Allen & Gooch Blog

Employment Law & Litigation

Fair Credit Reporting Act Effect on Employment

Credit reports are often used as decision makers in many aspects of our lives that do not include taking on more debt. Employers often use credit reports as indicators of a future employee’s stability and trustworthiness.  However, employers that use credit reports as part of their hiring process may need to reexamine their protocols.

Under the amendments to the Fair Credit Reporting Act (FCRA), a party must be informed if a third-party takes adverse action against them based on their credit report. Unfortunately for the employer, “adverse action” does not simply mean being declined for a new line of credit, but also includes a decision not to hire or promote an employee.

There have been a number of lawsuits by employees stating that employers have violated consumer reporting laws. These lawsuits can bring about big damages, given the availability of automatic statutory penalties.  (See provision in statute)  This can affect large and small companies equally.  Businesses can protect themselves with simple changes in protocol, as discussed below.


1. Disclosure forms

Provide all potential employees with a separate simple and clear disclosure forms that a credit report is being obtained for purposes of employment. Do not have any other information.  Keep it clear and simple.  Further, have the potential employee sign the disclosure form.

Many lawsuits have occurred due to this disclosure being buried in the boilerplate language of hiring and application paperwork.


2. Consistent hiring process compliant with FCRA

If you wish to use a credit check as part of your hiring process, you must comply with the FCRA.

Prior to taking adverse action, based in whole or in part, on a credit report (including not hiring a potential employee), you must notify the potential employee in writing of your decision, include the credit report, and the government-prescribed summary of their rights under the FCRA.  You must then give that employee a reasonable amount of time to dispute the information contained within that report.

After waiting a reasonable time, if the employer continues with the action, it must then provide another post-action notification that complies with the FCRA requirements.

These constraints may not work with many company’s hiring timelines, but they must be complied with if the employer wishes to utilize credit reports in its hiring decisions.


3. Local laws

States must comply with federal laws, but they are free to make the federal laws more stringent. Many states have their own reporting requirements.  Make sure you are aware of your state (and possible local) laws.


4. Hire an attorney to draft your forms

Do not blindly rely on forms you obtain from other sources. Hire an attorney to draft documents to fit your specific needs.  Your attorney can help you draft clear, concise forms that will comply with FCRA and local requirements, as well as help you develop your hiring protocols.


Contact us if you would like help developing your employee practice.

Allen & Gooch is providing this legal update for informational purposes only. This article should not be construed as legal advice or a legal opinion as to any specific facts or circumstances. You should consult your own attorney concerning your particular situation and any specific legal questions you may have.