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New Amendment to the Fair Credit Reporting Act Loosens Restrictions on Employers’ Use of Third Party Investigators

Volume 3, Issue 2
March 31, 2004

The Fair and Accurate Credit Transactions Act of 2003 ("FACTA") amends the Fair Credit and Reporting Act ("FCRA") in various respects, including lifting many of the requirements placed on employers that use third-party investigators in workplace investigations.

In 1999, the Federal Trade Commission ("FTC") issued a staff opinion letter, commonly referred to as the "Vail Letter", indicating that a workplace sexual harassment investigation conducted by an outside investigator fell within the FCRA's definition of an "investigative consumer report", thus triggering an employer's obligation to comply with the FCRA's substantial disclosure and notice requirements. These requirements include obtaining a signed disclosure and authorization agreement from the individuals under investigation prior to starting the investigation, providing a full copy of the investigator's report before taking any adverse action against the employee, waiting a "reasonable" amount of time between giving the report to the accused and taking adverse action, and reinvestigating, at the company's expense, facts challenged by the accused. See FTC Staff Opinion Letter of Apr. 5, 1999, available at http://www.ftc.gov/os/statutes/fcra/vail.htm.

The Vail letter caused considerable concern for employers that use outside investigators (including attorneys) to investigate sensitive allegations of workplace misconduct, such as situations involving allegations against high ranking company officials. Such stringent requirements rendered workplace investigations by outside investigators virtually impossible and highly ineffective. Additionally, employers and outside investigators would be subjected to substantial liability, including punitive damages, if they failed to meet all of the FCRA's requirements.

FACTA addresses many of these concerns in a new exemption. Provided that: (1) the information given by an outside investigator to an employer is connected to an investigation concerning suspected employment related misconduct or compliance with laws, requirements of self-regulatory organizations, or preexisting written company policies; (2) the communication is not made for the purpose of investigating a consumer's creditworthiness, credit standing, or credit capacity; and (3) the communication is not provided to anyone other than the employer, an agent of the employer, a government official, an agent of a self-regulatory organization, or an individual as otherwise required by law, employers are exempt from the restrictions contained in the Vail letter.

However, FACTA does require that an employer utilizing an outside investigator provide a summary of the investigator's report after taking adverse action, if the action was based in whole or in part on the information provided by the investigator. The summary does not have to disclose sources, only the "nature and substance" of the report.

While the U.S. Chamber of Commerce lobbied for express language confirming that the FCRA and FACTA did not abrogate the attorney-client privilege and attorney work product doctrine with respect to workplace investigation reports, the language was rejected as too controversial. This issue will certainly be the subject of litigation. However, there is some existing case law to suggest that these protections will remain in force.

It is expected that that the FTC will issue new regulations interpreting FACTA's amendments and clarifying the parameters of the workplace investigation exemption. In the meantime, employers should proceed cautiously and make sure that they continue to have employees sign broad FCRA disclosure and authorization agreements at their time of hire.

Employer Report articles are for general information only; they are not intended and should not be construed to be legal advice. Reading or replying to such articles does not establish an attorney-client relationship. In addition, because the subject matters and applicable laws discussed in Employer Report articles are often in a state of change and not always applicable to every type of business entity or organization, readers should consult with counsel before making decisions based on the same.