DEFINING ADVERSE ACTION IN EMPLOYMENT: KEY ELEMENTS AND IMPLICATIONS

Looking for the perfect candidate can be exhausting work — and it can be even more so when you feel like you have found the applicant who checks all the boxes and looks like a great fit for your team.

But then you receive an employee background check report, and it reveals a concerning piece of information: the person was convicted of assault in the workplace.

This scenario is a common challenge faced by employers. While a past conviction doesn’t necessarily disqualify a candidate, it can raise significant questions and concerns. The Fair Credit Reporting Act (FCRA) provides specific guidelines for handling such situations, particularly when it comes to adverse actions.

An adverse action refers to any decision that negatively impacts an applicant’s chances of employment due to information discovered in a background check. These actions can range from rescinding a job offer to not extending one in the first place. But why does the terminology matter?

The importance lies in what comes next. Employers must adhere to specific legal steps to ensure the process is fair, transparent, and compliant with the FCRA. If your business doesn’t follow these steps, you could face legal challenges, fines, and damage to your reputation.

Let’s take a closer look at what constitutes adverse action and what your business needs to do when it takes such an action based on an applicant background check.

What Exactly Is an Adverse Action?

In the context of employment, adverse action isn’t just about criminal backgrounds—it refers to any decision that negatively affects an applicant’s terms and conditions of employment based on the results of a background check.

This includes but is not limited to:

• Denial of Employment: Refusing to hire a candidate based on information found in a background check.
• Termination: Dismissing an employee due to information uncovered in a background check.
• Refusal to Rehire: Denying a former employee re-employment based on information found in a background check.
• Denial of Benefits or Privileges: Withholding or revoking benefits or privileges, such as promotions, raises, or participation in company events.
• Demotion: Reducing an employee’s salary, responsibilities, or status within the company.
• Refusal to Promote: Denying an employee a promotion based on background check results.
• Change in Work Schedule: Altering an employee’s work hours or shift assignments.
• Disciplinary Action: Taking disciplinary measures, such as reprimands or suspensions, due to information from an employee background check.

All of these things are considered adverse actions under the FCRA.

Here’s where things get tricky: the law mandates a specific process for handling these decisions, ensuring that the job applicant or employee has an opportunity to address any potentially incorrect or misleading information. This process protects the individual while giving employers the legal backing to make informed decisions.

The Adverse Action Process

Understanding adverse action is essential for employers because the FCRA imposes specific requirements when taking such actions. If you fail to comply with this requirement, it can lead to legal consequences.

So, what does the law require when an adverse action is on the horizon? Here’s a step-by-step breakdown of what your business must do to stay compliant:

1. Pre-Adverse Action Notice

The first step in the process is notifying the individual about the potential adverse action. This is called a pre-adverse action notice. Before making final decisions based on the background report, you must inform the candidate that you are considering adverse action.

In this notice, you must:

• Include a copy of the applicant background check report you used to make your decision.
• Provide a summary of the applicant’s rights under the FCRA.

The purpose of this step is to allow the candidate to review the report and dispute any inaccurate or incomplete information.

This is very important because background check errors can happen—and making a decision based on faulty information could hurt the candidate and put your business at legal risk.

2. Waiting Period

Once you’ve sent the pre-adverse action notice, it’s time to pause. You cannot make a final decision until the individual has had a reasonable amount of time to respond to the notice and dispute any issues with the report. The FCRA doesn’t specify an exact waiting period, but five to seven business days is generally considered acceptable.

During this time, the candidate can:

• Contact the background check provider (also called the Consumer Reporting Agency or CRA) to dispute inaccuracies.
• Provide additional information or context about the findings in the report.

If the candidate disputes the report and it is corrected, you may need to reconsider your decision. However, if the report stands and you still believe adverse action is necessary, you can move forward with the final step.

3. Final Adverse Action Notice

After the waiting period, if you decide to take the adverse action, you must send a final adverse action notice to the individual. This formalizes your decision and includes key information, such as:

• The fact that adverse action is being taken based on the background check.
• The contact information of the CRA that provided the report.
• A statement that the CRA did not make the hiring decision and cannot explain the reasoning behind it.
• The individual’s right to receive a free copy of the report within 60 days.
• The individual’s right to dispute the accuracy or completeness of the information in the report.

By following this process, you protect your business from potential lawsuits while ensuring the applicant’s rights are respected.

If you fail to comply with these steps could result in legal repercussions, including fines and lawsuits. Candidates can sue for statutory damages between $100 and $1,000 per violation, as well as punitive damages in the case of willful non-compliance.

The Importance of “Ban the Box” and Fair Chance Acts in Adverse Action

Many states and municipalities have enacted “Ban the Box” laws, which restrict when and how employers can inquire about an applicant’s criminal history. Typically, these laws prevent employers from inquiring about criminal backgrounds on initial job applications, allowing applicants to be evaluated based on their qualifications first.

Legal consequences of violating “Ban the Box” laws include:

• Fines and Penalties: Employers that violate local “Ban the Box” laws may face monetary penalties, which vary by jurisdiction.
• Private Lawsuits: In some states, applicants can sue employers directly for violating these laws.
• Reputational Damage: Violations can negatively affect public perception, particularly in areas that emphasize fair hiring practices.

These laws are especially important when conducting background checks, as they can affect the timing and nature of adverse action notices.

Equal Employment Opportunity Commission (EEOC) Guidelines

The EEOC enforces anti-discrimination laws that apply to employment decisions, including those based on background checks. The use of criminal records must comply with Title VII of the Civil Rights Act of 1964, which prohibits discrimination based on race, color, religion, sex, or national origin.

