United States: Good News For Employers – Misconduct Amendment to FCRA

Employers investigating allegations of sexual harassment, discrimination, theft, or other misconduct or policy violations can breathe a sigh of relief. They will no longer have to notify suspected employees and obtain authorization prior to conducting an investigation. Nor will the employer have to provide notice prior to taking adverse action or furnish the employee with a copy of the report. Congress has finally followed California’s lead and passed long-awaited amendments to the Fair Credit Reporting Act ("FCRA"), http://www.ftc.gov/os/statutes/fcra.htm. President Bush signed the legislation on December 4, 2003, and the effective date of the amendments will be determined jointly by the FTC and the Board of Governors of the Federal Reserve System.

FCRA’s new amendments are intended to overturn the Federal Trade Commission’s infamous April 1999 "Vail letter" in which the FTC responded to questions concerning FCRA’s application to sexual harassment investigations. See Keller-Vail, Fed. Trade Comm’n Staff Op. Letter, April 5, 1999, http://www.ftc.gov/os/statutes/fcra/vail.htm. The FTC concluded that private investigators hired by an employer qualify as consumer reporting agencies under FCRA even when the scope of the investigation does not go beyond the employer’s workforce or internal documents. While FTC opinions are not law, the Vail letter effectively stifled an employer’s ability to bring in outside investigators, including attorneys, without triggering obligations under FCRA.

In 2002, California responded to employers’ concerns by amending the Investigative Consumer Reporting Act ("ICRA") to generally exclude from coverage those investigations conducted by employers that suspect an employee of wrongdoing or misconduct.¹ In practice, the amendment provided little benefit to employers because FCRA lacked a comparable exception. However, FCRA’s new provisions make the federal act more consistent with its California equivalent.

Once the amendments become effective, communications relating to employee investigations will be excluded from FCRA’s definition of consumer report if all of the following are true:

• The communication is made to an employer in connection with an investigation of (a) suspected misconduct relating to employment; or (b) compliance with Federal, State, or local laws and regulations, the rules of a self-regulatory organization, or any preexisting written policies of the employer;

• The communication is not made for the purpose of investigating a consumer’s creditworthiness, credit standing, or credit capacity; and

• The communication is not provided to any person except (a) the employer or agent of the employer; (b) any Federal or State officer, agency, or department, or any officer, agency, or department of a unit of general local government; (c) any self-regulating organization with regulatory authority over the activities of the employer or employee; (d) as otherwise required by law; or (e) pursuant to 15 U.S.C. § 1681f (disclosures to governmental agencies).

Communications satisfying the above description will be subject to only one requirement. If an employer takes adverse action "based in whole or in part" on such a communication, the employer must disclose to the employee or applicant a summary of the nature and substance of the communication on which the adverse action is based. This obligation is considerably less than that imposed on communications meeting the definition of consumer report. Without the new exemption, employers would need to disclose the results of an investigation prior to taking adverse action and then give the employee a "reasonable" amount of time before taking the desired action. The FTC opined that five days is reasonable. See Brinckerhoff-Weisberg, Fed. Trade Comm’n Staff Op. Letter, June 27, 1997, http://www.ftc.gov/os/statutes/fcra/weisberg.htm.

The new amendments are also significant in that they allow an employer to withhold from disclosure sources of information acquired solely for use in preparing an investigative consumer report. This provision is another departure from the Vail letter, which prohibits an employer from redacting information contained in a consumer report. It qualifies as a major victory for employers who worry that witnesses may not otherwise be forthcoming with information due to concern that their identity will be revealed to the suspect employee.

Although compliance with federal and state investigation requirements remains an arduous task, FCRA’s new amendments at least lighten the burden. And employers can only hope that the amendments are but one step in the right direction.