Testimony by Christopher P. Reynolds on the Fair Credit Reporting Act
Prepared Statement of Christopher P. Reynolds, Partner, Morgan, Lewis & Bockius on behalf of the U.S. Chamber of Commerce before Financial Institution and Consumer Credit Subcommittee of the Financial Services Committee United States House of Representatives
10:00 AM Hearing on "The Role of the Fair Credit Reporting Act in Employee Background Checks and the Collection of Medical Information"
June 17, 2003
Good morning Mr. Chairman and distinguished members of the Subcommittee. Thank you for asking me to testify before you today.
My name is Christopher Reynolds and I am a partner with the law firm of Morgan, Lewis and Bockius, which serves on the United States Chamber of Commerce Labor Relations Committee. I am here to testify on behalf of the Chamber about the Fair Credit Reporting Act's (FCRA) effect on employee background checks and employer investigations into workplace misconduct.
The Chamber has asked me to speak here today because, as part of my law practice, I frequently conduct sensitive and confidential investigations into potential workplace misconduct and advise clients with regard to legal issues related to those investigations and employee background checks, including issues involving FCRA. More generally, my law practice involves representing employers in discrimination and other employment-related litigation and counseling employers on a broad range of matters, including discrimination, equal employment opportunity, global workplace diversity, regulatory compliance and workforce restructuring. I also regularly speak on such matters and have authored a handbook entitled "The Prevention and Investigation of Sexual Harassment Claims," as well as several white papers on related topics. In addition, I am a member of the American Bar Association's Labor Section Equal Employment Opportunity Committee, a former co-chair of that organization's National Institute on Sexual Harassment, a member of the Legal Division of the Securities Industry Association and a member of the Advisory Board of Regulatory DataCorp (RDC).
My understanding is that today's hearing is one of several scheduled to address various issues that may become part of the debate surrounding reauthorization of FCRA's uniform standards provisions. Before addressing the issues specific to today's hearing, the Chamber would like me to stress that reauthorization of these provisions is of vital importance to its members, and the entire economy. As you know, FCRA's uniform standards fostered the growth of the national credit system we enjoy today. This credit system has helped facilitate the creation of our whole consumer credit economy, from the miracle of instant credit to the ubiquitous availability of credit cards.
Failure to reauthorize the uniform standards could result in the collapse of this credit system that has become so vital to our economy. In its place, we would have multiple and conflicting state credit rules, creating a complex and costly web of regulation that would confuse and confound both consumers and lenders alike. This could limit the availability of instant credit, and make it more difficult and expensive for consumers to obtain credit for everything from home loans to student loans.
Credit availability is also vital to small businesses, who often rely on access to credit to start new businesses or tied them over during lean times. Thus, a failure to reauthorize could not only jeopardize our consumer economy, but could also stymie the economy's ability to create new jobs through small businesses.
Reauthorization, however, is not the Chamber's only concern with FCRA. The issue before you today – the effect of FCRA on background checks and workplace investigations – also is of the utmost concern to Chamber members.
Both background checks and workplace investigations play a key role in employer efforts to protect employees, customers, stockholders and the public at large from workplace violence, harassment, financial misdeeds and other dangerous and unlawful acts. While FCRA does not affect every background check or investigation, it does affect many. Specifically, when employers hire experienced and objective third parties to conduct background checks and workplace investigations, as is often practical or necessary for them to do, the background check, and arguably the workplace investigation, must comply with FCRA's numerous notice and disclosure requirements. This is the case even though the check or investigation may have nothing to do with the individual's credit or credit worthiness.
Because FCRA affects background checks and investigations into workplace misconduct differently, I will address each issue separately.
Our primary concern with regard to background checks is not with existing law, but rather that, as part of the reauthorization effort, new provisions will be added to FCRA that could adversely affect employers' ability to obtain reliable job-related background information on applicants or current employees.
As I will explain in greater detail, background checks are an essential employment-screening tool and, increasingly, both the public and the government are demanding that employers expand use of background checks to enhance workplace security. While the Chamber recognizes that – particularly at this time – it is crucial that security needs be balanced with individual rights, FCRA and other federal laws already provide protections to ensure privacy, accurate reporting and fair use of background checks. Consequently, the Chamber strongly urges you to resist adding provisions that would hamper employers from obtaining reliable, relevant, and job-related background information on applicants and employees. In fact, if you are to make any changes to FCRA that would impact background checks, we recommend it be one that removes impediments FCRA poses to obtaining background checks on contract workers.
