These are the most contested issues when employers are sued for taking adverse employment action after a background check
The U.S. Fair Credit Reporting Act (15 U.S.C. § 1681) (“FCRA”) touches the lives of your clients every day.
Signed into law by President Richard Nixon in October 1970, the FCRA regulates consumer reporting agencies, users of consumer reports, and entities that furnish consumer information. Under the statute, traditional credit reports, as well as employment background checks and tenant screening checks requested by would-be landlords, are considered “consumer reports” and are governed by the statute.
Did your client’s credit report falsely claim they defaulted on a loan, but they actually paid it off in full six months early?
Was your client denied a new apartment based on a tenant screening report claiming they were convicted of a felony last year, but that charge was actually dropped?
Was your client denied life insurance based on a consumer report that contained false information about their medical and prescription history?
These errors and your clients’ remedies regarding them are governed by the FCRA. But of all the consumer report errors your clients will face, perhaps the most pernicious error is when an incorrect employment background check costs a client a job and their ability to earn a living.
A common example of this would be an employer rejecting your client’s job application based on a background report the employer received claiming your client was convicted of a felony four years ago. Your client actually has no criminal record. But the company conducting the background check wrongly included criminal records from someone with a similar name to your client’s. Unfortunately for your client, the would-be employer doesn’t know—and likely doesn’t care— there was a mistake. They don’t want to hire someone who, according to a background check company, has a criminal record.
In situations like this where there is an adverse employment action—defined by the FCRA as “a denial of employment or any other decision for employment purposes that adversely affects any current or prospective employee,” that is also an action taken or determination “made in connection with an application that was made by, or a transaction that was initiated by, any consumer” and “adverse to the interests of the consumer”—the statute requires employers to do more than simply say, “Thanks, but no thanks.”
Pursuant to section 604(b)(3) of the FCRA (codified at 15 U.S.C. § 1681b(b)(3)), before taking any adverse action against a prospective or current employee based on information in a background check, such as rejecting a job application, reassigning or firing an employee, or denying an employee’s promotion, an employer must first give the applicant or the employee notice of that forthcoming adverse action, including a copy of the consumer report the employer is relying on, and a copy of the “A Summary of Your Rights Under the Fair Credit Reporting Act” document. This is known as a pre-adverse action notice (“PAAN”).
As you might imagine, it is not uncommon for an employee or job candidate to allege that an employer failed to fulfill its obligations under section 604(b)(3)/1681b(b)(3). When one does, it opens itself up to liability under the FCRA.
In these kinds of cases, which I will refer to as “(b)(b)(3) cases,” there are three issues that tend to be the most contested. I walk through each of them below.
Employers will argue they timely provided a PAAN as required by the FCRA, or one wasn’t needed
Naturally, employers tend to argue that, based on the facts of their particular case, they provided the required notice before taking adverse employment action, or no such notice was necessary because no adverse action was taken. Thus, they did not run afoul of the FCRA.
In many cases, however, employers send out PAANs after they’ve taken an adverse action. Or, what they claimed was not an adverse action and thus did not require a notice to be sent to a candidate or employee is actually a question of fact for a jury that a judge will not rule on when entertaining a motion to dismiss or a motion for summary judgment.
Part of evaluating whether an adverse action occurred involves looking at whether a decision has been made regarding the action to be taken. An employer might claim it did not need to provide a PAAN before making an internal decision to revoke a candidate’s offer of employment and stop their onboarding of the candidate, or to not promote a current employee. The employer might be right because, generally speaking, courts have held that an adverse action does not occur until the decision is communicated or takes effect.
But if the employer communicates to a candidate that it was revoking its conditional offer of employment or a promotion, the employer has likely crossed the line from contemplation to decision and was required to send a PAAN before the decision was made.
Given that whether an employer timely provided a PAAN is such a fact-specific inquiry, no matter how compelling an argument an employer can make regarding their compliance with the FCRA, they are unlikely to successfully obtain a favorable ruling on the question until a motion for summary judgment at the earliest.
Employers will argue that a plaintiff does not have Article III standing
Defendant employers also tend to argue that a plaintiff does not have Article III standing to press their (b)(b)(3) claim. Specifically, they will argue the plaintiff did not satisfy the “injury-in-fact” test for standing because their alleged violation did not cause “real” harm that actually exists in the world.
