What Does Adverse Action Mean and How To Handle It

Any employer who performs background checks will inevitably be faced with candidates with negative records. You may find someone whose information doesn’t check out when you verify it, someone who has a criminal record, or find a failed drug test.

These findings may result in your decision to reject an applicant or dismiss a current employee, but you need to make sure you are following state and federal regulations when utilizing this information.

What Does Adverse Action Mean?

Within the context of background checks, adverse action means that an employer has negatively impacted an applicant’s job prospects due to information gained from the report.

Any adverse action that you take as a direct result of the information you received from a background check report that negatively affects the status of someone’s employment is adverse action. This occurs whenever an employer decides to behave in a way that would put a group of people or an individual at a disadvantage regarding their implied equal employment opportunity when applying for a job.

The umbrella of adverse action can cover anything from denying a current employee’s transfer or promotion to outright rejecting a new applicant. This can also include demoting someone by offering a current employee a lesser position.

The FCRA, or Fair Credit Reporting Act, as well as specific local and federal jurisdictions, require employers to closely follow outlined procedures when sending an adverse action notification. Make sure that you follow all of the specified adverse action process criteria if you find yourself declining to hire or promote someone on the basis of findings obtained from their background report.

Why is This Important?

So, you have to reject a candidate. Why is this such a serious concern for an employer?

The adverse action process inherently affects consumers adversely, which makes it a frequent subject of litigation as well as a compliance risk for you as an employer. Using incorrect background data without giving candidates a chance to respond can result in legal liability for employers.

The potential risk of a class action lawsuit acts as a significant motivator for employers to make sure that their background check procedures are in compliance with the FCRA. Adverse action litigation can result in some serious payouts. For example, there was a lawsuit in 2019 that resulted in the major pet supplies chain Petco paying the plaintiff over $1 million because Petco allegedly neglected to provide their applicants with the required notices as stated by the FCRA.

Aside from the compliance risk, it is also possible for an error to occur within a background check report. You should want to ensure that you are doing the right thing by your applicants, because the FCRA is designed to protect consumers from unfair or uninformed employment decisions. Follow the process accurately in order to make sure you are utilizing the proper information in your consideration.

The Process of Handling Adverse Action

In order to deliver an adverse action notification, there are certain steps you need to follow in order to comply with the FCRA in instances when adverse action is required in relation to a background check. Before the background check is even initiated though, FCRA authorization and disclosure requirements hash out the procedures needed for notifying the employee or candidate as well as obtaining the written permission for conducting the check.

Here are the steps an employer should follow for a safe adverse action process:

Step 1: Provide Disclosure and Send a Notice for Pre-Adverse Action

After completing a background check that results in findings that are grounds for dismissing a current employee or denying a job applicant, the employer must issue a pre-adverse action letter. The letter must include the background report and a copy of the candidate’s FCRA Summary of Rights. It will serve as a notice to relay this information to the applicant, giving them a legal opportunity to respond before a final decision is made.

Sending this Pre-Adverse Action Notice will notify the applicant that the information obtained from their background check may affect the decision of their employment negatively.

Make sure to keep a copy of any attachments you send as well as the letter itself while documenting the date that it was sent. Along with this notice, the company or employer that conducted the background check has to provide both a copy of the background check as well as a summary of the candidate’s rights upon sending to the candidate.

Step 2: The Waiting Period

Next in the adverse action process, the employer has to allow the candidate a reasonable amount of time to review the documents they received as the candidate may wish to dispute the accuracy of various aspects of their background report. The candidate must be allowed to address any of the information they believe is inaccurate within the background check report.

The employer also has to give the candidate in question a chance to provide clarifying information to either explain the findings within the report or potentially correct the record. While no specific waiting period is defined under FCRA, courts have historically outlined five to seven days, and employers must wait a reasonable amount of time before making a final hiring decision.

Step 3: Review the Report Results Again

Consider the candidate’s response and corrections made to the record, if any. If, after a second review, the employer is still deciding against promoting or hiring the candidate due to the contents of the background check, the employer must send a final adverse action notice confirming the decision and explaining the candidate’s rights.. This notice can be delivered electronically or in a hard-copy form.

Step 4: Provide the Notice of Adverse Action

Time to send the notice of adverse action. This notice must clearly inform this candidate of their power to dispute your decision, as well as offer to provide them with another copy of their report at any point within 60 days of their reception of the notice.

If the background check was outsourced to an outside company, then the adverse action notice must also state that the employer, not the provider, is responsible for the hiring decision and for sending all adverse action notices. You will also need to include the name and contact information (including address) of the company you outsourced to on the adverse action notice. Keep a copy of all of this for your own records, and always document the date you sent your paperwork.

