Tough New Rules on Employee Credit Reports

In a new move to protect the privacy rights of employees and prospective employees, Congress amended the Fair Credit Reporting Act in ways which impose significant new requirements on employers.

Many companies order credit reports on their employees, both present and prospective. In order to do that now, employers not only need the written consent of the subject of the report, but they must comply with a series of notices, requests, and authorizations for which the Federal Trade Commission has promulgated increasingly strict rules.

This is not the place in which to set forth the specifics of the rules. However, every employer should be aware that they contain several sets of notices and disclosures to the employees (some of which are required even though they are duplicative). The employer may not obtain the credit report before obtaining the permission of the employee, and the employer must send all employees and candidates a copy of their report before taking any adverse action, such as failure to hire or promote.

Not only do the new rules require disclosure, they require it in particular forms. The new rules specify what must be contained in each notice and what may be. The rules also specify the sequence in which notices must be given and disclosure made.

Perhaps the most significant aspect of the new rules from this perspective is the new requirement that employers notify present or prospective employees that adverse action will be taken based on a credit report prior to the actual taking of the adverse action. The Federal Trade Commission has stated that one purpose of this new requirement is to “allow consumers to discuss reports with employers or ... respond before action is taken.” An additional purpose is to permit employees to dispute inaccurate information contained in a credit report and that, after all, is probably the most important right given to consumers under the Fair Credit Reporting Act.

An employer who doesn’t follow the rules is subject to severe penalties. Suit may be brought by the individual employee or by the Federal Trade Commission. For negligent noncompliance the employer stands to lose the actual damages suffered by the employee plus the employee’s attorneys’ fees and costs. Willful noncompliance can result in these punishments plus punitive damages.