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How To Reduce The Likelihood Of Adverse Actions

October 14, 2015


October 14, 2015

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There are certain HR decisions which are carried out so routinely that most HR professionals and staffing companies hardly give them a second thought. Examples include not hiring an applicant, demoting an employee, reducing an employee’s pay/benefits and suspending or firing an employee. In most cases, an HR can carry out such decisions on their own volition, without risking legal sanctions.

However, there are certain circumstances where such decisions have the potential to bring the organization under legal scrutiny. One such circumstance is when these decisions are based on information collected through background checks. In such circumstances, the Fair Credit Reporting Act (FCRA) comes into play, and these decisions are termed as “adverse actions”.

An adverse action is basically an HR decision which has negative implications for a job applicant or employee. An example is not hiring a job applicant or firing an employee as a result of information unearthed in a background check.

Such a decision cannot just be carried out at an HR professional’s discretion. There are strict FCRA guidelines which must be followed for such a decision to be legally valid. Even the slightest deviation from the guidelines can be grounds for costly legal consequences.

Before looking at how to safely carry out adverse actions, it is important to have a clear picture of the legal consequences. In a nutshell, carrying out adverse actions haphazardly can open your organization to class action lawsuits or Federal Trade Commission (FTC) sanctions. Let’s take a brief look at each of these legal consequences.

Class Action Lawsuits

In 2014, the Society for Human Resource Management (SHRM) reported an emerging trend of FCRA class actions against employers. It reported that 27 FCRA class action lawsuits had been filed in 2014 (the article appeared in August 2014) countrywide. The lawsuits had been filed across industries from restaurant chains and financial institutions to theatre chains and manufacturing. The SHRM also reported a number of FCRA class action settlements ranging from $2.5 to $4.4 million.

One recent example is the $3 million settlement paid by Delhaize America to settle a FCRA class action. The class action was brought after Food Lion LLC – a subsidiary of Delhaize America – hired a woman, promoted her and then fired her after a background check unearthed a previous conviction.

The mistake made by Food Lion LLC is that it violated two sets of FCRA provisions. First, it did not give the woman a proper disclosure. Second, it did not follow the prescribed adverse notification guidelines. The attorneys brought two class action lawsuits against Delhaize America – a disclosure class action on behalf of 57,000 people and an adverse notification class action on behalf of 2,500 people. Realizing that it was in a no-win situation, Delhaize decided to pay the $3 million settlement demanded by the attorneys.

An important fact to note is that every FCRA class action begins with an adverse action. People typically sue when they have been fired or denied employment. The actual FCRA violation for which they sue may not involve adverse action violations. A case in point is the 6.8 million settlement paid by Publix Supermarkets Inc in a class action brought by 90,000 job applicants. The FCRA violation committed in this case was the “stand-alone disclosure”. However, the lead plaintiff first contacted their lawyer when they felt that the reason they hadn’t been hired had something to do with the background checks carried out by the company.

The bottom line is that every adverse action carried out has the potential to lead to an expensive class action. With smart attorneys always on the lookout for opportunities to sue, HRs need to take precautions to avoid such lawsuits. But then, class action suits aren’t the only thing HRs need to worry about. Precautions also have to be taken against FTC sanctions.

Federal Trade Commission (FTC) Fines

Over the past few years, the FTC has stepped up its crackdown on organizations which violate FCRA regulations. A case in point is two companies fined for carrying out adverse actions without following the right stipulated notification procedures. The companies, Quality Terminal Services LLC and Rail Terminal Services were fined $24,000 and $53,000 respectively. In both cases, the companies failed to send the adequate pre-adverse and adverse action notifications to job applicants.

In a way, the FTC may actually pose a greater legal challenge than class action attorneys. This is because attorneys tend to pick on cases they can win. The reason for this is simple – they are motivated by a financial motive. The FTC isn’t constrained by such motivations. As such, they can take on any potential violations.

Therefore, an adverse action isn’t something which an HR should take lightly. It is a potential legal tripwire which can easily result in “adverse reactions” from class action attorneys or the FTC. Therefore, every HR needs to take precautions to lower the risks of a legal backlash. The ultimate question is: how can an organization carry out an adverse action safely.

How To Carry Out Adverse Actions Legally

For an adverse action to be deemed legal, it has to be carried out within the bounds of the relevant legislations. The major legislation in this case is the FCRA.

To ensure that your adverse action stays within the FCRA bounds, you can use the following tips:

  1. Follow FCRA disclosure procedures. Any background check which is carried out without authorization of an employee or applicant is illegal. As such, any adverse action based on such a background check is illegal. Therefore, the first step is towards legal compliance is to ensure that all the FCRA disclosure procedures are followed.
  2. Send adverse action notifications. There are two kinds of notifications which are supposed to be sent to an employee or applicant. They are the pre-adverse action notice and an adverse action notification. Make sure you send them each of them in time.
  3. Send a copy of the credit report to the employee/applicant. The credit report is basically the background check report. Under FCRA regulations, an employee/applicant is entitled to receive a copy of the report on request. However, it is important to send them a copy before carrying out an adverse action. This is because most lawsuits arise when employees/applicants realize that erroneous information was contained in the report. Most employers send the credit report after the adverse action – hence the lawsuits.
  4. Give the employee/applicant an opportunity to challenge the contents of the report. There are numerous cases where a rebuttal of the contents of a credit report has caused the background checking company to recheck their details and come back with a different report. The simple fact is that even the best background checking companies sometimes get it wrong.
  5. Pay attention to other relevant legislations. Adverse actions don’t just lead to FCRA-related lawsuits or sanctions. Other potential suits include wrongful termination, discrimination and even a willful violation of your own internal policies. Each of these requires specific measures to counteract.

Ultimately, the best strategy for carrying out adverse actions legally is not to carry them out on a whim. Before carrying out such an action, an HR needs to take into consideration the potential legal consequences. The good news is that such considerations have the potential to improve the overall quality of HR decisions. Therefore, if you an HR who desires to avoid an adverse action legal backlash, then make sure that you think carefully before each decision; and use the above tips to reduce the risks.

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