The nature of their argument will vary based on a plaintiffs’ allegations against them, but generally, they will argue that their failing to provide a PAAN was simply a technical violation of the FCRA for which the plaintiff cannot (and perhaps did not) assert tangible or intangible harms flowing from it. A common refrain from employers in (b)(b)(3) cases where a plaintiff was a job applicant is that a plaintiff was merely eliminated from consideration for a job early in the process and might have still been eliminated later on in the process on other grounds, such as because of poor performance on a pre-employment exam or due to negative feedback from references.
With the caveat that a plaintiff’s retort will depend on the facts of their case, in many (b)(b)(3) cases, plaintiffs will have strong arguments for standing. First, as the U.S. Supreme Court recognized last year in an FCRA case, TransUnion v. Ramirez, 141 S. Ct. 2190 (2021), certain harms readily qualify for Article III purposes, including economic harms. Where a job applicant already received a job offer, or an employee is otherwise in good standing, they will likely be deemed to suffer economic harm if they lose a job offer or their job without having the opportunity to review the background check in question, verify its contents, and provide an explanation to the would-be or current employer.
But the Supreme Court in TransUnion also recognized that intangible harms can be concrete where Congress has chosen to recognize a particular category of behavior as harmful. The PAAN gives job seekers and employees the ability to discuss with a would-be or their current employer the contents of a problematic background check with the benefit of the report in hand. This is central to preventing the harm caused by not giving these individuals a chance to provide context to their prospective or current employers regarding, or find and remedy errors in, their background checks. This context could persuade an employer not to follow through on the adverse employment action it is contemplating taking.
Plaintiffs who can allege and then prove they suffered a tangible harm, such as an economic harm, or an intangible harm in the form of losing their chance to preserve a job or job opportunity, will find case law supporting their argument in multiple federal circuits.
Employers will argue their alleged violations of the FCRA were not willful
When a person or company willfully fails to comply with the FCRA, they are liable for statutory damages of $100-$1,000 or actual damages, punitive damages, and attorneys’ fees and costs. A company willfully violates the FCRA when it knows its actions violate the FCRA, or when the company displays a “reckless disregard” for the FCRA’s requirements. A company’s actions will be deemed reckless when they carry an unjustifiably high risk of harm that is known or so obvious that it should be known. As a matter of law, a violation of the FCRA is reckless when it ignores an unambiguous requirement of the statute.
In (b)(b)(3) cases where damages for willful violations of the FCRA can add up quickly—e.g., class actions—employers want to kick the willfulness question to the curb as soon as possible. They might successfully knock out the willfulness question in a motion to dismiss, but more realistically, the first chance they’ll have to do so is in a summary judgment motion. They’ll argue that discovery has not added to the record any evidence that would allow the plaintiff to carry their burden.
This argument faces an uphill battle for two reasons.
First, federal courts across the country, from the Third Circuit to California and Oregon district courts, have repeatedly found that willfulness determinations under the FCRA are for a jury to decide. Given that these inquiries are fact-intensive because they focus on a company’s state of mind, what a company did or didn’t do, and whether it ignored an unambiguous requirement of the FCRA, it shouldn’t come as a surprise that such a determination will be left to a jury.
Second, discovery often yields documents and testimony that would allow a reasonable jury to find that a defendant willfully violated the FCRA when it took adverse action against an employee.
More times than not, a defendant will have written processes and procedures in place identifying its obligations under the FCRA when taking an adverse employment action to provide a PAAN. And, more times than not, there will be documents and deposition testimony that show a defendant’s employees do not follow the company’s written policy. Courts have ruled this discrepancy suffices to find a willful violation. And, when documents or testimony obtained during discovery show that a company routinely takes adverse action against consumer job applicants based on background reports before sending a PAAN, it makes for an even more persuasive argument that the violation was willful.
These issues show (b)(b)(3) cases tend to be technical and hard-fought
As you could tell from these three most frequently contested issues, if your client believes they have a (b)(b)(3) case, they can expect a hard-fought fight from their employer and/or its insurance company.
These cases deal in technicalities and rely on arguments based on statutory interpretation, legislative intent, and policy concerns. Additionally, many employers are unlikely to settle a (b)(b)(3) case early because they feel they can win these cases on a motion to dismiss or motion for summary judgment. For this reason, members of the bar who do not frequently practice consumer rights law but who have a (b)(b)(3) case should either spend the necessary time diving into treatises and case law so they can become competent regarding this area of the law or seek out a consumer rights attorney who knows their way around the FCRA and (b)(b)(3) cases.
John Soumilas is a partner at Center City-based Francis Mailman Soumilas, P.C., a leading consumer rights law firm. He can be reached at jsoumilas@consumerlawfirm.com.
Reprinted with permission from the July 12, 2022 edition of The Legal Intelligencer © 2022 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.