New Amendment Loosens Restrictions on Third-Party Investigations Requirements of Fair Credit Reporting Act

The Fair Credit Reporting Act (FCRA) was recently amended in a number of ways by the Fair and Accurate Credit Transactions Act of 2003 (FACTA.)The most significant changes for employers is the loosening of restrictions on investigations conducted by outside investigators like preemployment background screening firms, human resource consultants, attorneys, private investigators, etc. The new amendment takes effect March 31, 2004.

This amendment signals good news for employers after the Federal Trade Commission's (FTC) now infamous 1999 advisory opinion, commonly know as the Vail letter, indicated that a workplace sexual harassment investigation conducted by an outside investigator fell within the scope of the definition of an investigative consumer report under the FCRA.Based on the Vail letter, the FTC indicated that an employer that chose to use an outside investigator was required to comply with all requirements of the FCRA. This included obtaining a signed disclosure and consent form from the individuals being investigated before beginning the investigation and providing a full copy of the outside investigator's report after the investigation and before taking adverse action against an employee. Employers were greatly troubled by this interpretation because many employers use outside investigators to conduct investigations, especially in circumstances in which impartiality is important like situations when a high-ranking employee or executive is the alleged harasser, or there are conflicting facts.

Investigative consumer reports

The FCRA defined an investigative consumer report as "any written, oral, or other communication by a consumer reporting agency bearing on a person's character, general reputation, personal characteristics or mode of living, which is to be used in whole or in part for employment purposes, and which is obtained through personal interviews with neighbors, friends or associates of the person or others with whom he/she is acquainted or who may have knowledge concerning any such items of information." Like consumer reports, "investigative consumer reports" are obtained through an outside, fee-paid third party. Investigative consumer reports, however, also involve a personal interview, which is what distinguishes an investigative consumer report from a non-investigative consumer report.

New exemptions

The new law provides a long-awaited practical exemption for most types of workplace misconduct investigations conducted by outside investigations. To fall within the exemption, the following requirements must be met:

  • The communication is made to an employer in connection with an investigation;
  • The investigation concerns either:

    - suspected misconduct relating to employment; or
    - compliance with federal, state, or local laws and regulations, the rules of a self-regulatory organization, or any preexisting written policies of the employer;

  • The communication isn't made for the purpose of investigating a consumer's creditworthiness, credit standing, or credit capacity; and
  • The communication isn't provided to any person except:

    - the employer or an agent of the employer;
    - any federal or state officer, agency, or department or any officer, agency, or department of a unit of general local government;
    - any self-regulatory organization with regulatory authority over the activities of the employer or employee;
    - as otherwise required by law; or
    - in accordance with an existing FCRA provision allowing a consumer reporting agency to disclose personal identification information to a government agency.

As long as the communication meets those requirements, the exemption excuses an employer from the previously established requirements under the Vail letter's interpretation of the FCRA, including:

  • Obtaining written authorization to conduct the workplace investigation from the individuals involved;
  •  Disclosing to the individuals under investigation that an investigation has begun;
  •  Providing to the affected person detailed information about the investigator, the investigation results, the sources of information, and the person's rights under the FCRA before taking any adverse action based in whole or in part on the report;
  •  Waiting some period of time before making a decision about a possible adverse employment action; and
  •  Notifying the affected person of additional rights under the FCRA at the time of taking any adverse action.

'Summary report' requirement

FACTA does, however, require an employer using an outside, third-party investigator to provide the affected individual a summary of the report after taking an adverse action. Unlike the prior requirement to provide a full copy of the report, including all sources of information, the new law requires only a summary, without sources, as long as the information was obtained solely for the purpose of the investigation. In addition, the employer isn't required to provide the summary report until after it has taken an adverse employment action and only if that action is based in whole or in part on the information received from the investigator.

Preemployment Investigations

It isn't clear whether FACTA exempts from FCRA coverage any preemployment inquiries that rise to the level of an investigative consumer report (e.g., applicant reference checks conducted by an outside, third-party agency that go beyond dates of hire and termination at the prior employer and delve into areas such as job performance). Although those types of preemployment inquiries arguably are designed to explore "suspected misconduct related to [prior] employment," FACTA's exemption could be interpreted as applying to investigations into workplace misconduct only at the employer requesting the investigative consumer report, not at a prior employer.

Bottom Line

As a result of the passage of FACTA, the impractical FCRA restrictions suggested by the Vail letter have been for the most part removed. To preserve clearly the ability to secure investigative consumer reports during the preemployment stage, however, you should still strongly consider including specific language in a disclosure and consent form (on its own sheet of paper) authorizing the procurement and use of an investigative consumer report. Also, given the infancy of FACTA, you should consult with labor and employment counsel in determining how to satisfy the "summary report" requirement, including how much and what type of information to provide.

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