Adverse Action: What It Is and What You Need to Know

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Adverse Action

Many people may be unaware of the fact that background screening is a highly regulated industry. If your organization is using a background screening company (also known as a Consumer Reporting Agency or CRA), it’s important to be aware of the various laws and regulations that affect the industry.

The process of Adverse Action has been highlighted even more over the past several years thanks to a growing number of class action lawsuits against employers. Employers who use the results of a background investigation for their hiring, promoting, suspending or terminating decisions need to understand Adverse Action and its procedures under the Fair Credit Reporting Act (FCRA).

So what exactly is Adverse Action? The FCRA defines it as a denial of employment or any other decision for employment purposes based in whole or in part on a consumer report that adversely affects any current or prospective employee. FCRA §603(k)(1)(B)(ii) and FCRA §615.

Before rejecting a job applicant, denying a promotion, reassigning or terminating an employee based in whole or in part on information obtained in a consumer report, under the FCRA employers are obligated to follow a two-step adverse action process, pre-adverse action and adverse action. This process provides the applicant or employee the opportunity to review and dispute information in the report, if they so choose. Employers must follow the process correctly in order to protect their organization, as well as the rights of the applicant or employee.

Before Any Adverse Action: Pre-Adverse Action

Once the applicant has undergone a background check, if the consumer report that you receive from a CRA has information that you may use to make a negative hiring decision, the pre-adverse action process begins.

First, you must provide the consumer (i.e. the applicant or employee) with a “pre-adverse action” notice, which consists of a letter to the applicant indicating that adverse action may be taken as a result of the consumer report.

The letter will include the name of the CRA and its contact information, informs the consumer that the CRA did not make the decision to take the adverse action, and informs them about their right to dispute the completeness/accuracy of the information. In addition, a copy of the consumer report, as well as a copy of “A Summary of Your Rights Under the FCRA” and any state-specific letters also need to be provided.

Following the initial notice, the FCRA requires that consumers be afforded a reasonable amount of time to respond to the pre-adverse action notice.

Although the FCRA does not give a specific amount of time, typically a reasonable amount of time is 5-10 business days (please note that some local variances exist and spell out how long employers must wait before taking adverse action). During this time, the applicant or employee can contact the prospective employer or the CRA to dispute the results of the report.

Step Two: Adverse Action

After the applicant or employee has received adequate time to request a reinvestigation, employers are required to notify them again if they choose to proceed with an adverse action (i.e. denying the application, reassignment or termination).

The employer is required to send an adverse action letter that notifies the consumer that adverse action has been taken based on a consumer report. The letter will also include the name of the CRA and its contact information, informs the consumer that the CRA did not make the decision to take the adverse action, and informs them about their right to dispute the completeness/accuracy of the information.

In addition, a copy of the consumer report, as well as a copy of “A Summary of Your Rights Under the FCRA” and any state-specific letters also need to be provided.

It’s very important the employers comply with these adverse action procedures because non-compliance may be penalized under the FCRA. And litigation is increasing—more plaintiffs are filing expensive class action lawsuits against employers they say are not complying with the FCRA’s adverse action procedures.

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