When a company uses commercial background checks to evaluate the suitability of job applicants, they must comply with the Fair Credit Reporting Act (FCRA), which regulates the collection, dissemination, and use of consumer information when communicated through a consumer report. The FCRA stipulates that before an employer obtains a consumer report about an applicant, the applicant must receive notice and certain disclosures of their rights, and must provide their written consent. If the employer anticipates not hiring the candidate based in whole or in part on the information in the report, then the employer must also provide an “adverse-action” notice to the candidate, including a copy of the report and a description of the consumer’s rights.

These FCRA requirements have limited and narrow exceptions, such as Section 603(y), which excludes certain communications for employee investigations. Section 603(y) states that a communication is not considered a consumer report—and therefore exempt from FCRA rules—if it is “made in connection with an investigation 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.”

Employers, lawyers and the background screening industry have debated when background checks of job applicants fall under this 603(y) exception. Recently, in a Staff Letter, the Federal Trade Commission (FTC) examined whether background screening reports for job applicants are exempt from FCRA requirements under Section 603(y)—and the short answer was, “No.

In the letter, the FTC explains that the Commission:

• Views “Section 603(y) as covering only investigations of current employees, rather than investigations of both current employees and job applicants.”
• Believes an “existing employment relationship” is necessary in order to apply 603(y), and supports its limited reading of the exception, by citing to legislative history suggesting 603(y) was added as “a narrow technical correction.”
• Advises that the FCRA is “a remedial statute that must be read in a liberal manner” and “its exceptions [should] be narrowly applied.”

The FTC’s Staff Letter was clear that job applicants are not “employees” and therefore, do not fall within the narrow 603(y) exceptions for investigations of “suspected misconduct relating to employment” or “preexisting written policies of the employer”. That much seems clear. However, the FTC did not address other situations involving prospective or conditional employees that potentially trigger the second prong of 603(y), namely “compliance with Federal, State, or local laws and regulations, [or] the rules of a self-regulatory organization.” Several industries, such as the financial sector, require background checks of certain employees. The question is how does 603(y) apply when it intersects with other laws, regulations and rules?  Perhaps that is still up for debate.