Background Checks and Workplace Security
Employers use information gathered from background checks to help screen out individuals who may pose a danger to the workplace or who may be inappropriate for certain jobs. For example, an employer may not want to hire an individual who has multiple recent drunk driving convictions as a school bus driver, or a person with a history of embezzlement as a bookkeeper.
A typical background check contains a review of an individual's criminal history, and sometimes other information pertinent to employment, such as verification of educational or professional credentials or prior work history. For certain positions, such as one where the individual will be responsible for large sums of money, the background check may also include a review of the candidate's credit history.
Available evidence suggests that background checks are effective at revealing information relevant to employment eligibility that the employer may not find elsewhere. For example, Avert, Inc., an Internet-based screening company, found that at least 24 percent of the 1.8 million applicants it screened in 2000 submitted information that was misleading or negative and 6 percent of the background checks revealed a criminal history. Similarly, in 1998, the Society for Human Resource Management (SHRM) released survey results showing that 45 percent of the employers that conducted background checks at one point or another found an applicant had lied about criminal records.
In addition, at least with regard to criminal activity, statistics show that past criminal behavior can be predictive of future criminal behavior. In 2002 the Bureau of Justice Statistics reported on prisoners released in 1994. The report revealed that 81.4 percent of the prisoners had convictions prior to the one for which they had just served time and, within three years of release, 46.9 percent were convicted of a new offense.
Anecdotal evidence demonstrating the importance of background checks is also readily available. While there are many examples, the case of Ernesto Forero-Orjuela is particularly interesting. Authorities suspected that Forero-Orjuela was a high-level figure in one of the world's largest drug cartels, and Maryland had charged him with the 1991 murder of a Baltimore businessman. He had eluded federal authorities, however, for six years, until he was fingerprinted and had a background check as part of his employment application at Merrill Lynch.
The Public and the Government Demand Increased Use of Background Checks
Since the tragic events of September 11, growing concerns over workplace security has fueled an increased public and government demand for use of background checks as an employment-screening tool. In fact, last year, Harris Interactive reported that, according to a recent poll, 53% of employees want employers to conduct more detailed background checks. Other studies have yielded similar results.
As for the government, in this session alone, Congress has introduced at least twenty-one different bills requiring background checks for employees that perform specific jobs or work in a specific industry (a list of these bills is attached to this testimony). Some of these bills are driven by national security concerns, such as H.R. 1407 which requires background checks for locksmiths working in judicial or executive branch facilities, or S. 157 which requires background checks for certain employees working in the chemical industry. Others, such as H.R. 439, which requires background checks for workers entering people's homes, or H.R. 1855, which requires background checks for certain health care providers, are aimed at protecting individuals from fraud, theft, violence and other crimes.
The 107th Congress was also active with regard to background check legislation, enacting several laws requiring backgrounds checks for certain airline, port and other transportation workers.
Many states also have enacted their own laws requiring employers in childcare, or similar industries, to conduct background checks on prospective employees. Even where there are no explicit requirements to conduct a background check, some states implicitly encourage employers to conduct background checks by permitting negligent hiring suits. In these suits, courts may hold an employer liable for an employee's tortious actions, if the employer did not meet a certain standard of care in selecting the employee, including failing to conduct a background check or not conducting the background check thoroughly.
It is clear from these legislative efforts that many in Congress, as well as those in the state legislative bodies and courts, endorse greater use of employee background checks as a tool for increasing safety and security.
Current Regulation of Background Checks Balances Security Needs and Individual Rights
FCRA defines "consumer report" as any written or oral communication by a consumer reporting agency (CRA) which bears on a person's creditworthiness, character, general reputation, personal characteristics, or mode of living, if the communication is used or collected in order to determine eligibility for, among other things, employment. Under the statute, a CRA is any organization that regularly assembles consumer reports for a fee. According to both the courts and the Federal Trade Commission (FTC), the agency that enforces FCRA, a criminal background check on prospective or existing employees constitutes a consumer report when it is conducted by a CRA.
Thus, if an employer hires an organization that regularly conducts background checks, such as a private investigator or a company like Choicepoint, the background check falls within FCRA's purview.
