Employer Beware: The Fair Credit Reporting Act Applies to Employee Misconduct Investigations

In 1996, Congress passed the Consumer Credit Reporting Reform Act, Public Law 104-208, which broadened the Fair Credit Reporting Act (FCRA), 15 U.S.C. Section 1681, to include employer investigations into employee misconduct. The Federal Trade Commission's (FTC) statement that employers are subject to the provisions of the FCRA, contained in an opinion letter (Vail, 4/5/99), has employment attorneys, and employers alike, struggling to reconcile compliance with the FCRA, 15 U.S.C. Section 1681, and Title VII (the federal statutes that govern employee discrimination and harassment investigations), 42 U.S.C.A. Section 2000e, which now clearly are in conflict. While the FTC's position has not been challenged nor upheld by any federal court, employment attorneys must caution their clients to comply with the FCRA's requirements. Failure to do so could cost an employer up to $1,000 in compensatory damages, attorney's fees, court costs, unlimited punitive damages and criminal penalties, 15 U.S.C. Section 1681n(a).

The current version of the FCRA contains broader definitions than the original FCRA with regard to "credit reporting agency," "consumer report" and "investigative consumer report," 15 U.S.C. Section 1681a, all of which, at least one individual at the FTC has reasoned, bring employers who hire outside firms to conduct investigations regarding employee misconduct under the expanded umbrella of the FCRA. "Consumer reporting agency" now includes anyone who regularly assembles or evaluates, in whole or in part, information regarding consumers, which the person supplies to third parties, 15 U.S.C. Section 1681a(f). This, according to an FTC opinion letter, may include an attorney, human resources firm or any other outside individual who conducts an investigation regarding employee misconduct for an employer, LeBlanc, 6/9/98. "Consumer report" now includes any communication issued by a consumer reporting agency bearing on a consumer's character, general reputation, personal characteristics or mode of living used as a factor to establish the consumer's eligibility for employment, 15 U.S.C. Section 1681a(d)(1). An "investigative consumer report" includes reports detailing a consumer's character, general reputation, personal characteristics or mode of living when such information is obtained from interviews with neighbors, friends, associates or acquaintances of the consumer, 15 U.S.C. Section 1681a(e). Consequently, employer investigations conducted by outside firms, which result in the generation of a report regarding sexual harassment, other forms of harassment, discrimination, retaliation, theft or violence would qualify as investigative reports under the FCRA, as long as such investigations could affect an accused employee's continued employment.

Employer Requirements
In a nutshell, the FCRA requires an employer, who hires an outside firm to conduct an employee investigation, to:

  1. Disclose to the accused employee, in writing, that the employer may obtain an investigative report, which may include information regarding his or her character, general reputation, personal characteristics and mode of living, 15 U.S.C. Section 1681d(a). (The employer must make this disclosure to the employee no later than three days following the employer's request for investigation to the outside firm, 15 U.S.C. Section 1681d(a)(1)(A).) The employer must also disclose to the employee his or her rights under the FCRA, especially with regard to additional disclosures, 15 U.S.C. Section 1681d(a)(1)(B).
  2. Obtain signed authorization from the accused employee prior to conducting the investigation, 15 U.S.C. Section 1681b(b)(2)(A).
  3. Provide the accused employee a complete, unaltered copy of the report resulting from the investigation, as well as another copy of the employee's rights under the FCRA, before taking any adverse employment action against the employee (i.e., discipline or termination of employment, 15 U.S.C. Section 1681b(b)(3)(A).
  4. Wait a reasonable period of time after providing the accused employee with a copy of the investigative report and his or her rights under the FCRA before taking any adverse employment action against the employee, 15 U.S.C. Section 1681b(b)(3). The FTC, while acknowledging that the FCRA is silent with regard to a pre-adverse action waiting period, stated, in one such instance, that five (5) days was reasonable, Weisberg, 6/27/97. However, the author of the same opinion letter noted that the reasonableness of the waiting period is a very fact-specific issue, Weisberg, 6/27/97.
  5. Notify the employee, after taking adverse action against him or her, that the employer based such action on an investigative report, disclose the identity of the investigating firm and provide the employee information regarding his or her right to dispute the accuracy or completeness of the report and to request a new investigation, 15 U.S.C. Section 1681m(a).

Employer Problems
These requirements make it clear that compliance with the FCRA and Title VII can cause many problems for the employer. First, the requirement that the employer notify the accused employee of the pending investigation may allow the guilty employee an opportunity to alter evidence and intimidate others with knowledge, thereby minimizing the investigator's ability to observe initial reactions and conduct an effective investigation. This requirement may also increase the likelihood of retaliation and violence against a victim. Furthermore, if the accused employee refuses to authorize the investigation, the employer is faced with the dilemma of either proceeding with the investigation and facing penalties under the FCRA, 15 U.S.C. Section 1681n, or terminating a pending investigation, which would prevent the employer from complying with Title VII.

