Understanding the adverse action process is crucial PARTICULARLY if you use a consumer reporting agency to receive background investigations or verification of information on the application e.g. prior employment, education, license etc.
This is a summary of an article from JDSupra with our comments included.
You’ve gone through the hiring process, sent out an offer letter, and all that remains is the background check. But what happens when the results raise a red flag? You may decide to rescind the offer, but it’s not as simple as it seems.
Before making any final hiring decisions, you must follow the adverse action process.
While it may seem like a hassle, this process is crucial to protect your reputation and avoid hefty fines. [R&A comment – This process also gives the consumer an opportunity to advise the consumer reporting agency that a mistake has been made i.e. the information in the consumer report is in error.]
In fact, in 2018, Petco was ordered to pay over $1 million due to a class-action lawsuit for violating the Fair Credit Reporting Act (FCRA). More recently, Walgreens faced a similar lawsuit and must pay up to $918 to individuals who weren’t properly notified that their employment was denied based on their background checks between March 2020 and May 2022. [R&A comment – This blog post shows that class action lawsuits for non-compliance with the adverse action steps can cost $5 Million]
What is Adverse Action?
When researching adverse action, you might come across references to banks, credit scores, housing, insurance, and employment. While these situations differ, they all involve consumer reports, which is why they must comply with the adverse action process under the FCRA. In the workplace context, a consumer report is equivalent to an employment background check.
Adverse Action refers to any decision that negatively impacts employment based on information uncovered during the screening process. This includes:
Rejecting a job applicant
Terminating a current employee
Denying a promotion
Any other employment decision negatively influenced by the consumer report
Adverse action is designed to protect individuals from unjust outcomes, especially in cases of identity theft or errors in their reports.
Failure to comply with adverse action requirements exposes your organization to fines and lawsuits from individuals, the Consumer Financial Protection Bureau (CFPB), the Federal Trade Commission (FTC), and other regulatory bodies.
Now that we’ve covered the basics let’s walk through the steps you must follow to ensure compliance.
Step 1: Pre-adverse Action Notice
A pre-adverse action notice or letter is the first step in the adverse action process. This notice informs the candidate that you may not proceed with their employment, promotion, etc., based on the information found in the background check. The information you have based this decision on must be relevant to the job itself and an inability to perform the job.
Additionally, either the employer or the screening company should send the candidate a copy of the background check and a summary of their rights.
Step 2: Waiting Time
After issuing the pre-adverse action notice, you must wait a reasonable amount of time—typically 5-7 business days—to give the candidate an opportunity to review the documents and dispute any inaccuracies. During this period, the candidate can contact the employer or background check provider to address these issues.
There are several reasons for discrepancies in a consumer report that the candidate can dispute including:
Identity theft
Outdated information reported by a credit reporting agency or credit score
Transcription or typing errors within courthouse reports
Confusion resulting from a common name
Step 3: Review Candidate Response
If the candidate disputes the report, an investigation must be conducted by the consumer reporting agency (background screening provider), which has up to 30 days to resolve the issue. The hiring process should be paused during this time, and the position should remain open until the investigation is complete. [R&A comment – And the additional due diligence review should be done at no additional cost to you, the client receiving the consumer reports.]
Step 4: Adverse Action Notice
If no dispute is raised, or once the investigation is resolved, you can proceed with the final adverse action notice. This notice must include:
The reason for not moving forward with employment
Information on the candidate’s right to dispute and obtain a free copy of their background report within 60 days
If you use a third party for background screening then you must also include:
Name, address, and contact information for the agency
A statement acknowledging that the hiring decision was made by the employer and not by the third-party agency
Step 5: Dispose of Sensitive Information
After the final notice is delivered, there’s still some clean up left to do to remain compliant. The FCRA requires that all sensitive information be disposed of properly as outlined in the Disposal Rule. This includes directions for both paper and electronic documents.
Note: There may be additional steps to the adverse action process, depending on the state.
Adverse Action Best Practices
To ensure your organization stays compliant and avoids legal pitfalls, it’s essential to follow best practices when handling adverse action. Here are some key strategies to keep in mind:
Give a Heads Up: Inform candidates that you are conducting a background screening and ensure they are aware that the results could impact their employment before getting their written consent.
Keep Proper Documentation: To avoid lawsuits or compliance document every step of the process and keep copies until the process is complete.
Watch the Time: Set reminders and keep track of how long each step is taking. You must do this to maintain compliance with required deadlines and wait times.
Be Aware of State and Local Laws: Work with a third party or legal team to ensure compliance with unique state and local requirements. This can apply to the required waiting time, documentation required, and additional steps
Stay Informed on Fair Chance Hiring Laws: These laws are continually evolving, so it’s important to stay up to date.
Work with a Third Party: One of the easiest ways to remain compliant is to work with a background screening provider that can handle these requirements for you. [R&A comment – We have a very simple process we call our QuickApp that complies with all the steps outlined above].
James P. Randisi, President of Randisi & Associates, Inc., has been helping employers protect their clients, workforce and reputation through implementation of employment screening and drug testing programs since 1999. This post does not constitute legal advice. Randisi & Associates, Inc. is not a law firm. Always contact competent employment legal counsel. To learn more about the rights of employees who test positive for marijuana, Mr. Randisi can be contacted by phone at 410.494.0232 or Email: info@randisiandassociates.com or the website at www.randisiandassociates.com
