June 16, 1999 

RE: Possible Restrictions on Internal Investigations 

To Our Clients and Friends: 

The Federal Trade Commission recently published an advisory letter suggesting that the Fair Credit Reporting Act may significantly restrict an employer's ability to investigate sexual harassment complaints and other employment related investigations.  Although the FTC letter is advisory and not binding, employers should take immediate action to avoid the potential for falling out of compliance with the Act and to avoid having impractical restrictions placed on internal investigations. 

The Fair Credit Reporting Act ("FCRA") was amended in 1996.  The 1996 amendments govern, in part, the manner in which employers may obtain consumer reports and consumer investigative reports on both applicants for employment as well as employees.  Now, according to the FTC, an internal investigation of an employee may also qualify as a consumer investigative report and subject such investigations to the requirements of the FCRA. 

Under the FCRA, an employer may not obtain a consumer report or consumer investigative report on an applicant or employee unless the employer has first provided the applicant/employee with a clear and conspicuous written disclosure that such a report may be obtained.  It is not sufficient to provide this disclosure as part of an employment application.  Rather, the law requires that the disclosure be in a document consisting solely of the disclosure.  In addition to this separate clear disclosure, the applicant/employee must also provide written authorization for the employer to obtain the report. 

An employer need not provide the disclosure prior to obtaining each report on the applicant/employee.  The employer may provide the disclosure and obtain the authorization at the start of employment or at any time during employment.  Once the disclosure and authorization requirements are met they need not be repeated during the employee's employment.  Having an appropriate authorization on file prevents the awkwardness of having to obtain authorization from an employee to investigate a sexual harassment complaint made against that very employee.  Such authorization also avoids giving an employee the possible right to frustrate an employer's effort to conduct a sexual harassment investigation that is mandated by state and federal law. 

Unfortunately, properly obtaining the authorization does not end the difficulties raised by the FTC's advisory letter.  Under the FCRA, prior to taking any adverse action based on a consumer report (potentially including a investigation report), the employer, according to the FTC, may have to provide a copy of the report to the employee along with a description of the employee's rights under the FCRA.  An employer may also have to provide certain additional information to the employee after any adverse action is actually taken. 

The courts have yet to test the FTC's broad interpretation of the FCRA.  Until the courts definitively rule on this issue, we advise our clients to take every precaution to avoid having to release any internal investigative report. 

Our firm is able to assist you in ensuring that you are providing your employees with appropriate disclosure and obtaining appropriate authorization.  We can also help you properly structure investigations to avoid having the investigations come under the coverage of the Fair Credit Reporting Act.  If you have any questions or need assistance in implementing the disclosure and authorization process, please contact Peter Bennett.