Conducting background checks is a standard and essential part of the hiring process, but doing it incorrectly can land employers in serious legal trouble. The Fair Credit Reporting Act (FCRA) governs how employers obtain and use background information, and non-compliance can result in costly lawsuits, regulatory penalties, and damage to your companyās reputation. Whether you’re a small business owner or an HR professional in a large organization, understanding the FCRA is not optional, itās critical.
The FCRA is a federal law that regulates how employers use third-party consumer reporting agencies (CRAs) to obtain background reports. These reports can include criminal records, credit history, employment verification, education history, driving records, and more. Under the FCRA, employers must follow a very specific process, and skipping a single step can be considered a violation.
First, before ordering a background check, the employer must provide the candidate with a clear and standalone written disclosure explaining that a background report may be obtained for employment purposes. This disclosure must be separate from the job application and cannot be combined with other forms or fine print. In addition to the disclosure, the employer must obtain the candidateās written authorization before proceeding with the background check.
If the employer intends to take adverse action (e.g., rescind a job offer, deny a promotion, or terminate employment) based on information in the background report, they must follow a two-step process:
- Provide a pre-adverse action notice, which includes a copy of the report and a summary of the applicantās rights under the FCRA.
- Allow the individual a reasonable amount of time to review and dispute any inaccurate or incomplete information. Only after this step can a final adverse action be taken, and a second adverse action notice must then be provided.
Errors in background checks are more common than many employers realize ā and failing to give the applicant an opportunity to dispute those errors is a violation of their rights. Employers are not only responsible for ensuring accuracy, but also for giving candidates a fair chance to correct or explain any discrepancies. Always use reputable CRAs and verify that they are FCRA-compliant.
Employers should also be aware that certain types of information have reporting limits. For example, most civil suits, judgments, and records of arrest cannot be reported after seven years. Bankruptcies are limited to ten years. However, criminal convictions may be reported indefinitely, unless state laws provide additional restrictions. Some states, like California and New York, have stricter rules, so multistate employers must also consider state-specific background check laws.
Beyond legal compliance, employers must ensure they apply background checks consistently and fairly across all applicants. Selective or inconsistent use of background screening can expose a company to claims of discrimination under Title VII of the Civil Rights Act. If certain background criteria are not directly related to the job, rejecting candidates on that basis can create unnecessary risk.
The FCRA also applies to current employees if you run a background check after hire. Whether itās for a promotion, internal transfer, or ongoing compliance (e.g., for positions involving access to sensitive information), the same rules apply: disclosure, written consent, and proper adverse action procedures. Documentation and consistency are everything.
Quick Knowledge Check:
What is the violation if an employer does not obtain the applicantās written authorization before conducting a background check?
A. The employer may be liable for statutory and actual damages under the Fair Credit Reporting Act (FCRA)
B. The employer may be subject to regulatory fines and civil penalties from the FTC or CFPB
C. The employer may be responsible for attorneyās fees and court costs if sued and found liable
D. The employerās reputation may be damaged due to public legal action
E. All of the above
Correct Answer: E. All of the above
Elga Lejarza
Founder & CEO
HRTrainingClassescom
