When do employers need to comply with the Fair Credit Reporting Act?

In  general, when employers use a third party to conduct background checks on applicants or employees, the federal Fair Credit Reporting Act (FCRA) will apply.

The FCRA governs how employers obtain and handle consumer reports, which include standard background checks. According to the Federal Trade Commission (FTC), an FCRA consumer report is any written, oral or other communication of any information by a consumer-reporting agency bearing on a consumer's credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics or mode of living. In the employment context, this definition may, for example, include credit reports, criminal history reports, driving records and other background check reports created by a third party, such as drug tests. The FCRA does not apply when an employer does its own investigation, only when a third party is used.

The FCRA requires employers to disclose that consumer reports may be used for employment decisions and to secure consent from employees or applicants to obtain these reports. If consumer reports provide information that results in an adverse employment action against an individual, the employer must provide the person with a copy of the report and his or her FCRA rights.

The FCRA excludes employee investigations, such as sexual harassment investigations conducted by third parties, from some of the law's notice requirements; however, employers are  required to notify employees of investigations after they have concluded.

The FCRA reports exclude preplacement or fitness-for-duty physicals or any reports generated internally by an employer, such as internal reference checking. Drug tests will likely be covered if reported to the employer from a consumer-reporting agency. Due to the complexity of the FCRA, prior to outsourcing any investigative check of applicants or employees, employers must ensure that the vendor's practices are compliant with the law.