Everything Employers Need to Know About Adverse Action

There is a right and wrong way to vet and hire new employees, and the same goes for firing. If you do it the wrong way, according to the Fair Credit Reporting Act (FCRA) and the Equal Employment Opportunity Commission (EEOC), you can land in a world of trouble in the form of class-action lawsuits, bad PR, and other penalties. In fact, FCRA litigation against employers has experienced a significant upturn in recent years.
Here’s how to properly cover your bases and protect your company when taking any form of adverse action as a result of information gathered in an employee background check.

The FCRA on Consumer Reports and Adverse Action

The FCRA is the federal legislation that regulates “the accuracy, fairness, and privacy” of consumer reports. There are strict civil and statutory penalties for noncompliance with the FCRA’s requirements, and any organization that uses consumer reports to make candidate eligibility decisions can find themselves in the realm of serious liability if they fail to prepare themselves for consistent compliance, especially when taking adverse action.

Consumer Reports

Employee background check information falls under the umbrella of “consumer reports,” but officially, the FCRA defines consumer reports as “any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumer’s eligibility” not only for employment, but for credit, insurance, housing, etc.
A few other examples of consumer reports include:
  • Credit history reports
  • Criminal and civil records
  • Civil lawsuits
  • Reference checks
  • Certain pieces of medical history
  • Tenant reports
  • Etc.

Adverse Action

Conducting employee background checks is largely considered an essential precaution for most employers, but it is especially critical in industries that deal with sensitive materials and at-risk demographics, such as the financial sector, eldercare, and childcare. In these situations, when you find something concerning or disqualifying in the results of a thorough background check, breathe a sigh of relief—the background check worked and you’ve just sidestepped a potentially disastrous situation. But the decision not to make an offer, or to withdraw a job offer that’s already on the table is what the FCRA calls adverse action, and must be handled with care.
Officially, the FCRA’s legal jargon in relation to adverse action in employment situations reads, “a denial of employment or any other decision for employment purposes that adversely affects any current or prospective employee.”
Adverse action can take many forms, including:
  • Deciding not to extend a job offer.
  • Withdrawing an existing job offer.
  • Terminating employment.
  • Suspending employment.
  • Withholding a promotion.
If any of these adverse action decisions are based on any part of the employee background check, you are legally required to provide the candidate in question with appropriate notice. Here’s how:

How to Properly Provide Adverse Action Notice

Prior to conducting a background check on the job candidate, you will have first provided a disclosure of your intention to run the check and received written pre-authorization from the candidate, per FCRA requirements. This disclosure will have at least formally informed the candidate that the results of the background check will potentially affect their eligibility.
Once you’ve determined their ineligibility, however, notice of adverse action should be issued in writing or electronically as follows:
  1. Letter One: Pre-Adverse Action Letter
  2. Waiting Period
  3. Letter Two: Post-Adverse Action Letter

Letter One: Pre-Adverse Action Letter

The purpose of this letter is not to announce that the applicant has been disqualified, but to give them a chance to see the background check results for themselves, to contest or correct any mistakes, and to discuss the report with the employer before the adverse action is made official.
The pre-adverse action letter must:
  • Clearly state the intention to take adverse action based on the results of the consumer report (in this case, the background check results).
  • Inform the candidate of their right to request a free copy of the consumer report from the reporting agency (the third-party vendor that provided the report) within sixty (60) days.
  • Include a formal document that summarizes the candidate’s rights as outlined by the FCRA. Click here to view an example summary of rights provided by the Consumer Financial Protection Bureau.

Waiting Period

The FCRA does not provide any specific timing requirements for when adverse action notices must be issued or how long you should wait after issuing the pre-adverse action notice. However, per Federal Trade Commission (FTC) guidance and the precedence set by recent FCRA court rulings, the recommended waiting period is five (5) days between the issuance of the pre-adverse action notice and the finalizing of the decision.

Letter Two: Post-Adverse Action Letter

This is the notice that informs the applicant that the adverse action has been finalized. It should:
  • Reiterate the applicant’s right to contact the consumer reporting agency within 60 days and request a free copy of the report that influenced the adverse action decision.
  • Include the contact information of the third-party consumer reporting agency (name, address, and telephone number).
  • Clearly state that the consumer reporting agency simply provided the report, had no bearing on the adverse action decision, and cannot provide the applicant with any information on why the action was taken.
  • Disclosures of the applicant’s credit score in the event that the state of their credit was a factor in the adverse action decision.

