In a surprise move last April, the Federal Trade Commission issued an opinion letter concluding that the Fair Credit Reporting Act (FCRA) governs workplace investigations of harassment allegations by outside investigators. The opinion letter, known as the "Vail letter" because it responded to a letter from Vancouver, Washington lawyer Judi A. Vail, applies the FCRA to investigations by persons, including lawyers, hired by employers to investigate charges of harassment against an employee.
What should employers who have always turned to outside counsel to conduct sexual harassment investigations do? At this juncture, the letter does not seem to carry much weight. At least one federal district court has noted that the letter itself states that it is "informal" and "advisory" in nature. The FTC, however, has announced plans to codify its position. Until the law is settled, while employers should be aware that hiring an outside third party to investigate allegations of harassment may expose the employer to a claim for civil penalties, this risk is much less than the risk posed by failing to promptly address an employee’s harassment complaint.
The FCRA — What Is It?
The FCRA is designed to protect consumers from inaccurate information regarding their credit worthiness. It primarily regulates the use of credit information by banks, the credit industry and employers. In the employment context, it regulates employers asking a "consumer reporting agency" for a "consumer report" or an "investigative consumer report" on a job applicant or current employee.
The FCRA defines a "consumer reporting agency" as an outside person who "regularly engages" in "assembling or evaluating consumer credit information or other information on consumers for the purpose of furnishing consumer reports to third parties." A "consumer report" is defined as a "written, oral or other communication of any information by a consumer reporting agency bearing on an individual’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living ... " An "investigative consumer report" is a consumer report that includes information compiled through personal interviews with neighbors, friends or associates of the individual being investigated.
The Vail Letter
The Vail letter asserts that external investigators hired by employers to conduct sexual harassment investigations are "consumer reporting agencies" and reports by external investigators of harassment allegations are "‘investigative consumer reports’ within the meaning of the FCRA." Accordingly, employers who use these reports are obligated to comply with the disclosure and authorization provisions of the FCRA. The letter also states that the act prohibits employers who take an adverse action based on information in the report from redacting any information in the report.
How Does an Employer Comply With the FCRA?
The FCRA has a long list of tedious requirements. Employers with questions regarding its applicability to a specific situation should consult a lawyer. As a brief overview, the FCRA requires employers seeking an investigative consumer report to:
- clearly and accurately disclose to the consumer that an investigative consumer report, containing information as to "character, general reputation, personal characteristics and mode of living, whichever are applicable, may be made"
- at the same time, inform the consumer of the right to request "a complete and accurate disclosure of the nature and scope of the investigation requested." The statement should include a summary of all of the consumer’s FCRA rights.
- obtain the consumer’s written authorization before obtaining the report.
Before taking any adverse action based on the information in the report, the employer must give the consumer an unaltered copy of the report and an additional copy of the consumer’s rights under the FCRA. Once the adverse action is taken, the employer must then give the consumer notice of the adverse action, the name, address and telephone number of the consumer reporting agency, a statement that the consumer reporting agency did not make the adverse decision and notice of the consumer’s right to obtain a free copy of the report from the consumer reporting agency.
Employer Exposure for Violating the FCRA
A consumer may bring a civil action against an employer who violates the FCRA. An employer who violates the FCRA is subject to actual and punitive damages and may be ordered to pay court costs and reasonable attorney’s fees. The consumer is not entitled to punitive damages in the case of mere negligent noncompliance. States may also sue, and, if successful, can get civil penalties.
An employer may contract with a consumer reporting agency to have the agency make the disclosures, obtain the consumer’s written consent and provide the relevant FCRA notices, however this does not shield the employer from liability — it will still remain liable if the agency violates these requirements.
A Quandary for Employers
The FCRA itself states that it deals with concepts of "credit worthiness, credit standing, (and) credit capacity." It does not contemplate investigating sexual harassment in the workplace. The Vail letter, not surprisingly, has angered employer groups and other opponents of expanding the statute. Commentators have raised a number of important concerns highlighted below.
The distinction between in-house and outside investigations is counterintuitive.