Background checks performed by the employer or by outside organizations that are not CRAs, however, are not regulated by FCRA. Also excluded from FCRA's requirement are "any report[s] containing information solely as to the transactions or experiences between the consumer and the person making the report[s]." For example, if an employer uses an outside organization to conduct drug or psychological testing on a candidate, the test results are not a consumer report because the information is based on transactions or experiences between the candidate and the testing agency.
Despite these exceptions, it appears most of the background checks performed every year are regulated by FCRA, primarily because most employers find it more cost effective to outsource background checks to CRAs.
For covered background checks, FCRA imposes certain requirements on the employer and the CRA to ensure privacy and accurate reporting. Specifically, the employer must notify the employee or applicant and obtain his or her consent before initiating the check. The employer must also provide the applicant or employee with a copy of the background check and a summary of his or her rights under FCRA before taking an adverse employment action (i.e., termination, demotion, etc.) based on the check. Following any adverse action, the employer must also provide the individual with the name, address, and phone number of the CRA (including any toll-free telephone number established by a national CRA) and a notice setting forth the individual's right to dispute the accuracy or completeness of any information in the report. The CRA is obligated to reinvestigate the matter free of charge and record the status of the disputed information within 30 days, if the employee or applicant challenges the information in the check.
FCRA also sets certain limits on the information that a CRA may report. Specifically, if the check is done on employees or applicants expected to earn less than $75,000 a year, FCRA prohibits the CRA from reporting information regarding arrest records, civil suits or judgments, or other adverse information from more than seven years prior to the check or according to the applicable statute of limitations, whichever is longer.
Federal discrimination laws limit the extent to which an employer may rely on individuals' criminal history when making employment decisions. Specifically, both the Equal Employment Opportunity Commission (EEOC) and federal courts have said that basing employment decisions on criminal history can have a disproportionate effect on select minorities, and therefore may run afoul of Title VII of the Civil Rights Act of 1964. To avoid problems with Title VII, the employer must show that an individual's criminal history is "job related" and the employment action is "consistent with business necessity."
State discrimination laws are even more restrictive. Indeed, many prohibit employers from even asking candidates about arrest records and impose limitations on employer inquiries into convictions.
In short, both FCRA and federal and state discrimination laws provide ample protection for individuals undergoing background checks and Congress should not be imposing any greater restrictions at a time where employers are facing increased public and governmental pressure to perform such checks. In fact, if you are to enact any changes to FCRA that affect background checks, we recommend you remedy the problems discussed below arising from FCRA's application to background check on contract workers.
FCRA and Contract Workers
Employers, particularly those in security sensitive and highly regulated industries, often need to ensure that a background check has been run on contract workers. However, employers are reluctant to run these checks themselves because doing so could result in the contractors being deemed employees for tax, labor law, or other purposes.
Thus, employers rely on the contractor (the company supplying the contract workers) to run the checks. However, employers may need to see a copy of the background check in order to verify that the contract worker meets certain criteria. This can cause problems with FCRA, if the contractor regularly provides the background checks. In such circumstances, the contractor may be deemed a CRA and have to comply with FCRA's many requirements.
Again, if you do intend to make changes to FCRA beyond reauthorization, we urge that you address this problem.
Investigations into Workplace Misconduct
I am also here to discuss FCRA's impact on employer investigations into workplace misconduct.
Workplace investigations are a critical part of employer efforts to combat harassment, violence, theft, fraud and other threats to the workplace and, in some instances, national security.
On April 5, 1999, the FTC issued a staff opinion, know as "the Vail letter," which has made it significantly more difficult for employers to conduct investigations. The letter was issued in response to an inquiry as to whether employers using "outside organizations" to conduct sexual harassment investigations need to comply with FCRA. The letter states that organizations that regularly investigate allegations of workplace sexual harassment, such as private investigators, consultants or law firms, are "consumer reporting agencies" under FCRA, and that if the employer hires such an organization to conduct an investigation, then both the employer and the CRA must comply with FCRA's notice and disclosure requirements. While the Vail letter only addresses whether FCRA applies to sexual harassment investigations, a subsequent FTC opinion letter states that FCRA applies to any investigation of employee misconduct.
FCRA's notice and requirements include:
1. notice to the employee of the investigation;
2. the employee's consent prior to the investigation;
3. a description of the nature and scope of the proposed investigation, if the employee requests it;
4. a release of a full, un-redacted investigative report to the employee;
5. notice to the employee of his or her rights under FCRA prior to taking any adverse employment action; and
6. that the CRA reinvestigate the matter free of charge and record the status of the disputed information within 30 days, if the individual disputes the accuracy or completeness of the information obtained in the investigation.
