Understanding Adverse Action: A Guide For HR Professionals

What is Adverse Action?

When researching adverse action, you might come across references to banks, credit scores, housing, insurance, and employment. While these situations differ, they all involve consumer reports, which is why they must comply with the adverse action process under the FCRA. In the workplace context, a consumer report is equivalent to an employment background check.

Adverse Action refers to any decision that negatively impacts employment based on information uncovered during the screening process. This includes:

• Rejecting a job applicant
• Terminating a current employee
• Denying a promotion
• Any other employment decision negatively influenced by the consumer report

Adverse action is designed to protect individuals from unjust outcomes, especially in cases of identity theft or errors in their reports.

Failure to comply with adverse action requirements exposes your organization to fines and lawsuits from individuals, the Consumer Financial Protection Bureau (CFPB), the Federal Trade Commission (FTC), and other regulatory bodies.

What is Required for Employers?

Now that we’ve covered the basics let’s walk through the steps you must follow to ensure compliance.

Step 1: Pre-adverse Action Notice

A pre-adverse action notice or letter is the first step in the adverse action process. This notice informs the candidate that you may not proceed with their employment, promotion, etc., based on the information found in the background check. The information you have based this decision on must be relevant to the job itself and an inability to perform the job.

Additionally, either the employer or the screening company should send the candidate a copy of the background check and a summary of their rights.

Step 2: Waiting Time

After issuing the pre-adverse action notice, you must wait a reasonable amount of time—typically 5-7 business days—to give the candidate an opportunity to review the documents and dispute any inaccuracies. During this period, the candidate can contact the employer or background check provider to address these issues.

There are several reasons for discrepancies in a consumer report that the candidate can dispute including:

• Identity theft
• Outdated information reported by a credit reporting agency or credit score
• Transcription or typing errors within courthouse reports
• Confusion resulting from a common name

Step 3: Review Candidate Response

If the candidate disputes the report, an investigation must be conducted by the consumer reporting agency (background screening provider), which has up to 30 days to resolve the issue. The hiring process should be paused during this time, and the position should remain open until the investigation is complete.

Step 4: Adverse Action Notice

If no dispute is raised, or once the investigation is resolved, you can proceed with the final adverse action notice. This notice must include:

• The reason for not moving forward with employment
• Information on the candidate’s right to dispute and obtain a free copy of their background report within 60 days

If you use a third party for background screening then you must also include:

• Name, address, and contact information for the agency
• A statement acknowledging that the hiring decision was made by the employer and not by the third-party agency

Step 5: Dispose of Sensitive Information

After the final notice is delivered, there’s still some clean up left to do to remain compliant. The FCRA requires that all sensitive information be disposed of properly as outlined in the Disposal Rule. This includes directions for both paper and electronic documents.

Note: There may be additional steps to the adverse action process, depending on the state.

Adverse Action Best Practices

To ensure your organization stays compliant and avoids legal pitfalls, it’s essential to follow best practices when handling adverse action. Here are some key strategies to keep in mind:

• Give a Heads Up: Inform candidates that you are conducting a background screening and ensure they are aware that the results could impact their employment before getting their written consent.
• Keep Proper Documentation: To avoid lawsuits or compliance document every step of the process and keep copies until the process is complete.
• Watch the Time: Set reminders and keep track of how long each step is taking. You must do this to maintain compliance with required deadlines and wait times.
• Be Aware of State and Local Laws: Work with a third party or legal team to ensure compliance with unique state and local requirements. This can apply to the required waiting time, documentation required, and additional steps
• Stay Informed on Fair Chance Hiring Laws: These laws are continually evolving, so it’s important to stay up to date.
• Work with a Third Party: One of the easiest ways to remain compliant is to work with a background screening provider that can handle these requirements for you.