Contrary to what some might think, the tight labor market has not deterred companies from screening job candidates.

In fact, we are seeing more companies than ever conducting third-party background checks –some for the first time.

That’s why it has never been more important to understand the legal requirements of this process, as defined in the Fair Credit Reporting Act (FCRA).

Part 1: The Preadverse Action Notice

Here’s an example to help illustrate the steps you must take to comply with this law:

Your business decides to run a background check using the services of a third party like Commercial Investigations.

You are alerted to an issue that can potentially affect the job candidate’s performance, or worse, reflect poorly on your business.

Based on the information found in what is referred to as the “consumer report,” you decide not to hire the individual.

In such an instance, the FCRA requires you to notify the job candidate of the information that was found and which served as the basis for not moving forward with their application.

This is called the Preadverse Action Notice, and it may be delivered orally, in writing, or electronically.

The primary purpose of the Preadverse Action Notice is to give the job candidate an opportunity to review the report and, if they choose, dispute the findings.

At this stage, you are under no obligation to keep the position open for the candidate, even if they assert there is inaccurate or incomplete information in the report.

If a second review of the report is requested and errors are found, the job candidate now has an opportunity to have them corrected so, at the very least, the information does not come up in future background checks.

Even if an error is found, you are still not obligated to reconsider the applicant for the position.

Part 2: The Adverse Action Notice

The Preadverse Action Notice is one of two FCRA requirements related to decisions made based on third-party background checks.

A second notice, the Adverse Action Notice, should follow no sooner than five (5) business days after delivery of the Preadverse Action Notice.

The Adverse Action Notice states that you have decided not to move forward with the candidate and effectively ends the application process.

Best Practices and Consequences of Non-Compliance

Failing to comply with FCRA requirements could have far-reaching implications for a business.

The home improvement store Lowe’s is currently the subject of a class action lawsuit for allegedly failing “to bring its hiring process in line with the FCRA’s easy-to-follow requirements.”

It’s important to note that Preadverse Action and Adverse Action Notices are only required when the information used to make the decision has been provided by a third party.

If one of your employees uncovers information that adversely affects a candidate’s application, FCRA requirements do not apply.

A related question we are often asked is: “If I decide not to hire an applicant based on their skill set and then learn of something in a background check, what should I do?”

In those cases, we recommend companies proceed with the Preadverse Action and Adverse Action Notices as a matter of good practice. It will also offer some measure of protection should a dispute later arise regarding the timing of these decisions.

The current hiring environment has proved challenging for even the savviest of hiring managers. Background checks have never been more important, and it’s crucial that you thoroughly and properly communicate the results to the job applicant. It may be the best business decision you ever make.

Want to know more? Watch our What You DON’T Know Webinars to learn about FCRA requirements and more!

Written by President Michelle Pyan