Lifting The Vail: Federal Trade Commission Determines That The Fair Credit Report Act Applies To Workplace Sexual Harassment Investigations

In 1996, Congress passed the Consumer Credit Reporting Reform Act, which amended the Fair Credit Reporting Act ("FCRA" or "Act"), the federal law that governs the acquisition and use of virtually any type of information gathered by "consumer reporting agencies" on job applicants and employees. These amendments expanded the procedural requirements for obtaining and using consumer reports for employment purposes, including hiring, promotion, termination, and reassignment.

Since passage of the Consumer Credit Reporting Reform Act of 1996, the Federal Trade Commission ("FTC"), the agency responsible for interpreting and enforcing the FCRA, has issued numerous staff opinion letters in response to various inquiries from employers and their representatives. One such letter (Vail, 4/5/99) has caused a great deal of concern and discussion, as it indicates that the FCRA applies to sexual harassment investigations conducted by third-party investigators. In this opinion letter, the Commission staff determines that third-party investigators hired to perform sexual harassment investigations in the workplace are "consumer reporting agencies" under the Act and that any reports prepared by such investigators are "most likely investigative consumer reports," as defined by the FCRA. The implications of this opinion are significant for employers, third-party investigators and employment counsel. This ASAP seeks to provide you with a quick overview of the scope and coverage of the FCRA and its potential effect on sexual harassment and other workplace investigations in light of the Vail letter.

General scope and coverage of the FCRA

The title of the FCRA is confusing, because it contains the phrase "credit reporting," but applies to a much broader spectrum of reports. The Act's provisions actually apply to "consumer reports" and "investigative consumer reports" which may contain absolutely no credit-related information. Indeed, almost any communication of information concerning an applicant or employee from a consumer reporting agency to an employer is likely to be a "consumer report." Common examples of consumer reports include driving records checks, criminal background checks, educational record and prior employment checks, and credit history checks, when this information is obtained from a consumer reporting agency for employment purposes. Under certain circumstances, drug test results may even be considered "consumer reports."

Based on the Vail opinion letter, sexual harassment investigations-and probably other types of workplace investigations-will be deemed by the FTC to be "investigative consumer reports" as defined by the FCRA. "Investigative consumer reports" are a subset of "consumer reports" and consist of reports bearing on an applicant's or employee's character, general reputation, personal characteristics, or mode of living obtained through personal interviews with that individual's friends, neighbors, or associates.

Common Questions and Concerns Related to the
FCRA and Workplace Investigations

How does the Vail letter affect employers conducting workplace investigations?

The FTC staff's analysis in the Vail letter raises the specter of new obligations and difficult issues for employers and employment counsel in the context of workplace investigations performed by third parties. To comply with the relevant aspects of the FCRA as applied to "investigative consumer reports," employers who retain third-party investigators must implement various disclosure, consent and communication procedures with respect to the investigated employee (e.g., the accused harasser) before and after the investigation commences.

What procedures does the FCRA require with respect to sexual harassment investigations performed by outside investigators?

According to the FTC's opinion letter (Vail, 4/5/99), the FCRA requires in this context that an employer do the following:

a) At any time "before the report is procured or caused to be procured," the employer must provide a separate, written disclosure to the investigated employee that a "consumer report" may be requested for employment purposes and obtain written authorization from the investigated employee to obtain the report;

b) Within three days after first requesting the investigation, the employer must mail or otherwise deliver to the investigated employee a special disclosure that an "investigative consumer report," which must be clearly defined as set forth in the Act, may be made; that the employee may request additional information about the nature and scope of the investigation; and that the employee may request a summary of rights under the FCRA;

c) If the employee requests additional information about the nature and scope of the investigation and/or a summary of rights the employer must provide such to the employee within five (5) days of receiving the request;

d) Before procuring the report or causing it to be prepared, the employer must certify to the third-party investigator (i.e., the "consumer reporting agency") that the employer will fully comply with the FCRA disclosure provisions described above;

e) Where adverse action is to be taken against the investigated employee, the employer must provide to the employee (a) an unredacted copy of the report issued by the investigator; and (b) a summary of rights under the FCRA as prescribed by the FTC before the adverse action is actually implemented, with an appropriate amount of time subsequently permitted for the investigated employee to raise any dispute as to the report's accuracy before implementation of the adverse action; and

f) The employer must provide oral, written or electronic notice to the investigated employee of the adverse action that was based in whole or in part on the investigator's report, including information about the consumer reporting agency that made the report, and statements concerning both the employee's right to obtain another copy of the report and a description of rights to dispute the report.

Based on the FTC's Vail letter, does the FCRA apply to workplace investigations other than those involving sexual harassment, and if so, what additional concerns are raised as a result?

