Employment Laws for HR: Adverse Action Compliance

Posted Wednesday, August 30th, 2017 by Debbie Lamb, Sterling Talent Solutions

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Employment Laws for HR: Adverse Action Compliance

As most employers know, there are many components to the hiring process. If an employment background screening check is conducted, an organization will have further procedures to follow when making a hiring decision based on the background screening reports. When a company uses a job candidate’s background information to deny employment, they must comply with federal and state laws that protect the applicant from discrimination. The variety of laws/rules can be overwhelming to an employer, and if regulations are not complied with properly, an organization might have to deal with penalties. One possible outcome of a background screening report is that an employer takes adverse action when choosing to deny employing a candidate based on the findings of the report.

Sterling Talent Solutions is producing the “HR Essentials” webinar series with industry experts who will speak on HR compliance matters and provide best practices with actionable takeaways which companies can implement immediately. This month’s webinar, “Employment Laws for HR, Part 2: Adverse Action Compliance,” presented by Pam Devata and Stacey Blecher of Seyfarth Shaw LLP, focuses on the adverse action process.

What is Adverse Action?

Adverse action is “an action that denies an individual or business, credit, employment, insurance or other benefits. An adverse action is generally taken by a business based on a criminal past.” Adverse action regulations apply to new hire candidates who have been offered a position with a company on a conditional basis or current employees.  When using consumer reports to make employment decisions, including hiring, retention, promotion or reassignment, a company must comply with the Fair Credit Reporting Act (FCRA). The Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC) enforce the FCRA. To be compliant, companies must follow a three-step process before they take any type of adverse action based on the findings in a consumer report:

  • Pre-Adverse Action Notification
  • Waiting Period
  • Adverse Action Notification

Step One: Pre-Adverse Action Notification

The FCRA has rules that employers must follow if they have a third party conduct employment background screening reports. The first step in the adverse action process is called the Pre-Adverse Action Notification.

Based on the FCRA, an employer must do the following before taking adverse action:

  • Advise the applicant it is thinking about taking adverse action based in whole or in part on information in the consumer report. This can be presented to the candidate orally or in writing.
  • Provide the candidate with the name of the consumer reporting agency who provided the background screening report.
  • Inform the applicant that they have the right to dispute any inaccurate or incomplete information in the report by contacting the consumer reporting agency or the employer.
  • Provide the candidate with a copy of their full background screening report.
  • Give the applicant a copy of the Summary of Your Rights Under the Fair Credit Reporting Act

Some states and cities have even more stringent processes and require more information from the employer when a hiring decision is made based on the findings of a background screening report. Some states such as New Jersey, New York, Washington and Massachusetts require specific state summary of rights in addition to the Federal Summary of Rights. In New York City, if there is adverse action based on criminal history, employers must complete and provide a copy to the applicant of the New York City Fair Chance Act Form. In Los Angeles, employers must provide a written assessment required by the Los Angeles Fair Chance Initiative for Hiring Ordinance to the applicant.

Step Two: Waiting Period

Before taking adverse action and after giving notice that you are “considering” action, an employer must wait a “reasonable period” of time. The FTC has stated that five business days is reasonable. However, what is considered “reasonable” depends on how the notification is communicated to the applicant. The key is to the waiting period is to provide enough time so the applicant/employee can dispute the information before the employer fills the position.

Certain cities and counties have more specific laws defining the amount of time for the waiting period. For example, New York City requires an employer to wait at least three business days after RECEIPT by the applicant of the pre-adverse action notification before they can proceed to the last step.

Step Three: Adverse Action Notification

After giving the Pre-Adverse Notification and exhausting the waiting period, an employer can take adverse action. When giving adverse action, an employer must give written notification to the applicant stating what action is being taken and what the decision was based upon, such as the criminal history in the background screening report findings.

The decision to start adverse action can be in whole in or in part on the findings of the consumer report, but it must come from the employer. With an adverse action decision, an employer must state the decision for adverse action was not made by the consumer reporting agency. The candidate can dispute the information in their report with the third-party consumer reporting agency. Also, the candidate has the right to ask for a free copy of the report within 60 days from the consumer reporting agency. If an applicant disputes the findings of the employment background screening report, then the adverse action process needs to be stopped.

As with the first two steps, certain states and cities have considerations requiring employers to include written assessments. For example, the state of Massachusetts requires specific language that indicates the decision to proceed with adverse action is due to credit information. The city of Philadelphia states that employers must give applicants ten business days to provide information concerning the accuracy of criminal history or additional information for the employer to consider and must also provide another copy of the consumer report.

Unique Circumstances that Affect Adverse Action Process

There are unique circumstances that affect the adverse action process including what happens for pending judicial cases, New York City and Los Angeles special requirements and written assessments, ATS auto-send letters and start dates being set before the background screening reports are finalized. In any of these cases, the best action is to follow the pre-adverse action process that is required by the FCRA.

Always review with legal counsel all state and local regulations around the adverse action process. Follow each step of adverse action in the proper order. Send the pre-adverse notification, wait a “reasonable period” and then send the adverse action notification. Find out more about the adverse action process and how they affect the workplace by downloading the OnDemand version of “Employment Laws for HR, Part 1: Adverse Action Compliance.”

Please Note:

Please note that Sterling Talent Solutions is not a law firm. The material available in this publication is for informational purposes only and nothing contained in it should be construed as legal advice. We encourage you to consult with your legal counsel to obtain a legal opinion specific to your needs.

This publication is for informational purposes only and nothing contained in it should be construed as legal advice. We expressly disclaim any warranty or responsibility for damages arising out this information. We encourage you to consult with legal counsel regarding your specific needs. We do not undertake any duty to update previously posted materials.