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Nov 04, 2013

Can you obtain a credit report when investigating employee wrongdoing?

By: Paul Ebeltoft

You know about the Fair Credit Reporting Act (FRCA). This is the federal law regulating the collection, dissemination and use of consumer information, including consumer credit information. Under its terms, employers are required to jump through specific procedural hoops to obtain and use consumer and credit reports of employees or job applicants. One of these hoops is that the employer must notify the employee or applicant of its intent. Then, the employee or applicant must give her written consent. Another hoop is that the employer must give the credit report to the employee and wait a reasonable time before taking adverse action based upon what it discloses.

Noncompliance with the FRCA is potentially onerous. Even if the violation is merely negligent, and not intentional, a disgruntled employee or job applicant can obtain recovery of actual damages (such as the net salary increase that the person would have received but for the violation) and attorney’s fees. For intentional violations, a wronged employee or applicant may obtain a money award even in the absence of actual damages. Further, punitive damages are permitted.

Many employers find the FRCA process to be unwieldy and do not use it, falling back upon the also tricky but more accepted criminal background check as a primary indicia of job-worthiness, forgoing the sometimes better-indicators of FRCA-governed credit checks, education verification, neighbor interviews, social security number checks and driving record reviews, to name a few. Particularly in the context of workplace investigations of suspected wrongdoing, the FRCA is a barrier to effective sleuthing because of the notice and written consent requirements.

How does the FRCA impede workplace investigations?

Let’s say that you hire an person that you later come to suspect had fraudulently represented her academic credentials and job history. You would like to hire a third party to investigate. Does the FRCA govern? Must you give an employee notice and obtain the consent, assuming that you do not have an appropriate, signed, “blanket authorization”? Many employers believe so. They may be wrong.

What is FACTA and how does it help?

There is a less well-known law, the Fair and Accurate Credit Transactions Act (FACTA) that provides the hope of some relief to beleaguered HR professionals asked to manage or conduct workplace investigations. Many of you may have heard of FACTA. It is the law that allows consumers to obtain a free credit report once every 12 months and allows you to place a credit alert on your record if you suspect yourself to be a victim of identity theft. Less well known is that FACTA also may act to make HR’s job a little easier.

FACTA allows employers to engage third parties to investigate into “compliance with Federal, State or local laws and regulations, the rules of self-regulatory organization, or any preexisting written policies of the employer… (emphasis added)”, as long as the investigation does not concern the employee’s credit standing. How can HR use this?

Consider the case of Carol Millard

Carol Millard was a municipal employee. She claimed to have injured her back on the job, suspiciously the day after a negative performance review. The city-employer terminated Carol when she ran out of leave and claimed she could not return to work, but not before Carol filed a workers compensation claim. The city disputed that Carol was injured.

During the workers compensation proceedings, an independent medical examination was scheduled. Carol asked for and received a delay, claiming that she had to travel to visit relatives that day. The city smelled a rat. It felt that Carol had once again lied, this time to delay the examination. In an effort to prove the lie, the city requested a credit report. They did not give notice to Carol or request her permission to do so. The credit report disclosed her credit cards. The city subpoenaed the credit transaction history from each credit card company. This effort uncovered that Carol had not been traveling to visit relatives as she had sworn, but rather had been in-town, shopping.

Carol sued the city, her former employer, claiming a FRCA violation. The city claimed that FACTA made Carol’s consent unnecessary. Carol responded that the credit investigation could not have been of employment misconduct because it occurred long after the city had shown her the door. Who wins?

Some good news and …

The good news for HR professionals is that the city won. The Court found that FACTA “is not limited to ‘employment misconduct’ but is drafted more broadly to include any misconduct “related to employment.” Any reasonable interpretation of this broader phrase includes conduct occurring in the worker's compensation context because a worker's compensation claim by definition relates to employment.”

The bad news is that, so far, very few courts have weighed in on this statute. Carol Millard’s case is from a Wisconsin federal trial court. It has no authority outside the limited federal district that rendered it. Sadly, many questions about the scope of FACTA remain unresolved. To date, North Dakota courts have given us no pronouncements on the law.

So, what is the takeaway?

The purpose for which a credit report is ordered will affect the steps that the employer must take in order to protect itself from a claimed violation of the FRCA. FACTA will provide the employer some cover when investigating employee misconduct, but be sure that the purposes for which you request a credit report fall within the investigatory purposes permitted by FACTA. If in doubt, don’t. Action that may cross the line into FRCA violation presents too great a risk to employers for HR to recommend.

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Reprinted with permission from an article submitted for publication in the November, 2013 Southwest Area Human Resource Association newsletter.