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Adverse Action

Following the Law in Background Checking and Hiring


Why should I care about FCRA compliance?

For employers and business owners, finding and maintaining good hires can be challenging. A single wrong decision can lead to potential liabilities. Companies are increasingly adopting smart, strategic hiring practices that include background checking, credit review, and criminal histories. But employers should be wary; while employment background checks can be helpful in narrowing your applicant pool, employers that don’t comply with the Fair Credit Reporting Act (FCRA) can face legal and financial consequences. GoodHire strongly recommends that employers consult with legal counsel to develop a legally compliant adverse action policy.

What is Adverse Action?

As an employer, you may want to perform a background check on a potential or current employee for reasons including hiring, retention, promotion, or reassignment. In doing so, your company must comply with the FCRA, a law that is enforced by the Federal Trade Commission (FTC). If specific information retrieved from a background check is reason for your business to not hire an individual (or terminate an existing employee), your company must legally pursue an ‘adverse action.’ Adverse action refers to an official legal process that an employer is required to follow as they inform a job candidate or employee that they are not eligible to work for your company due to information found in their background check. At GoodHire, we want to help you understand adverse actions and the legal protocol it requires.

6 Steps to Legally Pursuing Adverse Action:

1. Notify Employees of the Background Check

Before running a background check or requesting a consumer report, you must inform employees that the information could be used in decisions related to their employment. In other words, individuals must be aware that negative results from a screening could prevent them from getting hired and working at your company.

All notifications must stand alone and not be hidden in an employment application. Employers may give a brief description of the nature of the investigation; however, they cannot use additional text or language to confuse or distract from the written notice. Create and maintain honest communication with your employees from the start, and explain to them the background checking process as clearly as possible. Some states limit access to consumer or credit reports, so employers should review applicable state laws.

2. Obtaining Candidate or Employee Consent

Along with an explanation of the screening process, employers must obtain written permission from the applicant or employee. Without explicit consent, you are not authorized to obtain any information or report. You must explicitly indicate your intention to conduct additional background checks during an individual’s employment at your company, if that is the case. As an employer, you must certify that the employee was notified and that you have consent, that you have complied with FCRA requirements, and that you will not misuse information or discriminate based on state or federal equal opportunity laws.

GoodHire Consent Form

3. Provide Information to Candidates

Before you reject a job applicant, reassign or terminate an employee, or deny a promotion, you must provide the employee with a pre-adverse action notice, and a copy of the consumer report responsible for your decision. In addition, you are required to provide a copy of “A Summary of Your Rights Under the Fair Credit Reporting Act,” which should have been provided to you by the third-party company that provided your report.

Pre-Adverse Action Notice Template

4. Review Applicant or Candidate Results

After the appropriate information has been conveyed to the applicant, you (the employer) must also give the applicant or employee the opportunity to review the report and determine whether the information presented is correct. While the FCRA does not clearly state how long employers must wait after providing pre-adverse action, the FTC recommends that employers should “keep in mind the clear purpose of the provision to allow consumers to discuss reports with employers or otherwise respond before action is taken.” The FTC suggests that five business days is a reasonable amount of time.

5. Provide Notice of Adverse Action

After an approximate five-business-day waiting period, you can proceed with adverse action. The employer is legally required to provide an official oral, written, or electronic notice to the applicant or employee. The notice should include the name and address of the consumer reporting company along with a statement that the adverse action is based on information contained in the background report. The employer must also provide a statement that the company supplying the report did not make the decision and cannot give specific reasons for the adverse action. Lastly, the employer needs to include a notice of the applicant or employee’s right to dispute information in the report. The notice should state that the applicant or employee has the right to obtain another free copy of their background report within 60 days.

Adverse Action Notice Template

6. Dispose of Sensitive Documents

Once you are finished reviewing a consumer report or no longer need an applicant’s information, the FCRA requires that you securely dispose of the report, including any information that has been gathered in the process. According to the FTC, burning, pulverizing, or shredding of paper documents are appropriate methods of disposing sensitive documents and information. Electronic information should be completely destroyed, so that it cannot be retrieved or reconstructed.

GoodHire recommends all employers to consult with legal counsel to develop a legally compliant adverse action policy.

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