Investigating Employee Wrongdoing and Workplace Misconduct:
Navigating the Amended Fair Credit and Reporting Act

By Kathy Dent and Sheehan Sullivan
[Feb. 2004]

With the new Fair and Accurate Credit Transactions Act (FACT) signed into law on Dec. 4, 2003, Congress amended the Fair Credit Reporting Act (FCRA) and clarified the FTC’s role in regulating workplace investigations. Specifically, the amendments exclude certain workplace investigations from the cumbersome notice and consent requirements contained in the FCRA. The amendments also contain new disclosure requirements when a workplace investigation results in an adverse employment action for an employee.

The FCRA has troubled employers and their counsel since the Federal Trade Commission (FTC) issued a controversial letter by a staff attorney in 1999 (known as the “Vail Letter”) opening the door for the FTC’s regulation of workplace employee misconduct investigations. The result of the Vail Letter was to impose burdensome requirements on employers who hired third parties to investigate employee wrongdoing and workplace misconduct. Specifically, employers were required to give advance written notice to and seek advance written consent from the target employee prior to conducting any workplace investigation. Not only was this an onerous burden, it compromised the integrity of the investigation and impeded an employer’s obligation to conduct an investigation.

This advisory bulletin provides an overview of the FCRA, discusses the challenges employers have faced since the FTC’s Vail Letter, explains the implications of the amendments on workplace investigations conducted by third parties, and provides a basic roadmap for how to comply with the FCRA.

FCRA Overview

Congress enacted the FCRA in 1970 to promote accuracy, fairness and the privacy of personal information obtained by credit reporting agencies (CRAs). Although primarily intended to protect consumer credit information, the FCRA's relevance and application in the employment context is now readily accepted.

Employers most often encounter the FCRA when: (1) conducting pre-employment background checks, (2) investigating claims of discrimination, harassment or employee wrongdoing in the workplace, and (3) monitoring potential workers compensation claim abuse.

It is important to remember that the FCRA applies only to investigations conducted by third parties. When an employer conducts its own internal investigation, without assistance from an outside third party, the FCRA does not apply.

The FCRA prohibits consumer reporting agencies from furnishing consumer reports for employment purposes unless the consumer is notified of and consents to disclosure of the report, and is furnished with a copy of the report if it results in an adverse personnel action.

• “Consumer Reporting Agency”: The FCRA defines a CRA to include almost any person or organization hired by an employer to obtain information about an applicant or employee. It does not, however, cover an employer’s own efforts to collect background information and it does not cover an employer’s use of a governmental agency to obtain public records. If an employer interviews its own employees or uses a public website to check a prospective employee’s background, the FCRA does not apply. Conversely, if an employer hires someone to search a public website, the FCRA would apply.
  
  
• “Consumer Report” & “Investigative Consumer Reports”: Consumer report is broadly defined and includes “any communication of information by a consumer reporting agency bearing on a consumer’s character, general reputation, personal characteristic, or mode of living” that serves as a factor in establishing the consumer’s eligibility for employment. An investigative consumer report is a more specific consumer report and is defined as information obtained “through personal interviews with neighbors, friends, or associates or others with whom the consumer is acquainted.”

Historically, employers encountered the FCRA only when conducting pre-employment background or credit checks that affect the employer’s decision to hire a prospective employee. However, in 1999 the FTC issued the Vail Letter, which concluded that “reports prepared by outside organizations performing harassment investigations for employers are most likely ‘investigative consumer reports.’” As a result of the Vail Letter, employers were required to:

• provide the target employee of an investigation with notice of the investigation;
• request permission of the target employee to investigate if the investigation was to be conducted by an outside party; and
• provide the target employee with an unedited copy of the investigation report along with an opportunity to refute the investigator’s findings before the employer takes any adverse action.

The notice and consent requirements undercut employers' ability to conduct prompt, impartial and thorough investigations of employee misconduct and placed employers in the untenable position of balancing the FCRA's notice requirements with their obligations to investigate complaints under state and federal discrimination and harassment law.

