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ABSTRACT The United States Supreme Court has affirmed an employer’s “vicarious liability” for failing to take reasonable care to prevent or correct promptly sexual harassment or other forms of workplace discrimination. The timely, complete, and objective investigation of such claims is central to an organization’s ability to protect itself from, or during, litigation. Organizations without in-house expertise to conduct such investigations will likely seek expert assistance from knowledgeable and experienced consultants or private investigators from outside the firm. This article examines the significant consequences of an organization’s decision to outsource investigations of workplace harassment following a claim of wrongdoing. According to a recent letter ruling by Federal Trade Commission staff, such externally conducted investigations fall under the provisions of the Fair Credit Reporting Act, thus placing additional compliance burdens on firms attempting to rid the workplace of discrimination. This paper reviews these developments, offers advice on managing the investigative process, and suggests changes in public policy. INTRODUCTION The importance of promptly and competently investigating claims of workplace discrimination, particularly claims of sexual harassment, cannot be overestimated. Since the 1991 confirmation hearings of Clarence Thomas as Associate Justice of the United States Supreme Court, the number of charges filed with the Equal Employment Opportunity Commission (EEOC) has risen substantially, as have the liability risks for all organizations, large and small. Because federal law caps the total of compensatory and punitive damages in workplace discrimination claims at between $50,000 to $300,000 depending upon the number of employees within the firm, many claims are litigated in state courts under state law where total damages may not be limited. For meritorious cases, out-of-court settlements and jury-trial awards increasingly reach six or seven figures. [FOOTNOTE 1]These heightened economic risks mandate that leaders and advisors of organizations take a special interest in understanding workplace discrimination law and minimizing (or avoiding altogether) the attendant threat of litigation. In the 1998 decisions of Burlington Industries v. Ellerth [FOOTNOTE 2]and Faragher v. City of Boca Raton [FOOTNOTE 3], the United States Supreme Court reaffirmed the principle that employers may be held liable for not establishing, disseminating, and consistently enforcing a policy that prohibits sexual harassment. These two cases also confirm the need for employers to implement due process concepts by conducting a “reasonable” investigation when a complaint alleging sexual harassment arises. On the heels of the Supreme Court’s rulings, the EEOC issued revised enforcement guidelines regarding employer liability for sexual harassment committed by supervisors. [FOOTNOTE 4]The EEOC emphasized the importance of prompt, thorough, and impartial investigations conducted by well-trained investigators. Workplace investigations perceived to be fair may help insulate the firm from potential litigation, but merely adhering to the letter of the law may not guarantee such a perception. [FOOTNOTE 5]Moreover, it may be that the perception of a fair and objective inquiry into alleged sexual harassment is best achieved by outsourcing these investigations to a neutral, professional third party. [FOOTNOTE 6]Undoubtedly, many organizations — particularly small- and medium-sized entities — will find it more cost-effective when conducting investigations in compliance with EEOC guidelines to seek assistance from knowledgeable, experienced, and unbiased outside investigators. This decision, however, has significant unintended consequences: it forces organizations using outside investigators to comply with the provisions of the Fair Credit Reporting Act (FCRA). [FOOTNOTE 7]A 1999 letter opinion by the staff of the Federal Trade Commission (FTC) interpreting the 1997 amendments to the FCRA indicates that the newly expanded disclosure, notification, and consent requirements apply to all employers who use “consumer reports” (e.g., outside investigations) for making employment decisions. [FOOTNOTE 8]Therefore, employers who use third parties to investigate claims of sexual harassment (or other forms of discrimination) must comply with the FCRA’s new disclosure requirements. This article reviews why investigations into allegations of harassment are necessary. We then describe the key characteristics of an effective investigation. The third section examines the recent FTC letter ruling on sexual harassment investigations. Next, this article presents suggestions for dealing with the FTC letter ruling in light of the requirements associated with a thorough and confidential investigation. The final section suggests changes in public policy that frees organizations from these new compliance burdens. THE NEED TO INVESTIGATE The failure to investigate — and to investigate competently — will have a significant negative impact on the firm by making it vulnerable in two ways. First, faulty investigations of discrimination and harassment claims inevitably lead to judgments in favor of alleged victims. Second, damages will be awarded to alleged harassers whose terminations are based upon insufficient evidence of wrongdoing. This multiple exposure to liability forces the employer to consider the very real possibility of defending harassment-related claims from diametrically opposing viewpoints. The margin for error is narrowing for the employer who must deal with a harassment claim. Therefore, a far greater need exists now for the employer to conduct a vigorous and effective investigation of allegations of impropriety. PROTECTING THE ALLEGED VICTIM’S RIGHTS While employers today must investigate claims of harassment, the Supreme Court’s decisions in Burlington Industriesand Faraghercreate, in many situations, a new affirmative defense. The EEOC guidelines interpreting these cases state that a claim by an employee or former employee alleging that an unlawful hostile environment existed in the workplace can be successfully defended where the employer shows (1) that the employer exercised reasonable care to prevent and correct promptly any harassment, and (2) that the employee unreasonably failed to take advantage of any corrective opportunities provided by the employer. The duty of the employer to exercise “reasonable care” necessarily requires the employer to conduct some type of investigation once management learns of the supposed harassment. PROTECTING THE ALLEGED HARASSER’S RIGHTS Not to be ignored, those accused of sexual harassment are bringing legal action with greater frequency. Two reasons appear to underlie this trend. First, a number of alleged harassers are wrongly accused — the proportion of unsupportable claims