The FTC's broad interpretation of "consumer report" in the Vail letter logically extends to any workplace investigation of an individual's misconduct. While harassment investigation policies and practices may often adapt to the FCRA requirements without compromising the employer's interests or public policy at stake, the Act's advance notice, consent and disclosure requirements present serious obstacles to such interests in the context of investigations performed by third parties where:

a) Confidentiality as to the nature and scope of the investigation is vital to its success (e.g., workplace violence risk assessment and undercover theft investigations);

b) The investigator's written report may contain highly sensitive, private information, information that increases the risk of retaliation by investigated employees, or information concerning separate workplace concerns that the employer may need to know for separate purposes;

c) Witnesses may refuse to provide important information once advised (in response to common questions) that a report may be provided to the investigated employee.

Where the employer's legal obligations collide in this manner, a cost-benefit analysis and legal advice from experienced labor and employment counsel are recommended.

How does an employer avoid or limit applicability of the FCRA in the context of workplace investigations?

To completely avoid potential applicability of the Act, the employer has two options:

a) Conducting all or a portion of the investigation itself (i.e., not use an outside investigator); or

b) Ensuring that any communications and documentation of the investigation, as well as subsequent reports, are implemented under the direction of an attorney and are thus attorney-client privileged or subject to the attorney work product privilege.

As to the first option, the FCRA does not apply where the employer conducts the background check or investigation, as the definitions of "consumer report" and "consumer reporting agencies" contemplate the activities of third parties who provide reports to employers. With regard to the second option related to using attorneys to perform investigations, there are no FTC opinion letters and no reported court decisions discussing the extent to which attorneys and law firms may be deemed to be consumer reporting agencies when they perform and report on workplace investigations. Questions as to how the FTC or the courts may balance the attorney-client and work product privileges against the FCRA's mandates remain open. The FTC attorney who authored the Vail letter has recently stated in an interview that the Act does not distinguish between lawyers and non-lawyers for purposes of defining "consumer reporting agencies." (See "Furor Over FTC Ruling," The Recorder/Cal Law, May 26, 1999, www.lawnewsnet.com/stories/A1786-1999May26.html). In any event, employers and their attorneys should unquestionably use great caution in seeking to cloak workplace investigations and related reports in these traditional privileges.

Should employers avoid using third-party investigators and just conduct all workplace investigations themselves in order to avoid FCRA compliance issues?

An employer should conduct the investigation itself only where the task can be assigned to an employee or employees with the experience, training, skills and knowledge necessary to accomplish an effective and lawful investigation. Where this is not possible, or in situations where the credibility or neutrality of the investigation will be questioned if done "in-house," a third-party investigation is still the better choice.

Is there a lawful and effective way to ensure that employees consent to workplace investigations performed by outside investigators before such investigations become necessary?

Yes. Employers should implement policies requiring that their employees sign a "blanket" prospective consent to workplace investigations and related consumer reports that the employer may request during the course of employment. The FTC staff has specifically endorsed this option as a means of avoiding the problems associated with disclosing information about certain types of investigations before they begin, and the potential that an employee suspected of particular misconduct may decline consent. Nevertheless, workplace investigations giving rise to investigative consumer reports will also trigger the employer's obligation to mail or otherwise deliver to the investigated employee a special notice about the particular investigation within three days after the report is first requested; the consumer reporting agency cannot begin to prepare the investigative consumer report until it has received confirmation that this notice was given to the employee. Employees who are subject to workplace investigations will consequently receive notice within several days after such investigations are first requested and are entitled to request more information from the employer thereafter.

Can the employer hire an attorney to perform pre-litigation workplace investigations, and thus avoid FCRA compliance based on the attorney-client privilege?

In pre-litigation situations requiring workplace investigations, the appropriate question is not whether an attorney should perform the investigation, but whether the attorney's relationship with the employer should be that of attorney/client or that of investigator/client. In other words, should the employer typically want to keep the investigation and report privileged in the pre-litigation setting? The general answer to this question is "no," not because of the FCRA, but because the investigator's testimony and report are likely to serve as important evidence for purposes of defending the employer later. Generally, an attorney may not serve as both a witness and litigation counsel and will be disqualified from providing legal representation if called as a witness. Moreover, if required to testify as a witness, the attorney may be required to disclose as evidence otherwise privileged communications and work product, some of which may contain damaging material arising from the attorney's obligation as legal counselor to advise the employer of weaknesses in the case.

Does the FCRA apply where an investigating attorney's report is used for employment purposes, as the basis for an adverse employment decision, or as the basis for an after-acquired evidence defense, and does it then make a difference whether the report is to be used as evidence supporting the defense of litigation?

