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Employers can breathe a sigh of relief. Although it has received little notice, the newly reauthorized Fair and Accurate Credit Transactions Act of 2003, signed last Dec. 4, eliminates a significant barrier to employers’ ability to effectively investigate workplace misconduct. By now, most employers are aware that they must comply with the requirements of the Fair Credit Reporting Act before they hire a third party to conduct a background check on an applicant or employee. The FCRA was passed to protect individuals against use of “consumer reports” without their knowledge and the chance to correct false or misleading information. Such reports are not limited to credit history. They include any report, oral or written, bearing on a person’s character, personal characteristics or “mode of 0living.” Thus, license, criminal record and court record searches, and investigations to verify information on an employment application are covered. When an employer uses a third party to conduct an investigation, it must comply with FCRA’s notice and disclosure requirements. Most notably, the employer must get the employee’s written authorization beforehand. Otherwise, the employer may be liable to the employee for actual damages, attorney’s fees and, in certain instances, punitive damages. In April 1999, the Federal Trade Commission issued an opinion that drastically expanded the act’s scope. In response to an inquiry from Judi Vail, an attorney in Washington State, the FTC opined that when an employer uses outside counsel to investigate a report of workplace harassment, that counsel is deemed a “consumer reporting agency.” Although the “Vail letter” addressed whether the FCRA applied to sexual harassment investigations, a subsequent FTC opinion letter expanded the opinion to apply to all workplace investigations of misconduct. The “Vail letter” put employers in an impossible situation. State and federal courts had held that employers could reduce potential liability under the anti-discrimination laws by conducting prompt and effective investigations in response to reports of workplace harassment. But the effectiveness of such investigations would be severely compromised if, under the FCRA, employers had to alert accused harassers of the nature and scope of the proposed investigation before it began. Dishonest employees would be given an opportunity to destroy evidence or coerce witnesses. Also, because the FCRA required the employer to give the targeted employee a copy of the final investigative report, including the identity of witnesses, if the employer intended to take adverse action against the employee, the Vail letter increased the potential for retaliation by the accused against his accusers. Ultimately, employees would be deterred from reporting workplace misconduct. Courts and commentators lambasted the Vail letter. Nonetheless, the FTC said the letter correctly interpreted the statute and that it was up to Congress to change it. Although it took nearly four years, Congress finally did just that. The Fair and Accurate Credit Transactions Act amends the FCRA to exempt from the act’s notice and disclosure requirements an investigation into suspected work-related misconduct or compliance with the law, rules of a self-regulatory organization or the employer’s written policies. The new law still requires employers to provide the accused employee with a “summary report” of the investigation if the employer intends to take adverse action, but employer may withhold the identity of witnesses and other sources of information. The Fair and Accurate Credit Transactions Act of 2003 is far from a perfect response to the problems created for employers by the FCRA and the Vail letter. For one thing, Congress did not define the meaning of the “summary report” and this will, no doubt, be the source of future litigation. In the end, however, the new statute is a reasoned and long overdue response to an unreasonable interpretation of the law. DelDuca is a partner and Kelly is an associate at Dechert in Princeton, where they represent management in labor and employment matters.

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