June 11th, 2024 | Sterling

Answers to Your Top Questions About Adverse Action

Estimated reading time: Approx. 9 minutes

HR and compliance teams have their hands full in 2024 trying to keep on top of the latest hiring and screening laws — not the least of which is adverse action. Adverse action is a federally-mandated process employers must follow under the federal Fair Credit Reporting Act (FCRA) when considering denying employment as a result of findings in a background check.

For many HR professionals, questions swirl around this complex area of the law: 

  • How should your organization notify the candidate with an adverse action notice in order to remain compliant with the FCRA and to help prevent possible legal liability?
  • Are there any new state or local laws that might apply to your organization’s adverse action process? 

Sterling’s compliance experts have weighed in on this popular topic. Angela Preston, Associate General Counsel, Corporate Ethics and Compliance, and Shawn O’Neil, Compliance and Privacy Officer with Vault Workforce Screening, A Sterling Company, answered questions directly from HR professionals during a recent webinar, which you can watch on-demand here.

Let’s answer the top-trending questions about how to help ensure compliance in the adverse action process.

Question #1: When exactly does adverse action apply?

Adverse action applies to any type of information given in a consumer report (credit history, employment verification, motor vehicle record, etc.) – that is to say, any adverse information in the consumer report that might disqualify a candidate. However, adverse action only applies if the information was delivered in a consumer report, not in such cases where, for example, the employer gets the information directly from the source, does their own verification, or contacts a government agency themselves and learns new information about an employee or candidate.

Note that adverse action pertains to anything found in a background screening report, so the process of adverse action is required even if that information is not related specifically to criminal history. No matter the type of information, if it’s a reason for you not to hire the candidate, then you must start and complete the federal adverse action process.

We offer compliance resources to help you address these requirements.

Question #2: What is the first step in the adverse action process?

The FCRA requires that employers follow a two-step process before denying employment as a result of adverse information found during a background check. The first step is to send your candidate a pre-adverse action notice. This initial step comes before you make an adverse hiring decision using information that you (as the employer) found in a background screening report that could potentially disqualify your candidate under your hiring policy. 

  1. Send a pre-adverse action notice, informing the candidate that an adverse employment decision may be made based on something in their report. Include a copy of the background check report for the candidate to review and address possible inaccuracies. Inform the candidate of their right to dispute possible inaccuracies.
  2. If the candidate does not dispute their findings within a reasonable amount of time or the allotted days, or if their dispute doesn’t result in amendment or change, employer can then make a final decision and then send the final notice of adverse action indicating that an adverse decision was made.  

You can find all of this compliance information — along with helpful Do’s and Don’ts — in our Adverse Action Checklist. Download the checklist as a helpful compliance tool to help ensure you’re following best practices.

Question 3: What do you need to include when sending a pre-adverse action notice?

In this step, you must notify your candidate that there’s something in their background check that could negatively impact your hiring decision. In the pre-adverse action notice, you must include all of the following:  

  • Inform the candidate that an adverse action employment decision may be made based on something in their report
  • Include a copy of the background check report for the candidate to review and address possible inaccuracies
  • Inform the candidate of their rights with the Summary of Rights under the FCRA, and their right to dispute possible inaccuracies
  • Send information stating how the candidate can lodge a dispute and how they can contact the background screening company if they believe anything in the report is inaccurate or incomplete 

Also be sure to attach any other state or local notices required. Depending on where you are hiring and where the job or the employee are located, you may have additional requirements based on a state or a local ordinance.

Sterling provides sample notices for both pre-adverse and final adverse action to assist clients in this process. 

How should you incorporate different regulatory requirements into your candidate process? First, you need to ask yourself questions such as: 

  • Does a state or local law impact this hire?
  • Is there a fair chance requirement that requires me to add something additional to my notice?
  • Do I have to give the candidate additional information?  

After sending your candidate that pre-adverse notice, the candidate now has a chance to take a look at the report (as stated above) and determine whether or not there’s anything that they believe is inaccurate or incomplete. If so, they may dispute any possible inaccuracies, which can result in amendments or changes to the report. If the candidate does not dispute their findings within a reasonable amount of time or the allotted days, or if their dispute doesn’t result in amendment or change, the employer can send the final notice of adverse action indicating that an adverse decision was made.

Question #4: Does adverse action apply to drug testing? Is drug testing regulated under the FCRA?  

In our recent webinar, our audience asked Angela and Shawn if adverse action applies to drug testing, and if drug testing is regulated under the FCRA.

Angela Preston jumped in to answer this one: “I’m going to give you the lawyerly answer: it may. The law concerning whether or not a drug test is part of a consumer report or is considered as a consumer report is fact-specific.” – Angela Preston.