Effect of the FCRA Amendments on Employers

In Dec. 2003, Congress amended the FCRA to exclude particular workplace investigations from the FCRA's burdensome notice and consent requirements. The FCRA now specifically excludes from the definition of consumer report “communications made to employers in connection with an investigation of: (i) suspected misconduct relating to employment, and (ii) compliance with federal, state, or local laws and regulations, the rules of a self-regulating organization, or any preexisting written policies of the employer.” Thus, employers are no longer obligated to:

• provide notice to and seek consent from the target employee, or
• provide the target employee with an unedited copy of the report.

This alleviates a huge burden on employers and protects the integrity of an investigation into employee misconduct.

The FCRA Imposes an Obligation on Employers to Keep Investigation Private: Although the amendments give employers greater leeway in conducting workplace investigations, they also require employers to take steps to protect the target employee's privacy. A workplace investigation report may not be disclosed to anyone except the employer (or its agent), state and federal agencies, officers, or as otherwise required by law. Accordingly, it is imperative that employers maintain the confidentiality of the report.

The FCRA Now Requires Employers to Provide a Summary to Employee: If the investigation meets the requirements to be excluded from the definition of a “consumer report,” the employer is no longer required to provide the target employee with an unedited copy of the investigation report. However, if the employer takes adverse action, in part or in whole, as a result of the investigation, the employer must provide the target employee with a “summary” of the investigation. The summary must contain the “nature and substance” of the communication upon which the adverse action is based.

The following example illustrates the effect of the new amendments. Company X hires a private HR consultant to investigate allegations that Employee A has been sexually harassing Employee B. Part of the investigation involves conducting interviews of the co-workers of Employee A and Employee B.

• Pre-Amendment: Company X would be required to give Employee A notice of the investigation and seek his consent to interview his co-workers. If the investigator found that Employee B’s allegations were valid and decided to discipline Employee A, Company X was required to give Employee A a full, unedited copy of the investigator’s report and an opportunity to refute the findings before Company X could take any adverse employment action.
  
  
• Post-Amendment: The investigator can conduct the investigation without giving Employee A notice or seeking his consent. If Company X finds wrongdoing on the part of Employee A and decides to discipline him, Company X must provide him with a “summary” of the investigation. However, Company X can provide the summary after it has taken the adverse employment.

The practical implications of these amendments for employers using third-party investigators are significant. The amendments take into account the complexities of the modern workplace and the reality of how a workplace investigation is conducted. The amendments also eliminate the apparent conflict between the FCRA's notice and consent requirements and an employer’s obligation to investigate claims of workplace conduct workplace investigations into discrimination and harassment allegations.

What can employers do to ensure they comply with the FCRA?

Given the new requirement that provides a right of privacy to the target employee, consider whether your current system provides that protection. Also, make sure to comply with the disclosure requirements to the target employee if the investigation leads to adverse employment action.

How can DWT help?

This advisory bulletin is intended to provide you with a brief overview of the FCRA and its application in the employment context. Although the recent amendments give employers greater flexibility in conducting workplace investigations, other types of consumer reports (e.g., pre-employment background checks by third parties) are still subject to the FCRA's notice and consent provisions. Employers, particularly those who rely on third-parties to screen applicants and investigate instances of misconduct, should consider the effect the FCRA may have on their current policies and practices.

Davis Wright Tremaine’s employment attorneys can help you understand your obligations under the FCRA and assist you in ensuring that your policies, procedures and investigative practices comply with the FCRA.

For further information, please contact the authors or your usual DWT employment law attorney:

Kathy Dent, Portland, (503) 778-5338, kathydent@dwt.com
Sheehan Sullivan, Seattle, (206) 903-3978, sheehansullivan@dwt.com

This Employment Law Advisory is a publication of the Employment Law Department of Davis Wright Tremaine LLP. Our purpose in publishing this Advisory is to inform our clients and friends of recent developments in employment law. It is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.

Copyright © 2004, Davis Wright Tremaine LLP.

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