Does your company conduct applicant background checks? If so, you are no doubt familiar with the disclosure requirements of the federal Fair Credit Reporting Act. Among other things, the FCRA states that employers may not obtain consumer reports about applicants or employees unless “a clear and conspicuous disclosure has been made in writing” that the report may be used for employment purposes; the statute goes on to provide that those disclosures must be made “in a document that consists “solely of the disclosure.” The Ninth Circuit (with federal jurisdiction over Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington) recently tackled the meaning of the word “solely” in this context in considering the legality of an employer’s inclusion of a prospective waiver as part of the FCRA-mandated disclosures. In Syed v. M-I, LLC, the Ninth Circuit found that this not uncommon practice constitutes a willful violation of the FCRA as a matter of law. Other federal circuits may find the Ninth Circuit’s decision to be persuasive authority.

The many technical requirements of the FCRA have for years spawned substantial and costly class action litigation. The Syed decision adds yet one more arrow to the quiver from which plaintiffs’ lawyers can draw in seeking the imposition of class-wide liability and potentially significant attendant statutory penalties on unwary employers. (See our advisory on avoiding litigation under the FCRA.)

In Syed, the plaintiff applied for a job with employer M-I. As part of its hiring process, M-I provided Syed with a document entitled “Pre-employment Disclosure Release.” The Disclosure Release informed Syed that his credit history and other information could be collected and used as a basis for the employment decision, authorized M-I to procure Syed’s consumer report, and further provided that by signing the document, Syed agreed to release M-I and its agents for violations of the FCRA. Syed’s signature thus served simultaneously as an authorization for M-I to procure his consumer report and as a broad release of liability relating to the information obtained by reason of the release. Syed filed a class action lawsuit, arguing that inclusion of the liability waiver willfully violated the FCRA requirement that the disclosure document consist “solely” of the disclosure. The Ninth Circuit agreed with Syed finding, after a lengthy analysis, that the FCRA’s disclosure provision (including specifically the use of the word “solely”) “says what it means and means what it says.” The court’s finding that the employer’s inclusion of the release in the required disclosure was a “willful” violation of the FCRA as a matter of law meant that Syed could recover statutory and punitive damages without having to prove actual harm.

Important Takeaways

Many employers use consumer reports as part of their hiring process. Employers should review their FCRA disclosure and authorization forms to ensure they do not contain liability waivers or any other information not specifically authorized by the FCRA. Waiver and release language can be included in other documents.

  • FCRA violation claims are susceptible to class treatment. Plaintiffs’ attorneys will no doubt argue that every applicant or employee who signed an improper disclosure form is entitled to statutory damages, punitive damages, and attorney’s fees and costs.
  • A determination that an employer “willfully” violated the FCRA may provide an employer’s liability insurer with a basis for rejecting coverage, thereby potentially leaving employers responsible for significant damages and attorneys’ fees.
    Employers should not assume that the forms provided by background check vendors comply with the FCRA. In Syed, the disclosure form had been provided by a third-party vendor that the employer had retained to conduct background checks. The Ninth Circuit nevertheless held that the employer had willfully violated the FCRA.
  • California employers also need to be mindful of the requirements of state law. The Investigative Consumer Reporting Agencies Act (“ICRAA”) outlines specific requirements for background checks. Like the FCRA, California’s ICRAA also requires a detailed disclosure “in a document that consists solely of the disclosure.” See California Civil Code Section 1786.16. Thus, California employers with non-compliant disclosure forms may be subjected to two sets of statutory damages. Employers should also be mindful to comply with California’s Consumer Credit Reporting Agencies Act (“CCRAA”), which prescribes when and how employers may conduct credit checks on current or prospective employees.

Employers with questions regarding their onboarding documents should contact their employment counsel to ensure compliance with all federal and state laws.