EEOC’s Role in Adverse Actions:

The EEOC recommends a three-part test to ensure that adverse actions based on criminal records are not discriminatory:

1. Nature of the Crime: Employers should consider the severity of the offense when making a decision.
2. Time Passed: The length of time since the conviction should be considered—older offenses may not be as relevant to the position.
3. Relevance to the Job: There must be a clear connection between the nature of the crime and the job’s responsibilities.

If an employer disproportionately impacts certain demographic groups by using criminal records in hiring decisions, they may face legal challenges under Title VII. Employers are advised to perform an individualized assessment for each candidate and avoid blanket policies excluding individuals with criminal records.

Legal Implications for Employers

As employers, you must understand the legal framework around adverse action. Improper handling of adverse actions can result in individual or class action litigation, particularly in cases of willful non-compliance with the FCRA. Employers have faced multimillion-dollar settlements for failing to follow the correct procedures for background checks and adverse actions.

Some common legal risks include:

• Failure to Issue Pre-Adverse Action Notices: Many lawsuits stem from employers skipping or mishandling the pre-adverse action process, which denies candidates the opportunity to correct mistakes.
• Inaccurate Background Reports: If a background check contains errors and leads to an adverse action, the candidate may file a lawsuit claiming harm due to incorrect information. Similarly, employers sometimes send an incomplete or confusing adverse action notice, which can also lead to complications.
• Mass Adverse Actions Without Individualized Consideration: Blanket policies that reject candidates based on criminal records without evaluating the context of the offense can lead to discriminatory practices, attracting lawsuits under Title VII.

Reputational Damage and Business Impact

Beyond legal and financial risks, failing to handle adverse actions properly can severely damage an employer’s reputation. Remember that candidates who feel they were treated unfairly may share their experiences online or through word of mouth, which could damage your company’s reputation and make it harder to attract top talent in the future.

Best Practices for Handling Adverse Actions

Given the legal and reputational risks involved, how can employers handle the adverse action process smoothly and effectively? Here are some best practices to keep in mind:

Use a Standardized Process

To avoid errors and inconsistencies, develop a standardized process for handling adverse actions. Ensure that your HR team and hiring managers are well-trained on the FCRA’s requirements and have a clear protocol for sending out pre-adverse and final adverse action notices.

Work with a Reliable Background Check Provider

Partnering with a reputable and compliant PBSA-accredited pre-employment background screening service can help ensure that the reports you receive are accurate and up to date. This can also make it easier to resolve disputes if a candidate challenges the information in their report.

Evaluate Candidates on a Case-by-Case Basis

Not all background check findings should automatically lead to adverse action. Consider the information’s relevance to the job at hand and evaluate each candidate individually. Use EEOC (Equal Employment Opportunity Commission) guidelines to consider factors like the severity of the offense, time passed, and relevance to the position.

For example, a DUI from a decade ago may not be as relevant to a desk job as it would be for a role that involves driving.

Communicate Clearly and Compassionately

When sending pre-adverse and final adverse action notices, be transparent and clear about why the decision is being made. This can help avoid confusion and frustration on the candidate’s part. Where possible, approach the conversation with empathy—remember, this is a sensitive topic for most people.

Document Everything

Keep thorough records of each step in the adverse action process, including copies of notices sent and responses received, to ensure a clear trail in case of future disputes or audits.

Stay Updated on Local Laws

In addition to federal FCRA background check guidelines, familiarize yourself with state and local laws regarding adverse action and background checks. Some jurisdictions have stricter rules, such as “ban-the-box” regulations, that affect how and when background checks can be used.

Allow Room for Clarification

During the waiting period, engage with the applicant if they contest the findings. Some issues might be due to errors, identity mix-ups, or extenuating circumstances that warrant a reconsideration.

Avoid Implicit Bias

Ensure that your hiring decisions based on background checks are free from discrimination or unconscious bias. Having a clear, documented policy for handling adverse actions can help eliminate bias from your decision-making process.

Offer Assistance Programs

For employees or candidates affected by adverse actions, consider offering referrals to rehabilitation programs or support resources. This can reflect positively on your business and foster goodwill.

Regularly Review Background Check Policies

Regularly update your employment screening and adverse action policies to align with evolving legal requirements and best practices. Training your staff on these updates ensures consistent application.

Ensure Confidentiality

Protect applicants’ privacy by keeping background check information and adverse action decisions confidential. Share them only with authorized personnel who need to be involved in the decision-making process.

Bottom Line

Employers must be mindful of the legal implications involved in taking adverse action based on background checks. It’s essential that you adhere to the FCRA, EEOC guidelines, and state-specific regulations to protect your business from lawsuits, fines, and reputational harm.

By understanding how to conduct the adverse action process properly, implementing best practices, using technology, and staying informed about evolving legal requirements, you can manage it effectively and fairly. This safeguards your business and promotes a culture of transparency and integrity in hiring.

Employers looking to streamline the background screening process and ensure compliance with the Fair Credit Reporting Act (FCRA) and other regulations should consider partnering with our PBSA-accredited background company, TruDiligence. Our cutting-edge tools and expertise simplify the adverse action process, ensuring that every step, from disclosure to final decision, is handled smoothly and legally.

With automated notifications, detailed reports, and customizable solutions, TruDiligence can help protect your business from legal risks while making fair and informed hiring decisions.

For more information on how TruDiligence can help you with comprehensive background screening services.