The FTC’s reading of the definition of "investigative consumer reports" senselessly distinguishes between internal and external investigations. As the FCRA only applies to reports done by outside agencies that regularly conduct these types of investigations, it does not apply to investigations done in-house or to outside agencies that are not in the business of conducting investigations. Yet, if the overall purpose of the FCRA is to help ensure accuracy, it seems that people who do not regularly perform these sort of investigations are more likely to make mistakes — mistakes that might harm the employer’s position in the long run.
The letter is at odds with recent U.S. Supreme Court sexual harassment law.
In Burlington Industries, Inc. v. Ellerth and Faragher v. Boca Raton, the Court, in addition to holding that employers will be held vicariously liable for the discriminatory behavior of their supervisors, found that employers who take swift and immediate action in investigating sexual harassment allegations may avoid liability under Title VII. Applying the FTC’s requirements to workplace harassment investigations may compromise the ability of employers to meet their obligations under Ellerth and Faragher.
The disclosure requirements can set investigations back and destroy employee unity.
In an August 1999 letter, the American Bar Association (ABA) asked the FTC to renounce its position. The ABA asserted that the FCRA’s consent and disclosure provisions will have "negative repercussions" on sexual harassment investigations. Employees will be less likely to come forward if the employee they accuse of inappropriate conduct will learn who provided the information to the employer.
The attorney-client privilege may be compromised.
The attorney-client privilege might very well be waived when an employer hires an outside law firm to investigate the harassment charges because the employee being investigated is entitled to receive a copy of the investigative consumer report. A court may conclude that the privilege is only partially waived because of the mandatory nature of the disclosure and the strong public policy in favor of reporting sexual harassment. In those situations, a court would hold that the work-product doctrine still protects other investigative materials and the attorney’s thoughts and conclusions prepared in anticipation of litigation. Also, employers would still have the option of waiving the privilege in order to use the information contained in the report in court.
Court Reaction
One court has commented on the Vail letter. In Robinson v. Time Warner, Inc., 187 F.R.D. 144 (S.D.N.Y. 1999), an employee who sued his employer for race discrimination sought to compel disclosure of the results of an investigation conducted by a law firm retained by the employer. The court unequivocally held that the investigation was conducted in anticipation of litigation and therefore was protected from discovery under both the work product doctrine and the attorney-client privilege.
One of the arguments advanced by the plaintiff was that, in light of the Vail letter, the FCRA mandated disclosure of the information. In rejecting this argument, the court stated that not only did the relevant portions of the FCRA predate the actual investigation, it was doubtful that the FCRA’s disclosure requirement even applied because no adverse action was taken. Rather, the report was prepared in order to provide the company with legal advice. Furthermore, the court deemed the Vail letter an "informal" and "advisory" exercise which does not govern the scope of the FCRA.
Congressional Action?
Although reportedly the FTC plans to codify the Vail letter, some observers predict that Congress will amend the FCRA to exempt outside agencies hired by employers to conduct sexual harassment investigations. After all, the FCRA’s stated purpose is to ensure "fair and accurate credit reporting." Perhaps law firms will be excluded because they are for the most part not "in the business" of performing these kinds of investigations.
Employer Options
The FTC issued another letter advancing a number of theories to address some of the issues raised above.(FTC Opinion Letter from Staff Attorney David Medine to Susan R. Meisinger at the Society for Human Resource Management (Aug. 31, 1999)). First, the letter said, the employer can always conduct the investigation in-house or use a third party that does not "regularly engage" in preparing reports rather than hiring an outside agency. The employer could also obtain consent and make the required disclosures to all new employees at the start of employment, or ask all current employees to sign a blanket consent and disclosure form to avoid approaching an employee accused of harassment immediately before the investigation is to begin. Also, the employer could have the investigative agency draft its report without naming the parties who provided the negative information about the employee. Rather, the agency could use terminology such as "former employer" or "company official."
While no one can predict with certainty the actions of the FTC, Congress or the courts, the risk of not conducting a prompt investigation into allegations of workplace harassment are likely to far outweigh the risks of conducting an investigation that may run afoul of the FCRA.
Labor and Employment Update is a publication of the Labor and Employment Practice Group of Pepper Hamilton LLP. The material in this newsletter is based on laws, court decisions, administrative rulings and congressional material, and should not be construed as legal advice or legal opinions on specific facts. Copyright 2000 Pepper Hamilton LLP. All rights reserved.