This question is perhaps the most difficult one presented by the FTC's Vail letter applying the FCRA to harassment investigations performed for employers by third parties. As the FTC attorney who authored the Vail letter recently noted, the FCRA does not distinguish between lawyers and non-lawyers in defining "consumer reporting agencies" or "consumer reports." Unfortunately, there are no reported cases and no FTC letters addressing this subject to date. If any report generated by an attorney investigator is used or intended to be used for "employment purposes" under the Act, the FTC may uniformly take the position that the attorney is a "consumer reporting agency" and that the investigation report is a "consumer report" subject to all FCRA requirements. Where a current employee is pursuing litigation against the employer, use of such an attorney report to support an "after-acquired evidence" defense cutting off the employee's prospective claims for damages may also lead to application of FCRA restrictions. A consistent interpretation of the FCRA in this respect, without reference to whether the report is privileged and generated solely for purposes of providing legal advice, would jeopardize the sanctity of the attorney-client privilege in the employment setting. Congress did not likely intend such a result in enacting the FCRA.

Nonetheless, where counsel exceeds the role of providing legal advice to the employer concerning a pre-litigation workplace investigation and becomes a witness by participating in the fact-finding or report, it seems likely that the FTC will currently apply the Vail letter interpretation of the FCRA and find that the attorney has functioned as a consumer reporting agency. Based on the definition of "consumer reporting agency" under the Act, such a result is more likely where the attorney investigator regularly engages in workplace investigations and provides related reports to employers. This realization presents another reason why attorneys should avoid pre-litigation investigations for employers whom they intend to represent or counsel on the matter investigated.

Can an attorney retained by the employer oversee and direct an outside investigator's pre-litigation workplace investigation and the resulting report through privileged communications and avoid FCRA compliance?

Where a third-party investigator is to conduct the investigation, and the information obtained may be considered a "consumer report," or may otherwise constitute important defense evidence for the employer, direct communications between employment counsel and the investigator may be discoverable in future litigation.

The safer strategy is for employment counsel to limit direct communications with the investigator and to instead provide legal advice and any written guidance to the employer, who can then communicate with the investigator on a non-privileged basis. Any direct communications between employment counsel and the investigator should be appropriately marked as subject to the attorney work product privilege in anticipation of litigation and should focus on the overall goals and legal compliance issues related to the investigation, rather than the specific witnesses, facts or fact-finding function. Additionally, if the investigator is an attorney, this person should avoid any appearance of providing legal advice to the employer. Written communications with the investigator should clearly confirm this understanding. In this manner, employment counsel's role as legal advisor and the privileged nature of counsel's relationship with the employer is protected.

What are the potential penalties where an employer fails to comply with the FCRA?

The Act imposes civil liability for negligent and willful noncompliance. The injured party may recover actual damages, attorney's fees and costs, liquidated damages, and, in certain instances, punitive damages. Additionally, the FCRA contemplates criminal penalties where "[a]ny person knowingly and willfully obtains information on a consumer from a consumer reporting agency under false pretenses." Such persons may be fined or imprisoned for not more than two years, or both. The FTC also has procedural, investigative and enforcement powers under the Act and may sue to enforce any violation as an "unfair or deceptive act or practice in commerce in violation of the Federal Trade Commission Act."

Specific Steps For Maintaining The Attorney-Client Privilege
For Legal Advice Concerning A Workplace Investigation

Where labor and employment counsel is retained to provide legal advice to an employer concerning an investigation that may be introduced as evidence in subsequent litigation, the parties should understand and agree to the following concepts and procedures, so as to preserve the privileged nature of their communications:

• The primary purpose of counsel's communications is legal advice and to fulfill the role of legal advisor, rather than investigator;
• Confirm in writing that communications are made with the understanding that they are subject to the attorney-client privilege;
• Label any necessary written communications between the attorney and the investigators as subject to the attorney-client privilege or work product doctrine. Files containing privileged materials should be maintained by the employer separately from those containing non-privileged investigation materials;
• Generally, apart from the new issues presented by the FTC's Vail letter interpreting the FCRA, communications between counsel and the employer made strictly for the purpose of rendering or developing legal advice will be subject to the attorney-client privilege whether or not litigation is anticipated. Documents and other materials prepared by the employer or investigator in anticipation of litigation may also be subject to the work product doctrine. The first instance of any threat of litigation should be documented so as to more easily establish appropriate application of privilege to subsequently prepared documents;
• Counsel retained to provide legal advice should avoid any fact-finding, and should not be used to interview any person during the investigation who might be a potential witness in subsequent litigation (i.e., where evidence of the investigation may be an element of the employer's defense); and
• Make clear in a written agreement with any attorneys retained to conduct investigations that their role is that of investigator and not legal advisor. Such attorney-investigators should be informed that they are likely to be called as witnesses in any litigation that follows and that any communications between them and the employer will be subject to disclosure. The activities of attorney-investigators should thus be limited to fact gathering and reporting, as with other investigators.