action Mean And How To Handle It

November 2 2020
5 min read

Adverse action is a federal law which states that employers have to go through a three-step process if they are thinking about rejecting a candidate or terminating an employee or demoting an employee based on their background screening report. Adverse action refers to any action taken which will negatively affect someone's employment due to a background report's results.

What are the steps employers should follow for a compliant adverse action process? 

Step 1: Pre Adverse Action Notice 

Inform the candidate that you are considering not moving forward with them due to the information in the background report. Provide a copy of the background report and a federal notice called a "summary of your rights" under the Fair Credit Reporting Act (FCRA) to the candidate and allow them to dispute any inaccuracies in the report. 

Step 2: Waiting Period 

The employer must then wait a reasonable period of time (editor's note: this is typically understood to be a minimum of 5 business days) to allow candidates to raise those disputes. 

Step 3: Provide the final Adverse Action Notice

The final step is to close the loop by providing a post adverse action letter. If the candidate does not raise a dispute and they are going to be rejected based on the background screening report.  The employer has to send out a final adverse action letter.  Know that there are very specific sentences that have to go into that final adverse action letter. It is strictly regulated.

How do you avoid Adverse Action Compliance violations? 

Employers must be careful to follow each of the adverse action steps correctly to FCRA-related lawsuits.  Large employers like Wells Fargo paid $12M (class action lawsuit alleging the company failed to meet pre-adverse action notification requirements prior to taking adverse employment action). 

  • Amazon paid $5M (class action lawsuit alleging in part that Amazon did not adequately comply with adverse action requirements).
  • K-Mart paid $3M (class action lawsuit alleging the company did not follow adverse action requirements prior to denying employment).

These are the types of settlements that attract plaintiffs’ attorneys.  These are not “cherry-picked” cases, but rather, representative of these types of cases.

Individual plaintiffs in a class action lawsuit receive a small amount of money e.g. $30, $40, or possibly even $100.  The cases are for thousands of plaintiffs, so you can see how the numbers become explosive very quickly. (Editors note:  the attorney’s fees are commonly 25% of the settlement amount.  So, you can see the incentive in play here.)

What are some best practice ideas for adverse action letters?

It's really the nuts and bolts. It's making sure that the pre-adverse action letter is sent, the pre-adverse action time is provided, and the final adverse action letter is sent.  All three steps must be taken.

It's also making sure that the wording is good. We don't want to say in the pre-adverse action letter that someone's been rejected when they haven't been given the dispute period yet.

It's important to make sure that the final adverse action letter is right and there are no verbal comments that essentially say that the process is over.

Sometimes, I'll see employers go through the three-stage adverse action process, but the front-end call with HR or the recruiter with the candidate said, “you're out.” That sort of thing can create problems.

We also see problems related to matrices where there is an automatic sending of adverse action letters. Sometimes this approach can be helpful.  It certainly drives efficiencies in the hiring process.  But it's really important to try to get these matrices right and to make sure that the process works in a way that accommodates the rights that each candidate has under federal and state law.

The other thing which we haven't talked about today related to adverse action is that there are a number of states and municipalities that now make additional requirements above and beyond what the Fair Credit Reporting Act requires.  (Editor’s note: for instance, some states require that the reason for the adverse action being taken be specifically identified on the adverse action letter(s).)

In dealing with employers, many times they haven’t updated their correspondence for five or ten years.  Working in California, New York, Washington (state), or many other jurisdictions, there is specific information that must go to candidates or employees during the adverse action process.  If that (candidate-specific) information is not conveyed, this is just a "black-and-white violation" of that jurisdictions’ laws and it can give rise to damages.

How to make your Adverse Action process easier 

Outsourcing your adverse action process to an FCRA-compliant background check provider can give you peace of mind knowing you are compliant every step of the way.

Orange Tree takes compliance seriously.  We can help you create legally defensible solutions with your adverse action process.

If you decide to not hire a candidate based on the results of a consumer background report or drug test, Orange Tree is able to manage the “adverse action” process from start to finish:

  • Orange Tree can customize adverse action letters to your requirements.

  • The time frame for sending adverse action letters can be determined by your organization.

  • Your candidates can receive an immediate notification of adverse action and the letters, disclosures, and information on how to dispute via our mobile-friendly CandidateConnect® platform.

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

  • Orange Tree can handle all aspects of your candidate's disputes, notifying you if anything is changed from the final report.

  • Your organization enjoys full visibility into the process from start to finish.

To learn more about Orange Tree's legally defensible solutions, contact us now.

This information is not legal advice, either expressed or implied. Orange Tree recommends you seek the advice of your corporate legal counsel for all aspects of employment law.