Why it matters

A California employer recently received a lesson in Fair Credit Reporting Act (FCRA) compliance from the Federal Trade Commission (FTC). The agency investigated California Health & Wellness's (CHW) pre-employment screening process and determined that the employer did not violate the statute. In the hope of providing guidance to other employers, the FTC published its closing letter to the employer. CHW's procedures were "consistent with those" set forth in the FCRA, the agency explained, by notifying job applicants of its intent to use a screening report and obtaining an applicant's authorization before running the report, for example. Applicants were given the chance to review and contest the screening report before a final employment decision was made, the FTC noted, with an adverse action notice sent when applicable. The agency also took the opportunity to discuss Section 603(y) of the statute, clarifying its position that the exceptions listed in the provision are limited in application to investigations of current employees and not job applicants. Employers should keep the FTC's stance on the exceptions in mind when using screening programs for potential employees.

Detailed discussion

A subsidiary of Centene Corporation, CHW is a California-based health plan that offers healthcare, pharmacy, vision, and transportation services to its members. Beginning in 2013, CHW began serving Medicaid beneficiaries in 19 counties.

As required by the contract with the state's Department of Health Care Services, CHW established a policy of conducting background checks on job applicants and obtained a screening report from a consumer reporting agency for each applicant prior to hire.

This pre-employment screening caught the attention of the FTC, which conducted an investigation into possible violations of the FCRA.

While the FTC determined that CHW's pre-employment screening program did not violate the FCRA, the agency published its closing letter to the employer to clarify certain points about the statute.

The FCRA imposes notice, consent, and disclosure requirements on employers using background checks in making personnel decisions, Maneesha Mithal, the associate director of the FTC's Division of Privacy and Identity Protection, wrote in the letter to CHW.

An employer must notify a job applicant of its intent to use a background screening report and obtain the applicant's consent to get the report. If the employer decides not to hire the applicant, it must provide a "pre-adverse action" notice, allowing the individual the opportunity to review the report and explain any negative information. An "adverse action" notice must also be provided to an applicant who is ultimately denied a job because of the information in a report.

CHW's programs and procedures with respect to background screening reports "are consistent with those set forth in the FCRA," the FTC concluded. "Among other things, staff's investigation showed that CHW currently notifies job applicants of its intent to use a screening report and obtains an applicant's authorization before obtaining this report. CHW further provides applicants with an opportunity to review and contest the information in the screening report before making a final personnel decision, and if the company ultimately declines the applicant, sends the applicant an 'adverse action' notice."

The FTC also used CHW's closing letter to make a point about an exception found in Section 603(y) of the FCRA, the Exclusion of Certain Communications for Employee Investigations. That provision excludes from the definition of "consumer report" communications made to an employer in connection with an investigation of "(i) suspected misconduct relating to employment; or (ii) compliance with Federal, State, or local laws and regulations, the rules of a self-regulatory organization, or any preexisting written policies of the employer."

FTC staff considered whether Section 603(y) applied to CHW's background screening program but determined the procedures did not fall within the exception because "we view Section 603(y) as covering only investigations of current employees, rather than investigations of both current employees and job applicants," Mithal wrote.

The letter listed three reasons for the agency's position. First, "the language of Section 603(y) itself contemplates an existing employer/employee relationship," the FTC said, noting that the title of the provision states "Employee" and not "Applicant." In addition, two subsections of the provision make reference to "suspected misconduct relating to employment" and "preexisting written policies of the employer," both phrases that connote an existing employment relationship.

Finally, the letter noted that "the FCRA is 'undeniably a remedial statute that must be read in a liberal manner in order to effectuate the congressional intent underlying it.' As such, it should be broadly construed and its exceptions be narrowly applied."

To read the FTC's letter to California Health & Wellness, click here.