Over the past few years, the Fair Credit Reporting Act (FCRA), the federal law mandating, among other things, procedures and reporting requirements employers must follow when conducting background checks through a third party vendor, has become a hot-button employment issue, and a lucrative one for class action plaintiff attorneys. Similar to other class actions involving technical violations, like wage and hour and "seating" lawsuits, plaintiff class action attorneys have latched on to technical requirements in the law providing for statutory damages when violated. The motivation driving these lawsuits? The promise of easy money.

Generally, to comply with the FCRA, an employer seeking an investigative consumer background report (conducted by a third party) on its employees or applicants must: (1) make a clear and accurate written disclosure to the employee/applicant of its intent to obtain the investigative consumer report; (2) obtain express authorization from the employee/applicant to obtain the investigative consumer report; (3) give the employee/applicant a pre-adverse action notice if the employer plans to take an adverse action against the employee/applicant based on the information contained in the investigative consumer report; and (4) provide the employee/applicant with an adverse action notice after taking the adverse action. Among other requirements, effective January 1, 2013, the FCRA requires that the employer provide an updated "A Summary of Your Rights Under the Fair Credit Reporting Act" to employees/applicants when an employer provides the pre-adverse action notice.

In addition to the FCRA's technical requirements, the damages available for FCRA violations make them targets for class action lawsuits. Where an employer willfully violates the FCRA (which includes both a "knowing" and "reckless" standard), a plaintiff may collect any actual damages sustained or statutory damages between $100 at the lowest end and $1,000 at the highest end without having to prove any actual damages, punitive damages (if proven) and, if the prevailing party, the costs of the litigation together with reasonable attorneys' fees.

Incidentally, where an employer has negligently violated the FCRA, a plaintiff may collect any actual damages sustained and, if the prevailing party, the costs of the litigation together with reasonable attorneys' fees. Because actual damages would have to be proven for each alleged violation, lawsuits based on negligent action are likely less suitable for class action treatment.

With the potential to collect statutory damages, the possibility of punitive damages and the ability to obtain attorneys' fees and costs, the FCRA can be a class action plaintiff's lawyer's dream. Over the past few years, class action plaintiffs and their attorneys have increased the filing of class action lawsuits alleging willful violations of the FCRA, and this trend is not slowing. A search of recent class action filings shows that in the past few months numerous class actions alleging willful FCRA violations by employers were filed in federal courts across the country. Given that actual damages for each employee/applicant are likely to be very low (or nothing) and difficult to prove, and the cost to an employee/applicant to litigate an individual statutory violation generally outweighs the reward, the class action mechanism will continue to be the preferred tool for bringing these lawsuits. Large and small employers alike must be vigilant, as a two-year statute of limitations applies and numerous applicants/employees may be involved over that period, making up a large class.

A 2012 decision and its case history illustrate the risks associated with systematic FCRA violations, particularly for a large employer. In Singleton v. Domino's Pizza, LLC, Civil No. DKC 11-1823, 2012 WL 245965 (D. Md. 2012), a federal court denied a motion to dismiss a class action complaint alleging class-wide willful FCRA claims against Domino's. In its decision, the court concluded that the plaintiff sufficiently alleged willful class claims based on the employers alleged knowledge of the FCRA requirements (by in-house and outside counsel) and its alleged continued, systematic failure to comply with multiple employees. This case illustrates that, although seemingly trivial, allegations of a systematic, willful practice of FCRA violations will not be easily dismissed. After the denial of the motion to dismiss, the parties engaged in mediation and are currently finalizing a settlement, with preliminary approval of a class settlement due on January 28, 2013. Considering the number of applicants/employees likely involved for a huge employer like Domino's Pizza, the potential damages are likely quite large.

Even smaller employers cannot escape the FCRA requirements and class action treatment for violation. For example, in Harris v. US Physical Therapy, Inc., Civil No. 2:10-cv-01508-JCM-VCF, 2012 WL 3277278 (D. Nev. 2012), the court approved a class action settlement for a class of 47 class members. The employer paid out more than $143,000 to settle the matter, not including its own defense costs.

So, what is an employer to do? To start, employers should immediately review their policies and procedures for conducting background checks and obtaining investigative consumer reports to ensure compliance with the FCRA. For example, if employers have not implemented the updated 2013 "A Summary of Your Rights Under the Fair Credit Reporting Act," employers should immediately begin using that form when applicable. Failure to provide the correct form could result in statutory violations (if willful) and subject an employer to a class action lawsuit. Some states, including, for example, California, also have their own additional disclosure and authorization requirements for conducting background checks on applicants and employees as well as restrictions for which a credit report can be run. As a result, employers should ensure that their policies and practices comply with applicable state law in addition to the FCRA. Utilizing knowledgeable counsel to create, review and/or implement appropriate policies, procedures and practices is highly recommended. Moreover, if an employer has engaged in violations of the FCRA, it should immediately seek counsel to rectify the issue so as to reduce risk of allegations of willful misconduct and to soften the blow of a potential class action lawsuit. Unfortunately for employers, plaintiffs and their lawyers will continue to follow the money, and the FCRA requirements provide exactly this lucrative opportunity.

The bottom line: Employers should take steps to ensure compliance with the FCRA so as to reduce the risk of class action claims seeking statutory penalties.
If you have any questions about the material presented in this Alert, please contact any member of BakerHostetler's Employment Class Actions Team or your regular BakerHostetler contact.