The Vail Letter Deters Employers from Using Experienced
Because it is virtually impossible to conduct an investigation while complying with FCRA's requirements, and because employers and investigators face unlimited liability, including punitive damages, for failure to comply with any of FCRA's many technical requirements, the Vail letter effectively deters employers from using experienced and objective outside organizations to investigate workplace misconduct. Yet, in many cases, an employer must do so in order to comply with obligations under other laws. Thus, the Vail letter often places employers in the untenable position of having to choose between two legal obligations.
While the Chamber believes the FTC should rescind the Vail letter because it misconstrues FCRA and conflicts with Congressional intent, the agency has repeatedly refused to do so, claiming a legislative fix is needed.
The Importance of Outside Investigators
While an employer may avoid running afoul of Vail by performing the investigation itself, there are many instances where a company has no choice but to use an outside investigator. For example, the technical nature of the alleged misconduct may require an expert investigator, such as where the misconduct involves securities fraud. In other instances, such as corporate governance cases, the investigation may involve misconduct by a high-level official and outside objectivity is necessary. In other cases, the employer may simply lack the resources to conduct an in-house investigation.
Even where outside investigators are not necessary, they may be preferred. Indeed, both the courts and administrative agencies have strongly encouraged employers to use experienced outside organizations to investigate suspected workplace violence, employment discrimination and harassment, securities violations, theft or other workplace misconduct. As Assistant Attorney General James K. Robinson said in his May 4, 2000 statement to this Committee, "[t]he Department [of Justice] and other agencies often strongly encourage companies, as part of their compliance programs, to retain outside counsel to conduct certain internal investigations, on the theory that an outsider is less subject to retaliation or intimidation by supervisors or co-workers and is less likely to be biased by concerns for the company's business with existing or future customers."
The experience of the investigator can also be an issue. For example, according EEOC guidance, "whoever conducts the investigation should be well-trained in the skills that are required for interviewing witnesses and evaluating credibility." Few employers have the resources to keep on staff an individual who is well trained in interviewing witnesses and evaluating credibility. Yet, because of the Vail letter, employers cannot use outside investigators without risking potential unlimited liability under FCRA.
Why It is Impossible to Conduct an Effective Investigation and Also Comply With FCRA's Notice and Disclosure Requirements
According to the Vail letter, FCRA's disclosure requirements apply to any employment investigation that meets the Act's definitions and is conducted for a fee by an "outside organization." As a result, employers have to obtain consent from employees suspected of theft, discrimination, SEC violations and other improprieties before retaining an outside organization to conduct an investigation.
The absurdity of this was recently highlighted in Rugg v. Hanac. In that case, a company's former executive director, relying on the Vail letter, sued the board of directors under FCRA for failing to provide her notice and obtain permission before hiring an outside organization to conduct an investigation which lead to her termination. The board of directors launched the investigation after the City of New York expressed concern with the company's finances following a routine audit. While the court expressed reservations about the validity of the Vail letter interpretation, it nonetheless denied the employer's motion to dismiss and ordered more discovery on the issue of whether the outside investigator regularly conducted such investigations, and therefore is a CRA within the meaning of the statute.
As this case demonstrates, Vail creates serious conflicts between a company's responsibilities under FCRA and a board of director's duties to meet its corporate governance obligations, such as those under the Sarbanes-Oxley Act of 2002. Obviously, the board of directors could not inform or obtain consent from the executive director before launching its investigation that might uncover her own financial improprieties. Nor could it ask the executive director to conduct an in-house investigation into such matters.
This case, however, is only one example of the many conflicts between Vail and employers' duties under other laws. Civil rights laws are another example. As then Chairwoman of the EEOC Ida Castro warned in 2000, "the FTC's conclusion that the FCRA's numerous and highly specific requirements control third-party discrimination investigations has serious unintended consequences for the enforcement of civil rights laws."
Simply put, employers cannot both adhere to FCRA's disclosure and consent requirements and comply effectively with their obligations under federal anti-discrimination laws.
In two 1998 cases, Burlington Industries, Inc. v. Ellerth, and Faragher v. City of Boca Raton, the Supreme Court delineated employers' obligations under Title VII of the Civil Rights Act of 1964 to investigate thoroughly all employee complaints of sexual harassment and to take reasonable care to prevent and promptly correct harassment. An employer who fails to meet these obligations can be found liable for a rouge supervisor's actions and greatly increase the likelihood it will be assessed punitive damages.