When conducting a drug test that’s not part of a broader consumer report, you might question whether or not the test is subject to Fair Credit Reporting Act (FCRA). The FCRA may allow for specific exemptions when it comes to standalone drug tests. In addition, most of the state and local laws covered in the webinar don’t apply to a drug test because they specifically address criminal history. As always, make sure to check with your legal counsel.

To sum up, the answer of whether your drug test could trigger an FCRA adverse action letter depends on many different factors, such as: 

  • How you’re sourcing or performing the specific drug test
  • How the reports are delivered
  • Whether the drug test is coming from a consumer reporting agency (CRA)
  • Whether you’re getting the drug test directly from a lab 

As you can see, there can be lots of variables involved, so be sure to check with your legal counsel.

Question #5: Do FCRA requirements apply to volunteers too?

Employers often ask us another great question: “Do FCRA requirements apply to volunteers too, or only employees?”

Keep in mind that the FCRA defines employment very broadly. In this area, it’s recommended to first check with your counsel.

We’ve spoken with our clients about considering the employment label in a very broad sense, because there’s a good chance that even a volunteer, independent contractor, or a contract employee could be considered under the employment definition under the FCRA. 

Note that employers are also required to follow additional notices under legislative models, including Ban the Box or Fair Chance laws, so when considering this question, you have to first stop and ask yourself: who exactly does the law apply to?

While employers may need to perform a fact-specific analysis to determine legal applicability, bear in mind that the Consumer Financial Protection Bureau (CFPB), the Federal Trade Commission (FTC), and many courts of law have taken that definition very broadly.

Question #6: How long is a “reasonable amount of time?”  

When sending candidates the pre-adverse action notice, employers are required to wait a “reasonable amount of time” to give candidates enough time to respond to an adverse action letter.

While there is no time period specific in the FCRA, some guidance indicates that that five business days is reasonable. Even so, the duration of the waiting period is up to interpretation by the employer, however Sterling recommends consulting with legal counsel when determining the process.

Question #7: How does adverse action apply by location?  

The rise of remote work and scaling globally has posed many hiring and employment law questions for compliance professionals in 2024, including: “Is adverse action jurisdiction determined by the applicant’s residence where they’re working, or the jurisdiction of the criminal report?”

Some state or local laws specify application based on candidate’s residence, other laws specify job location, and some laws require employers to take both into account. Employers may want to take both job location and residence into account. Consult with your legal counsel for fact-specific scenarios.

It’s important to review state laws for adverse action mandates, including states where the candidate lives and those in which they’ll be working. 

Question #8: Can you hold the position during the pre-adverse action process?

A popular question among Sterling’s HR professional audience is: can employers hold off on considering any candidates for an open position after providing the pre-adverse action notice? Specifically, this question addresses the possibility of finding a more qualified candidate during the process.

Generally speaking, if a candidate disputes what’s on the report and lodges a formal dispute, employers will typically pause the hiring process at that point and wait for the dispute to resolve. This is not always required, but in some jurisdictions, employers are not permitted to move forward with the hiring decision. If there is a dispute filed, particularly when an individualized assessment occurs (for example, LA County specifically addresses this particular issue), most employers will pause the hiring process and allow the dispute to resolve, even though under federal law it’s not required that you hold the position open pending a dispute.

Ultimately, this is a policy decision and you should consult with your legal counsel to determine the best approach. 

Takeaways: How to optimize your adverse action process

Adverse action is a very complex regulatory requirement for compliance professionals to meet due to the many different state and local laws. Employers can best implement compliance best practices in their employee hiring program by first defining an adverse action policy if they haven’t already, and by conferring with their legal counsel to ensure the policy is both accurate and up-to-date.

Are you following best practices when sending an FCRA adverse action letter? Download our checklist filled with recommended Do’s and Don’ts:

Sterling’s global compliance team partners with our busy clients, providing guidance and tools to help them to stay up-to-date and navigate complex issues. For more information on adverse action: 

  • Gain more valuable compliance insights in our on-demand adverse action webinar.
  • Our compliance blog post, “Fair Chance Laws Expand Into Occupational Licensing and Regulated Industries,” has more information about the latest developments in fair chance laws, which regulate how to handle criminal history in the hiring process.
  • We also have compliance resources available to help you address these and other requirements.

Sterling is not a law firm. This publication is for informational purposes only and nothing contained in it should be construed as legal advice. We expressly disclaim any warranty or responsibility for damages arising out this information. We encourage you to consult with legal counsel regarding your specific needs. We do not undertake any duty to update previously posted materials.