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New Regulations For Internal Investigations

An opinion issued by a staff attorney to the Federal Trade Commission shocked employment attorneys and human resources professionals. Failure to understand this informal opinion may result in liability under federal law for wrongful discharge. Liability may arise when investigations of employees are conducted or assisted by an outside agency and an employee is disciplined or terminated as a result of the investigation. This update provides a brief explanation of the opinion and the relevant federal statutes.

Fair Credit Reporting Act

15 U.S.C. §1681 ET SEQ.

For years, the Fair Credit Reporting Act (FCRA governed credit reports issued by credit reporting agencies, (e.g., TRW, banks, car dealerships or mortgage brokers). Among other things, the FCRA required notification to subjects of consumer reports and provided the right to challenge disputed credit information.

The definition of a "credit report" was expanded to include the communication of any information concerning an individual's general reputation or personal characteristics for the purpose of evaluating an application for employment, promotion, assignment or retention as an employee. Initially, this amendment did not receive much attention by human resources professionals. To the extent the amendment was considered, the human resources industry believed the intent of the amendment was to apply the FCRA to criminal or financial background checks of applicants for employment.

Application to Internal Investigations

In the spring of 1999, a staff attorney for the Federal Trade Commission (FTC) issued an opinion letter. The FTC is the agency that implements the FCRA. The FTC was asked whether the FCRA applied to sexual harassment investigations conducted on behalf of an employer by an outside organization, such as a human resource specialist or a law firm. Because such an organization fits the FCRA definition of a "consumer reporting agency", the staff attorney concluded that harassment investigations conducted or assisted by an outside organization are governed by the FCRA.

This opinion has drawn a great deal of criticism. The Society for Human Resource Management informed the FTC about the practical problems that result from application of the FCRA to investigations of work place misconduct. Nonetheless, the FTC staff responded with another letter opinion in August 1999 addressing the problems of FCRA coverage of workplace investigations. The recent opinion clarified that if the investigation is conducted by the employer, without outside help, the FCRA does not apply. However, if an outside agency conducts or assists with the investigation, the necessary consents and disclosures should be routinely obtained by the employer at the start of any employment. This recommended practice, the FTC points out, would avoid the difficulty of having to ask the accused employee for his permission to conduct an investigation.

Staff opinion letters do not bind the FTC or the courts. However, until there is other legal authority, these opinions are persuasive authority that when any outside agency (attorneys, human resources, specialists or accountants) conducts or assists in a workplace misconduct investigation, the FCRA may control. Penalties for willful violations of the FCRA include actual damages, punitive damages and attorney fees. If an individual is terminated from employment as a result of an investigation that did not comply with the FCRA, the discharged employee may have a claim for wrongful discharge, in addition to statutory remedies.


Require that all of your employees sign disclosure and consent forms. The form must be written on a separate sheet of paper and kept in the personnel manual. This procedure will avoid the requirement under the FCRA to ask an employee under suspicion of wrongdoing for permission to start an investigation conducted or assisted by an outside organization.

Before adverse action may be taken based on such an investigation, additional requirements must be met under the FCRA. Please obtain legal advice before taking such action.

If the employment investigation being conducted or assisted by an outside agency requires personal interviews or the employees' neighbors, friends, or associates outside of the workplace, different disclosure and notification requirements must be met under the FCRA. With such an investigation, the employee must be: (1) notified, within 3 days of the date the investigation was first requested, that the employee is the subject of such investigation; (2) provided a written statement of rights under the FCRA; and (3) informed of his rights to receive a complete and accurate disclosure of the nature and scope of the investigation. In the event such an investigation is necessary, please contact our office for the necessary forms.

As a service to our employment clients, the forms necessary to comply with this new obligation will be sent without charge.

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