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Congress Amends Fair Credit Reporting Act to Exclude Investigations of Employee Wrongdoing and to Further Restrict Receipt of Medical Information

December 1, 2003

The Fair Credit Reporting Act ("FCRA"), among other things, requires employers to obtain written authorization and disclose certain information whenever the employer uses an outside agency to conduct background checks, including criminal background checks, on employees and applicants. FCRA's notice and authorization requirements are not applicable when the employer uses its own employees to directly obtain information from sources available to the public, such as a court or law enforcement agency, as opposed to engaging an outside entity to conduct the investigation. On November 22, 2003, the United States Senate approved new legislation, entitled the "Fair and Accurate Credit Transactions Act of 2003" ("FACT"), passed by the House the previous day, that would amend FRCA to exempt from FRCA's notice and authorization requirements situations in which employers use outside agencies to investigate employee wrongdoing. President Bush has expressed support for the legislation and is expected to sign it into law shortly.

Under Section 611 of the new statute, employers will no longer be required to notify an employee and obtain the employee's written authorization before the employer may hire a third party to conduct an investigation of an employee's suspected misconduct relating to employment, or an employee's compliance with applicable laws, regulations or existing written employment policies. This means, for example, that if an employer suspects an employee of theft, the employer may hire an outside agency to investigate the employee's criminal background without having to first notify the employee and obtain his or her written authorization. If, however, an employer subsequently takes an adverse employment action against the employee, such as termination or demotion, as a result of information received from the outside agency's investigation, FACT requires the employer to provide the employee with a summary of the report, although the employer does not have to disclose the sources of the information for the report.

The new legislation does not change FRCA's requirement that employers must notify applicants and obtain an applicant's prior written authorization before engaging an outside agency to conduct a background check. FRCA's notice and authorization requirements would also still apply if an employer engaged an outside agency to perform background checks on current employees if the investigation is not being conducted in connection with suspected employee wrongdoing.

The effective date of Section 611 of the new law has not yet been determined. The Federal Trade Commission and the Board of Governors of the Federal Reserve System will jointly issue final regulations governing FACT within two months after the law has been signed by the President, and the effective date of the law must be within 10 months of the issuance of the final regulations.

In addition to the provisions regarding investigations of employee wrongdoing, FACT also strengthens FRCA's prohibition on an employer's receipt of medical information from an outside agency. Under Section 411 of FACT, an outside agency conducting an investigation of an employee or an applicant may not provide any medical information to an employer unless the information is both relevant to the employment and the employee or applicant has signed a written consent form "that describes in clear and conspicuous language the use for which the information will be furnished." Medical information is defined under FACT to include information or data, in any form, that relates to the past, present or future physical, mental or behavioral health or condition of an employee, including the provision of any health care to the individual or payment for health care. Section 411 of FACT is to become effective 180 days after the law is signed by the President.