When an employer complies with the FCRA, it cannot comply with Title VII. As the Supreme Court stated in Burlington Industries, Inc. v Ellerth and Faragher v. City of Boca Raton, 524 U.S. 742, 118 S. Ct. 2257 (1998), the employer must conduct a Title VII investigation promptly and thoroughly, while maintaining confidentiality of the parties to the extent practicable. An employer who complies with the FCRA's disclosure and waiting period requirements cannot possibly comply with these provisions of Title VII.

Other problems may result from FCRA compliance as well. The FCRA's requirement that the employer must provide the accused employee with a copy of the investigative report before it takes adverse action against him or her, 15 U.S.C. Section 1681b(b)(3)(A), may encourage witnesses to refrain from being candid, provide incentive for the accused employee to retaliate against witnesses and increase the employer's exposure to defamation claims. Under such circumstances, the resulting report is not likely to be thorough or unbiased. Additionally, the FCRA's waiting period requires the employer to maintain the guilty employee on its payroll for several days after the completion of the investigation before taking adverse action, 15 U.S.C. Section 1681b(b)(3), see also Weisberg, 6/27/97. Even more troubling, however, is the FCRA's provision granting the accused employee the right to dispute the results of the initial investigation and request a second investigation, 15 U.S.C. Section 1681i(a)(1), which not only is expensive and time consuming, but further delays justice for any victims involved.

Fortunately, if the employer conducts an internal investigation, without hiring outside investigators, it need not comply with the FCRA. But, because some employers lack the expertise to handle their own investigations appropriately under the requirements of Ellerth and Faragher, 524 U.S. 742, 118 S. Ct. 2257, they frequently turn to their attorneys for guidance. Unfortunately, the attorney who conducts an employee misconduct investigation for a client becomes a "consumer reporting agency" under the FCRA and may destroy the attorney-client privilege with regard to client communications. In addition, the attorney risks becoming a witness in the event a lawsuit follows, which would preclude the attorney from representing the employer.

Compliance Suggestions
If the employer absolutely cannot conduct its own investigation and, therefore, must comply with the FCRA, it should include a disclosure statement on its employment application form and obtain signed consent from all new employees with regard to future investigations. As an extra precaution, the employer should distribute a separate document to each new employee, explaining that, at a later date, the employer may obtain a consumer report regarding the employee for employment purposes. The FTC recognized this practice, in an opinion letter, as an acceptable means of complying with 15 U.S. C. Section 1681b(b)(2)(B),

However, when the investigation requires the employer to conduct personal interviews regarding the accused employee's character, mode of living and the like (triggering an investigative report to result), the employer still must notify the accused employee, within three days of ordering an outside investigation, that such an investigation is pending, 15 U.S.C. Section 1681d(a)(1)(A). Nevertheless, the Act does not specifically prohibit an employer, who disclosed the possibility of a future investigation and obtained authorization from the employee upon hire, from beginning its investigation three (3) days prior to notifying the employee that an actual investigation is pending. When the employer does notify the accused employee that an investigation is pending, the employer should caution the employee that he or she will be expected to adhere to the employer's policies and procedures, including those forbidding intimidation of and retaliation against victims and witnesses. The employer should further indicate that the safety of other employees must be considered and, as a result, the accused employee's violation of such policies, regardless of the FCRA's notification requirements, will subject him or her to dismissal for cause. By cautioning the accused employee with regard to the rights of others, the employer may reduce the likelihood of intimidation and retaliation. In such a case, however, the employer should seek the guidance of its attorney to ensure maximum compliance with the FCRA and Title VII.

The best option, however, is one that allows the attorney and client to avoid the FCRA while building a solid defense under Ellerth and Faragher, 524 U.S. 742, 118 S. Ct. 2257. This option requires the employer to conduct its own misconduct investigation. The attorney's role is to refrain from conducting any part of the investigation, while providing the client with the guidance necessary to properly complete the investigation. The key is for the attorney to provide detailed instruction with regard to prompt, thorough, unbiased investigation techniques while he or she avoids participation in the fact-gathering process and, thus, becoming a witness in a future cause of action.

About the Authors:
Mark J. McAndrew is a partner with Momkus Ozog & McCluskey LLC in Downers Grove, where he concentrates his practice in management-side employment law, corporate risk management and litigation. He received his Bachelor of Science degree from the University of Illinois in 1974 and his Juris Doctor degree from The John Marshall Law School in 1980.

Tamara L. Vergara is an associate with Momkus Ozog & McCluskey LLC in Downers Grove, where she practices management-side employment law. She received her Bachelor of Arts degree, with highest distinction, from Purdue University in 1993 and her Juris Doctor degree from Loyola University Chicago in 1998.

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