Just the FACT Act, please: using outside experts to investigate workplace misconduct just got easier

HR Magazine, April, 2004 by Gregory M. Davis

The recently enacted Fair and Accurate Credit Transactions Act (FACT Act) amends the Fair Credit Reporting Act (FCRA) in various ways, but one new provision of great significance to employers is an exception to the law's definition of "consumer report." The exception liberates employers from following the FCRA's exacting consent and disclosure requirements when they engage third parties to investigate workplace misconduct.

Specifically, the amendment excludes from the FCRA's definition of consumer report communications made to employers in connection with investigations 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."

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The amendment thus frees employers to hire outside consultants, investigators or law firms to investigate and report on a variety of workplace issues without first notifying targets of the investigation or obtaining their consent. The FCRA's notice requirements still apply, however, when employers use third parties in other contexts--for example, to conduct background or credit checks.

Past Is Prologue

To fully understand the significance of the legislative changes as well as the requirements that remain unaltered, some definitions and history are in order.

Enacted in 1970, the FCRA is a consumer protection law that calls for full disclosure of consumer reports by consumer reporting agencies (CRAs) so individuals subject to them can dispute the wrongful use or interpretation of information.

Definitions. A CRA is anyone who, for monetary fees, dues or on a cooperative nonprofit basis, regularly assembles or evaluates credit or other information about consumers for the purpose of furnishing reports to third parties.

The FCRA recognizes two types of reports--"consumer reports" and "investigative consumer reports."

Consumer reports are communications from a CRA that bear upon a consumer's credit worthiness, character, general reputation, personal characteristics or mode of living, and are used as factors in establishing eligibility for employment.

Investigative consumer reports go one step further than consumer reports by relying on personal interviews of the neighbors, friends or associates of the person being investigated.

Developments. Before 1997, the FCRA required employers--in limited circumstances--only to notify job applicants and/or employees that credit checks would be conducted with respect to their employment or application for employment.

Effective Sept. 30, 1997, however, the FCRA was amended, imposing burdensome new compliance requirements on employers who used CRAs to obtain background information on employees--whether or not the CRA's report contained credit information. These requirements, as summarized later in this article, remain in effect today.

In 1999, an interpretation of the FCRA by the Federal Trade Commission's (FTC) legal staff created significant challenges for human resources professionals seeking to use third-party experts to investigate allegations of workplace misconduct.

In response to an inquiry by attorney Judy Vail, FTC lawyers stated that "outside organizations utilized by employers to assist in their investigations of harassment claims are CRAs" and that oral or written reports resulting from the investigation "most likely" are investigative consumer reports.

Plot Thickens

The FTC's interpretation in the so-called "Vail letter" created serious problems for employers with legal and ethical obligations to promptly investigate and take corrective action in cases of workplace misconduct.

Many employers simply did not have the expertise or resources to conduct effective in-house investigations and thus avoid the FCRA's notice requirements. But when employers hired outside entities to investigate complaints of sexual harassment or other misconduct, they risked violating the FCRA if they failed to inform alleged miscreants ahead of time about the investigation, obtain their consent to proceed and, ultimately, give them the complete investigation report.

In short, the Vail letter interpretation deterred employers from using skilled and experienced outside consultants to conduct employment-related misconduct investigations because any misstep in compliance with the FCRA's many detailed, technical provisions easily could increase the threat of litigation.

Further, an employer's disclosure of the consumer report--including the names of those interviewed--to the targeted employee could compromise the privacy rights (or, in some circumstances, safety interests) of victims and witnesses. Thus, the employer's obligation to disclose had the potential to chill co-workers from coming forward with relevant information, and, of necessity, tipped off wrongdoers about the investigation and the possibility of suffering adverse action.

Moreover, application of the FCRA to workplace misconduct investigations added unnecessary cost and time to the process because CRAs are subject to extensive reinvestigation requirements designed to ensure the accuracy of information contained in consumer reports. Reinvestigation may be an effective tool when the consumer report at issue addresses an individual's credit history, but it poses significant problems for an outside organization conducting a workplace misconduct investigation. To wit, under some circumstances, the outside organization might have to reinterview witnesses because, for example, an alleged harasser protested the findings of the original investigation report.