Amendments to the Fair Credit Reporting Act Make It Easier for Employers to Investigate Employee Misconduct


On December 4, 2000, President Bush signed into law the Fair and Accurate Credit Transactions Act, a law which amends the Fair Credit Reporting Act. Although most of the provisions of the new law address credit and identify theft issues, Section 611 exempts investigations of suspected employee misconduct from FCRA's onerous reporting and disclosure provisions and makes it easier for employers to investigate workplace misconduct. This provision will become effective March 31, 2004.

The Fair Credit Reporting Act (FCRA) limits an employer's ability to conduct background checks of applicants and current employees when such investigations are performed by a separate entity. A background investigation can include the employee's criminal history, education history, driving record, prior employment history or credit history. Before conducting a background investigation, the employer must notify the targeted employee or job applicant and obtain written permission to conduct the investigation.

Before taking adverse employment action, such as demotion, termination, or failure to hire or promote, the employer must provide the employee a complete copy of the investigation report and notice of the employee's FCRA rights. Internal investigations that are conducted exclusively in-house and that do not utilize outside investigators are not subject to FCRA under the prior law or under the recent amendments.

The Vail Letter

In 1999, the Federal Trade Commission issued the "Vail Letter" stating that investigation reports of employee misconduct were subject to FCRA's restrictions. In the Vail Letter, the FTC concluded that private investigators hired by an employer to conduct an investigation qualified as consumer reporting agencies under FCRA. The FRCA restrictions, particularly the requirement that the employer obtain a signed release from the targeted employee before conducting an investigation, limited an employer's ability to conduct investigations of suspected workplace misconduct.

Investigations conducted by independent third-party investigators may be appropriate to investigate sexual harassment, discrimination allegations, employee fraud or theft, workplace violence, workplace drug use or other workplace misconduct that may lead to adverse employment action. The Vail Letter deterred employers from using experienced and objective outside investigators to investigate workplace misconduct.

The recent amendment has corrected this dilemma. If certain criteria are met, employer investigation of workplace misconduct will now be exempt from the general FCRA restrictions. The new law amended the definition of "consumer report" to exempt communications made to an employer in connection with the investigation of:

  • suspected workplace misconduct, or
  • compliance with federal, state or local law, the rules of any self-regulatory organization or any preexisting written policies of the employer.

The communication cannot be made for the purpose of investigating the employee's credit worthiness, credit standing or credit capacity. The communication must be kept confidential and cannot be disclosed other than to the employer, an agent of the employer, any federal, state or local governmental agency or officer or a self-regulatory organization with regulatory authority over the activities of the employer or employee.

Still Some Restrictions

Although the employer no longer has to obtain the employee's consent before engaging a third-party investigator to conduct a workplace investigation of covered activities, there are still restrictions. If the investigation meets the criteria for exemption, then the employer must provide the employee a summary containing the nature and substance of the communication upon which the adverse action was based.

However, the sources of the information need not be disclosed and the identity of witnesses can be protected. This feature is intended to encourage witnesses to speak freely about the matter at issue without fear of retribution from the employee who is being investigated. The summary report can be provided after the adverse employment action has been taken.

The new law is limited to investigations of suspected workplace misconduct or investigations relating to compliance with applicable law or preexisting written policies of the employer. FCRA's more onerous restrictions for other work-related investigations remain intact. For example, FCRA's more stringent restrictions apply to background investigations of job applicants or persons seeking promotion to a new job position. Outside investigations, such as criminal history, may be prudent and necessary, particularly when the job involves safety or security issues. For this type of investigation, employers should continue to comply with all FCRA requirements in place prior to the recent amendments.

Employers should be vigilant in their compliance with FCRA limitations on investigations related to the workplace. The penalties for FCRA violations can be severe. An employer who violates FCRA may be subject to a private cause of action brought by the applicant or employee who received the adverse employment action. Damages in such a lawsuit may include actual damages, liquidated damages, punitive damages, attorney's fees and costs. In light of the recent changes, employers should review their workplace investigation procedures and their FCRA compliance for all aspects of employment investigation.

*article courtesy of Teresa Clark of Stinson Morrison Hecker LLP, tclark@stinsonmoheck.com.