Pre-adverse action disclosure letter: How-to guide 

As an employer, you might expect to have honest employees with the right skills working in your company. To achieve this, you can run a background check both when you’re hiring new employees and when you’re evaluating current employees for promotion or reassignment.

While running the check, it is necessary to comply with federal regulations to protect the privacy of this information. As an employer, you must follow these procedures when obtaining a consumer report on a current or prospective employee:

1. Ensure that all of your applicants and employees know that you’re using consumer credit reports for employment purposes and that they agree to it.
2. The applicants or employees must be notified immediately if you find any information in a consumer report that could result in a negative employment decision, like rejection of the application or denial of a promotion.

Pre-adverse action letters help set the right path toward the proper hiring process for your organization. Your organization can get verified information and bring the right staff to support the business.

Best practices for hiring new employees

Following a professional pre-adverse action process, inform prospective employees in a timely manner of measures you might take based on the information received. It is ideal to create a document that can be used repeatedly and that will ensure compliance with federal and state credit regulations.

Treat all job applicants equally

Treat all applicants equally and be consistent in your questions about qualifications for the open position. Use the same consideration in questions about a potential employee’s schools, employers, or listed references.

Give adequate time to review documents

Be professional and courteous to every potential employee. Allow applicants ample time to review and complete any employment-related documents. Anticipate and be ready to answer questions about the releases you provide.

Choose your questions carefully with the job applicant

Ask only for release of information that’s absolutely necessary. This will reduce the risk of violating labor and federal credit reporting laws, and save time and energy of everyone involved.

Protect the privacy of your potential candidate

Protect the privacy of the information you receive. Label any papers with that information “PRIVATE” and file them in a safe place. As a general rule of thumb, this information should be released on a “need-to-know” basis or if a court orders that information be provided.

Consider designating a high-level manager to be responsible for maintaining the privacy of your employee’s records. Conduct periodic evaluations of the security and efficiency of this recordkeeping system.

Comply with the Fair Credit Reporting Act (FCRA)

You must comply with the FCRA Act if you use a consumer reporting agency to do background checks on applicants or employees. This federal law requires you to inform those individuals that a consumer report is being used for employment decisions and to obtain the permission of those individuals for the same. In addition, if you receive negative information from a background report that adversely affects the final decision (i.e., rejection of the application or denial of a promotion), those individuals must be contacted immediately with that information.

Note that this letter isn’t a notice of the intent to use consumer reports for employment purposes. It also can’t be used as evidence of the employee’s consent to a credit investigation. You’ll need to use a specific release of credit information form and notice for those purposes.

Explain the consequences of adding false information

Dishonesty on an employment application can provide grounds for later termination. If, for example, an applicant claims to have graduated from a particular school and the information released by your inquiry proves that to be false, they can be fired because of that lie. Applicants may also be denied unemployment benefits if they provide inaccurate information on their employment application.

If potential employees know the consequences of dishonesty and know that you’ll verify the information they provide through a background check, they may be more truthful in their answers. Moreover, your company will have documentation if there is suspicion of concealment or lies on the part of the employee.

Be careful while discarding important documents

Don't simply throw those documents into the trash when you decide to dispose of the credit reports you’ve obtained ( when the document retention periods are over). Take reasonable steps to protect an applicant’s confidential information by shredding paper copies or erasing digital copies.

How an adverse action process works

The following steps will help you understand the terms of your adverse action letters and the process for providing them.

Step 1: Send a pre-adverse action notice

Before taking any intended adverse action, you must notify the applicant or employee in writing that you plan on taking adverse action based on the consumer report you received. Along with the pre-adverse letter, you must include:

• A copy of the consumer report
• A copy of the Federal Trade Commission document “A Summary of Your Rights Under the Fair Credit Reporting Act”

Also, provide the applicant or employee a chance to review the information you obtained and offer any corrections or additions. Consumer reports aren’t infallible, and individuals may be able to explain credit blips satisfactorily. Insert a reasonable time frame within which the employee or applicant must respond.

Step 2: Notify with a post-adverse action letter

As a potential employer, you must notify the applicant or employee that you’ve taken an adverse action with a post-adverse action letter. Along with this letter, include:

• A copy of the consumer report
• A copy of the Federal Trade Commission document “A Summary of Your Rights Under the Fair Credit Reporting Act”

Add the name of the credit reporting company you used to conduct the applicant's background check and the contact information, including the address and toll-free phone number of that business.

Frequently asked questions

What is an adverse action?

An “adverse action” is any negative act resulting from a background check. For example, rejecting a job application, reassigning or terminating an employee, or denying a promotion are all considered adverse actions from a company.

What's an adverse action disclosure letter?

If your business uses credit history and related information to evaluate potential employees, you must disclose this to those whose credit you check. An adverse action disclosure letter lets you inform potential employees about their credit checks and, if you choose, gives them a chance to respond to the information in their credit report.

What are the elements of a pre-adverse action letter?

Here are the essential elements needed to complete your adverse action disclosure letter:

• To whom you're sending the letter: Have their name and contact information ready.
• Why you're checking their credit: Know the reason for the credit check, as well as the contact information of the credit reporting agency.
• Information review: Decide if you’ll give the recipient a chance to review and respond to the information about them.

Why should I comply with the FCRA while hiring?

Compliance with the Fair Credit Reporting Act (FCRA) can protect your company from costly litigation. You can also prevent tremendous damage to your company’s reputation and its ability to attract qualified employees. Using pre-adverse action notices allows your company to search lawfully for background information on an applicant, protect potential employees from unwanted invasion into their matters, and shield your business from claims that it has violated federal regulations.