Step 5: Properly Dispose of Sensitive Information

Because you will be handling sensitive documents, the FCRA requires that you, as the employer, dispose of these documents securely. Paper copies of the background check results must be incinerated or shredded, and any digital copies of the files must be erased irretrievably, as employers are legally required to dispose of background check data once it is no longer needed.

What Happens if a Candidate Disputes Their Report?

Both background check companies and employers wish to maintain as much transparency, accuracy, and fairness as possible throughout the hiring process. However, it is possible for the information obtained from a credit reporting agency, county courts, and any other source to contain errors.

These errors could occur as the result of:

• Identity theft
• Outdated information reported by a credit reporting agency or credit score
• Transcription or typing errors within courthouse reports
• Confusion resulting from a common name

Because of the possibility of human errors by the credit reporting agency, courthouse reports, and more, candidates have the legal right under the FCRA to dispute inaccurate background information. If a consumer believes that there is an inaccuracy, they should immediately contact either their employer or the background check company to initiate the dispute process. It’s always encouraged to actively try to resolve any consumer disputes as soon as possible, despite the 30 days a background check company gives themselves to complete an investigation.

Common Adverse Action Mistakes to Look Out For

The most common pitfalls we see in an adverse action process are:

Employer Does Not Issue the Pre-Adverse Action Notice

This mistake is especially common in instances where an employer doesn’t outsource to an experienced background check company. If you forget to issue a pre-adverse action notice and go straight to the adverse action notification, the consumer is refused the opportunity to dispute anything.

The Pre-Adverse Action Notice is Missing Information

Make sure that you include both a copy of the FCRA summary of rights as well as a copy of the full background report in your adverse action notices. If either of these are missing, you will be in violation of the FCRA.

Employer Does Not Wait Long Enough Before Issuing the Adverse Action Notice

If an employer is rushing to fill a position, they might rush through the adverse action process and not wait long enough before sending the official adverse action notice. This is common in recruiters who are anxiously awaiting to move on to a new candidate.

Customer Disputes Are Not Addressed in a Timely Manner

While background report companies faced with a dispute legally have 30 days to investigate the claim, a good firm will prioritize this process. This is not something you want to put on the back burner and forget about before sending your adverse action notification. If there is an issue due to a credit card reporting agency error, then you should take the legal advice of experts and address it as quickly as you can.

Employer Does Not Follow the Fair Chance Hiring Laws

Fair Chance Hiring laws are continuously growing, which means we will continue to see changes in the requirements of adverse action procedures. It is helpful to work with an outside counsel to ensure that you are following all the correct and up-to-date procedures.

Frequently Asked Questions

What Does Adverse Action Mean on a Background Check?

Adverse action on a background check refers to an employer negatively impacting a candidate’s job prospects based on the background check findings, including denying employment, promotion, or demotion. Employers must follow legal procedures when taking adverse action to ensure compliance with the Fair Credit Reporting Act (FCRA).

Can You Still Be Hired After an Adverse Action Letter?

Yes, you can still be hired after an adverse action letter. The letter initiates a process lasting five to seven days, allowing you to review and dispute any inaccurate information in the background check. If you correct the discrepancies, the employer may reconsider their decision and proceed with your hiring.

Conclusion

Issuing adverse action notices is guaranteed to never be a pleasure – much less to be the one receiving the notice. Regardless, it is important to always comply with FCRA regulations. Following FCRA-compliant procedures for adverse action (as well as any local laws relevant to the situation) will ensure that this process remains respectful, professional, and fair.

Outside legal advice is always recommended when dealing with this topic in the hiring process. For more information on everything from pre-adverse action to the final touches of the adverse action process and the Fair Credit Reporting Act, contact an expert such as our experienced team at ScoutLogic today.

*ScoutLogic is not a law firm.  You should always check with qualified counsel before you make any changes to your background check program.  If you need a qualified attorney, we would be happy to make a referral for you.

David Garcia

David Garcia, co-founder and CEO of Scout Logic, is an industry leader in the bulk background check world. With his strategic acumen and expertise in the HR sphere, specifically in hiring, recruiting, legal compliance, background checks, and resume screening, he’s an invaluable asset and consultant.

David's counsel extends across the boards of ScoutLogic, YipitData, and Supplier.io, drawing from his impactful stints on the boards of Infutor and Avetta. With an extensive 25-year journey, he champions unparalleled B2B commercial leadership within data & analytics, significantly shaping the HR landscape.