FCRA Compliant Background Checks and Why It Matters

Hiring the right employees is essential to workplace productivity. You’ve seen how a well-curated team moves efficiently, productively, and seamlessly, while the wrong fit can create dysfunction and disorder. But that’s not the only step of the process your organization must be on top of. Background screening is great, but compliant background screening is essential. 

Pre-employment background screening, when done correctly, can also help protect your company from liability and negligent hiring lawsuits. Background checks are considered “consumer reports” under the Fair Credit Reporting Act (FCRA), which means they are subject to legal parameters and guidelines regarding both access and use.  

Remaining compliant with the FCRA regulations throughout the background screening process is critical. Ignorance of these consumer laws, even if accidental, can expose you to expensive and time-consuming lawsuits and legal battles. In fact, The Salvation Army recently agreed to pay $1.87 million to resolve a class action settlement regarding FCRA violations. 

This guide explores FCRA-compliant background checks, ways they impact your hiring process, and how to understand your legal obligations as an employer. However, in no way is this meant to be legal advice. As always, you are encouraged to check with your legal counsel about any laws mentioned above. 

What is the Fair Credit Reporting Act (FCRA)?

The FCRA is a federal law passed by Congress in 1970 that aimed to create fairness in the use of credit reports. In fact, it was the first federal law to regulate the use of personal information by private businesses. Since its origin, the FCRA has been amended and expanded its scope to cover numerous consumer reports, such as background checks.

A consumer report contains information provided by a “consumer reporting agency”. The FCRA protects the subjects of these checks by what a consumer reporting agency can obtain and use. This law pertains to any type of consumer report that contains the following information: 

• An individual’s character
• An individual’s reputation
• Mode of living 
• Credit health
• Personal characteristics
• Criminal records
• And more

Today, the FCRA compliance standards generally pertain to employers using pre-employment background checks and the consumer reporting agencies they use. The Federal Trade Commission (FTC) governs these regulations and enforces the provisions of these laws. The FCRA also grants several rights to the consumer, including: 

• The right to informed consent prior to a background check
• The right to review background check information and correct mistakes
• The right to be informed when background check information is used to make decisions that adversely affect the individual 
• The right to appeal adverse decisions if the data from the background check is believed to be inaccurate or unfair

Why is FCRA Compliance Important for Employers?

To be compliant, your organization must adhere to the FCRA regulations requiring employers to conduct accurate, fair, and transparent background checks. Failure to comply with FCRA regulations can result in serious consequences for your organization. 

Whether you partner with a third-party agency, like a reputable background check provider, or not, you should familiarize yourself with the FCRA-compliant background screening process. Negligent hiring claims and other federal lawsuits can not only harm your reputation but also cost you thousands of dollars in time and money. 

According to The CFPB Consumer Complaint Database, FCRA lawsuits have significantly increased year-over-year, with a 125% rise since 2014. Just in the first quarter of 2024, 1,681 FCRA lawsuits were filed (compared to 1,309 in Q1 of 2023). As mentioned above, just recently The Salvation Army agreed to pay more than $1.87 million to settle claims that the company allegedly procured background check reports without providing proper FCRA-required disclosures. 

How to Conduct FCRA-Compliant Background Checks

Under the FCRA, employers utilizing background checks during hiring must comply with several regulations throughout various steps of the process. Even when utilizing a background check provider, your organization must ensure compliance with FCRA guidelines. Use these five steps to help develop an FCRA-compliant background screening process: 

1. Provide Disclosure of Background Check

Employers must provide applicants with written disclosure of their intention to conduct a background check, as well as what information will be gathered and used to inform the hiring decision. 

For example: if interviews will be conducted to gather information regarding the individual’s personal characteristics, lifestyle, or reputation, you must explicitly inform the applicant within this disclosure. 

This written notice must be provided as a standalone document, and should not be provided with other hiring or onboarding information. 

2. Obtain Written Consent 

After the applicant has reviewed your written disclosure, you must obtain signed consent to conduct and complete the background check. This signed consent shows that the applicant understands the scope and purpose of the background check, as well as their consumer rights. 

3. Make an Informed Hiring Decision

Using defined organizational standards, as well as the information received from the background check, you can make an informed hiring decision. You must certify that you are not misusing the information recovered, or unlawfully discriminating against the applicant, too. 

If you decide to not hire an applicant based on the information found in the background check report, you must follow the adverse action process regulated by the FCRA. 

4. Provide a Pre-Adverse Action Notice

If you decide to continue with the adverse action process, the first step is providing the applicant with a pre-adverse action notice along with a copy of the background check report and the “Summary of Your Rights Under the Fair Credit Reporting Act” from the FTC. 

After providing the pre-adverse action notice, you must allow the applicant a “reasonable amount of time” to give the applicant time to review the background check report and dispute any inaccuracies or incomplete information that may have influenced the pre-adverse action decision. A reasonable amount of time is widely disputed among different industries, but a good practice is to wait at least five business days. 

5. Provide Final Adverse Action Notice

If you still choose not to hire an applicant after the waiting period, you must initialize a final adverse action notice. This final adverse action notice should include the name, phone number, and address of the consumer reporting agency that conducted the background check, as well as a disclosure that the decision was made by the employer and not the consumer reporting agency. 

Achieving FCRA Compliance with Verified First

Avoiding FCRA violations and remaining compliant can be easy when you work with an accredited background screening provider like Verified First. An FCRA-compliant background check provider not only understands the regulations that your organization must adhere to but also properly handles the collection and storage of an individual’s report. 

As a PBSA-certified background check provider, Verified First can help you understand and maintain your compliance framework. Through features like an automated adverse action process, pre-written disclosures, and more, you can provide customized, transparent, and positive candidate experiences while supporting your compliance goals. 

Remaining FCRA compliant can be challenging and time-consuming on your own. However, mistakes can cost you serious time and money. Verified First can help you understand your compliance framework and conduct efficient, compliant background checks every time. 

Get started screening here.