Federal Appeals Court Concludes that Employer Violates Fair Credit Reporting Act by Including Liability Waiver in Mandated Disclosure

gavelEmployers procuring credit reports for applicants or current employees must navigate exacting disclosure and procedural requirements under the Fair Credit Reporting Act (FCRA).  In a question of first impression in the federal courts of appeal, the U.S. Court of Appeals for the Ninth Circuit recently ruled in Syed v. M-I, LLC that a prospective employer violated the FCRA when it obtained a job applicant’s consumer report after including a liability waiver in the required disclosure document.  The FCRA imposes procedures for procuring and using a “consumer report,” defined essentially as information procured by a consumer reporting agency bearing on an applicant’s “credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics or mode of living,” for establishing eligibility for employment.  These procedures include requiring that before obtaining the consumer report, the prospective employer disclose that it may obtain the applicant’s consumer report for employment purposes and provide the means for the applicant to withhold authorization.

Although the prospective employer in this case, M-I, provided the mandated disclosure, it incorporated into the same document an agreement that the applicant, Sarmad Syed, waive his right to sue M-I and its agents for violation of the FCRA.  Syed filed a class action lawsuit against M-I seeking statutory damages, punitive damages and attorney’s fees and costs. 

Following the trial court dismissing Syed’s Complaint, the appellate court considered whether the liability waiver contained in the disclosure document violated the FCRA.  Ultimately, the Ninth Circuit reversed the trial court, concluding that including the liability waiver violated the FCRA requirement that the document “consists solely of the disclosure.”

Technical FCRA Violation Exposes Employer to Substantial Damages

Equally significant to this issue is the Ninth Circuit’s analysis of whether the employer committed a willful violation of the FCRA.  Statutory and punitive damages are available under the FCRA only where a defendant “willfully fails to comply” with the statute.  Statutory damages do not require proof of actual harm and are in an amount up to $1,000 per class member.  The amount of punitive damages is, within certain constitutional limits, in the discretion of the jury to determine.  Accordingly, in a class action lawsuit involving hundreds or thousands of applicants, the potential recovery can be substantial where a willful violation is found.

In this case, the Ninth Circuit found that because the FCRA unambiguously bars a prospective employer from including a liability waiver in an FCRA disclosure document, that fact alone was sufficient to conclude that M-I’s violation was reckless and thus willful.

Takeaways for Employers

In light of this decision and that FCRA lawsuits have been on the rise, any employer collecting background credit information on prospective or current employees should review the forms used and practices followed, by both the consumer reporting agency and the company’s human resources, for

compliance with the FCRA.  Pursuant to this decision, companies must ensure that their FCRA-required disclosures not contain a liability waiver.  Additionally, not only must employers provide the mandated standalone disclosures prior to procuring consumer reports, they are precluded from declining employment or taking other adverse action based on a consumer report without first providing certain information to the prospective or current employee.

In addition, it is important to note that various states and municipalities limit the use of credit reports for employment purposes.  For instance, California’s Consumer Credit Reporting Agencies Act restricts the ability of employers to use “consumer credit reports” for hiring and personnel decisions.  Specifically, private sector employers are permitted to use consumer credit reports only if the individual is applying for or works in certain types of positions such as a managerial position, a position for which the employer is required by law to consider credit history information, a position that affords regular access to bank or credit card account information, or a position that affords access to confidential or proprietary information.  Additionally, as we discussed in a prior post, employers in DC are now prohibited from conducting a credit check on an applicant at any time during the hiring process, unless the specific position meets one of the exceptions included in the law.

Accordingly, any company doing business in California, DC or any other jurisdiction that imposes restrictions on the procurement or use of credit reports will need to navigate the restrictions and procedural requirements under those local laws, which may very well exceed those under the FCRA.

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