Following these decisions, the EEOC issued comprehensive policy guidance, explaining the circumstances under which employers can be held liable for unlawful harassment by supervisors. The guidance, which does not limit its scope to "sexual harassment," but covers all forms of harassment in the workplace, addresses the steps employers should take to prevent and correct harassment. It states that an anti-harassment policy and complaint procedure should contain, among other things, assurances that employees complaining of harassment and other witnesses will be protected against retaliation; the employer will protect the confidentiality of harassment complaints and records relating to such complaints to the extent possible; the employer will conduct a prompt, thorough, and impartial investigation; and the employer will take immediate and appropriate corrective action when it determines that harassment has occurred.
Clearly, an employer cannot both comply with FCRA's disclosure requirements and the guidelines. Indeed, an employer could be thwarted from performing the investigation altogether if the employee exercised his or her rights under FCRA to withhold consent. Also, advance notice of misconduct investigations could result in destruction of incriminating evidence. Other problems can arise due to FCRA's disclosure requirements. For example, few witnesses would come forward if they knew their testimony would be readily released to the accused harasser.
In short, an employer simply cannot meet its Title VII obligations while complying with FCRA.
In addition to Title VII, Vail thwarts employers' ability to comply with other numerous federal and state laws. For example, under the securities laws, broker-dealers have a statutory obligation to pursue allegations of wrongdoing by their employees and are monitored by self-regulating organizations. Among other things, broker-dealers conduct surprise internal audits and branch office compliance examinations to meet their statutory supervisory obligations. Often, outside consultants are used for these investigations. Moreover, in cases of suspected fraud, it is standard practice for issuers and broker-dealers to hire a law firm to conduct internal investigations. All the problems discussed above with regard to discrimination investigations are equally applicable to securities investigations.
Similarly, the laws regulating health and safety in the workplace require employers to provide a safe workplace and to investigate potential hazards including exposure to workplace violence. The Federal Drug-Free Workplace Act also imposes a duty on employers to investigate and eliminate drug use in the workplace.
Indeed the list of required employment related investigations is seemingly endless.
Vail Misconstrues FCRA
It is also clear that Vail misconstrues FCRA. There is no evidence in FCRA's text or legislative history that it was intended to apply to investigations of employee misconduct. The title of the statute – The Fair Credit Reporting Act - as well as the first few sentences of the Act are particularly telling on this point. Specifically, FCRA states that Congress found that "the banking system is dependent upon fair and accurate credit reporting. Inaccurate credit reports directly impair the efficiency of the banking system, and unfair credit reporting methods undermine the public confidence in the banking system." Clearly, the legislation was enacted to address the effect of inaccurate credit reports on the banking system and the financial well-being of consumers, rather than employee privacy rights in the face of investigations into specific acts of workplace misconduct. As Committee Chair Oxley and Subcommittee Chair Bachus aptly put, "Congress did not craft the FCRA to apply to [employment investigations]."
In addition, most courts that have specifically considered the letter have either rejected it or seriously questioned its reasoning. As one court put it, the letter "appears to have drawn a false analogy between employment decisions by a present or prospective employer based on information about consumer's general status (such as credit, criminal or family history and the like) and a decision by a present employer about the consumer's particular workplace conduct (such as threats of violence)."
While the FTC has acknowledged the problem caused by the Vail letter, it nonetheless has refused to reverse its position, claiming, even as recently as a few weeks ago, that a legislative fix is necessary.
Rep. Pete Sessions (R-TX) has introduced H.R. 1543, the Civil Rights and Employee Investigation Clarification Act, which would exempt certain workplace misconduct investigations from FCRA's notice and disclosure requirements. The bill would require, however, that the employer provide the subject of the investigation with a summary of the report, if it takes any adverse action based on the investigation. H.R. 1543 has bi-partisan support and its cosponsors include members of this Subcommittee as well as other members of the full Committee, including Ranking Member Barney Frank.
While the Chamber favors a complete exemption, it realizes that it is often hard to put the genie back in the bottle, and that H.R. 1543 represents a concerted effort on the part of the cosponsors to reach a reasonable compromise between competing interests. We commend them for this effort and urge that this Subcommittee support H.R. 1543.