EEOC Considerations: What Type of Information is Disqualifying?

While the FCRA governs how adverse action must be handled in the working world, the EEOC monitors the reasons why employers may choose to turn down prospective candidates. The intention, of course, is to make sure everyone has an equal chance to win offers of employment based on their merit, regardless of race, sexual orientation, political affiliation, age, gender identity, and even—to a certain degree—criminal history.
Following the FCRA guidelines is essential during the screening phase, but doing so doesn’t mean that employers have carte blanche on deciding what background information is disqualifying. An employer’s instinct may be to disqualify anyone with a blip on their criminal record, but it isn’t best practice to do so and can even get you in trouble per “ban-the-box” legislation that may be in effect in your state or jurisdiction. It’s important to stay up to date on the FCRA and EEOC laws that govern your locality.
For example, in Massachusetts and California, employers are prohibited from making employment-related decisions based on arrests that did not result in a conviction. And in California specifically, certain marijuana infractions and misdemeanor convictions from two or more years previous cannot be considered.
So what type of information can be considered disqualifying?
Some of the most troubling, or disqualifying, background check “blips” include:
  • Sexual offenses (Are they on the sex offender registry?)
  • Financial crimes (embezzlement, income tax evasion, fraud, etc.)
  • History of cyber-crime (hacking)
  • A single serious (often violent) crime or a pattern of lesser crimes
  • History of DUIs or drug-related offenses
  • Poor driving record
  • Bad credit history
  • Embellished or falsified work experience and/or education credentials
  • And a dishonorable military discharge
However, any one of the above red flags cannot be considered a universal disqualifier as every job position and applicant are different. As a rule, when troubling information is revealed in an employee background check, the employer should consider the following questions before taking adverse action:
  • Is the information relevant to the job’s responsibilities?
  • Does the position put the applicant in contact with vulnerable populations, such as the youth and the elderly?
  • Would the applicant have access to sensitive data?
  • How much time has passed since the relevant offense(s)?
  • Did the relevant offense(s) result in a conviction?
  • Does the job require security clearance?

Official EEOC Guidance on Arrest Records

Official EEOC guidance warns that employers who adopt blanket policies that disqualify candidates with arrest records can face discrimination liability under Title VII if:
  1. the policies disparately affect a protected class, and
  2. the employer can’t demonstrate how adverse action decisions based on blanket policies are “job-related and consistent with business necessity.”
The EEOC emphasizes that when it comes to arrest records, employment decisions should fairly incorporate an individualized assessment of the candidate, the nature of the offenses, and how the offenses would reasonably relate to the candidate’s job performance in the position in question.

How the EEOC Explains the Difference between Arrests and Convictions

When examining the criminal history portion of your applicant’s employee background check, it’s important to consider how the law and EEOC legislation looks at arrests vs. convictions under Title VII.

Arrests

  • Record of arrest is not proof in and of itself of criminal conduct as many arrests either don’t result in criminal charges (conviction) or the charges are dismissed.
  • Proof of guilt is established in prosecution and not before. Even after an arrest is made and an individual is charged, they are technically to be presumed innocent until prosecuted and convicted.
  • Arrest records are often incomplete or erroneous. Records may not report on a final disposition of the arrest, meaning it is unclear if the individual was prosecuted, convicted, or acquitted. The Department of Justice (DOJ) acknowledges that many arrest records in both the national FBI database and even state criminal record repositories do not include final dispositions or may contain inaccuracies (such as reporting on records that have been expunged or sealed).
Although the existence of an arrest record on its own cannot be grounds for adverse action, Title VII calls for and allows a “fact-based analysis” of the conduct underlying an arrest. After a thorough inquiry into the circumstances, the employer may decide that the conduct of the individual is grounds for adverse action if such conduct makes them unfit for the position in question (i.e., the disqualification is job-related and consistent with business necessity).

Convictions

  • Usually considered sufficient evidence of criminal conduct given the due process of law (trials, guilty pleas, etc.).
  • Conviction records may still contain errors. Records may not report when a conviction is expunged or a felony downgraded to a misdemeanor.
  • Like arrests, policies for adverse action based on convictions must still be linked to, and clearly demonstrate, the dangers and risks of particular criminal conduct in relation to the job in question.
The EEOC advises that best practice is to omit questions about convictions from job applications. In fact, some states already require employers to leave questions about criminal convictions for later in the selection process (usually when running background checks on select, viable candidates), so that the individuals have had the opportunity to demonstrate their merit.

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