filed with the EEOC climbed from 30.4% in 1995 to 42.3% in 1998. [FOOTNOTE 9]Second, employers have started adopting “zero tolerance” policies regarding harassment. Some employers, fearing liability for violating the laws prohibiting sexual harassment, are reacting to an allegation of sexual harassment by terminating the employee accused of misconduct before any type of “procedural due process” is provided the alleged perpetrator. The development of a formula protecting organizations against these lawsuits is still in its infancy. However, the Supreme Court of one major state provided guidance by ruling that the termination of an employee for sexually harassing a co-employee is not wrongful under state law if the investigation was conducted in good faith and the investigation generated reasonable grounds to believe that harassment occurred, even if the plaintiff in the original suit was unsuccessful. [FOOTNOTE 10]The employer’s defense in this type of case is still based on the fact that the employer conducted a reasonable investigation. Whether an organization performs this duty in-house or, alternatively, outsources the investigation, it must know that a reasonable investigation has been performed. ELEMENTS OF A REASONABLE INVESTIGATION Legal issues associated with conducting a reasonable investigation are best considered in three sequential stages: (1) pre-investigation, (2) actual investigation, and (3) post-investigation. THE PRE-INVESTIGATION STAGE At the first hint of impropriety, management should investigate allegations of harassment or discrimination. However, because the threat of defamation arises concurrently with the allegation, it is wise for selected corporate officials to check basic facts associated with the allegations before a formal investigation is ordered. For example, if after a cursory review of the complaint it is clear that the behavior could not have occurred in the manner described by the alleged victim (e.g., the alleged harasser was on vacation during the period in which inappropriate behavior was stated to have occurred), then there is no need for an investigation. Or, if overwhelming evidence is presented at the earliest possible time that the allegation of sexual harassment was motivated by retribution toward a jilted lover, no further investigation is warranted. THE INVESTIGATION STAGE The reasonableness of an investigation should be determined with three factors in mind: (1) process, (2) personnel, and (3) confidentiality. Process. A thorough investigation into a complaint of sexual harassment, for example, involves interviewing the complainant, the alleged harasser, and relevant witnesses. The focus of most inquiries of this type relates exclusively to the question of whether the alleged harasser created a “hostile work environment.” The thrust of the interviews is to determine the facts; accordingly, the investigator must distinguish statements of fact from mere conjecture. All aspects of the allegations and statements to the contrary made by the accused harasser must be investigated; many employees who file a complaint or are the subject of an allegation of sexual harassment are emotionally involved and may not articulate specifics clearly. Finally, the investigator must make determinations when conducting interviews and when writing the report regarding the credibility of the parties and witnesses. This requires the interviewer to make subjective judgments regarding demeanor (e.g., eye contact) and motivation (e.g., witness recently turned down for a promotion by accused harasser) — almost always tough calls. Personnel. Actual and perceived impartiality is best attained when an independent individual, perhaps from outside of the organization, conducts the investigation. While a person from the organization’s human resources department or a member of management from another division are sometimes sought to conduct the investigation, typically large organizations can afford to create a cadre of investigators who can perform the investigation at the highest levels of proficiency. Even then, many may still consider the investigation tainted. An outside investigator may be a human resources consultant, a private investigator, or an attorney not directly connected with in-house counsel. Regardless of the professional credentials of the investigator, the individual conducting the investigation should be skillful in interviewing witnesses and evaluating their credibility. Further, the interviewer must refrain from showing favoritism to either party, as any oral statement or body movement by the investigator may impact negatively on the honesty of responses from the individual being interviewed. The individual must also possess an up-to-date understanding of discrimination and harassment law, given that this is a complex and rapidly evolving area. Equally important, the person hired to conduct the investigation should have impeccable credentials in terms of personal and professional integrity. As a result, the demand for outside professionals, due to the 1998 U.S. Supreme Court rulings and the 1999 EEOC guidelines, is growing. Confidentiality. The employer must also consider the degree to which the investigation will (or can) be kept confidential. The individual making the allegations might need to know that the investigation is taking place and the general scope of the investigation in order to guard against retaliation. The accused harasser, once informed of the charges, will have an acute interest in protecting his or her reputation and will similarly desire to know details regarding the inquiry. Out of necessity, since sexual harassment investigations are often of the “she said, he said” variety, third-party witnesses usually must be told the basic allegations in order to provide valuable information capable of corroborating one side or the other. While the investigation may be less painful to parties and witnesses if management seeks to guarantee the confidentiality of harassment allegations, in practice ensuring absolute confidentiality may not be possible. Instead, those conducting the inquiry and making decisions based on the investigation should merely state that they will make reasonable efforts to keep all aspects of the matter confidential. THE POST INVESTIGATION STAGE At the conclusion of the fact-gathering process, the investigator normally prepares a written report. This report should include the interviewer’s perceptions of the individuals examined and, perhaps most important, the investigator’s determination as to the truth of the allegations made in the complaint. While management may reach a contrary decision, usually because of historical information regarding the parties or knowledge of the culture within a particular division of the organization, such action should only take place when the reasons for disagreeing with the investigator’s determination are significant and documented. Because the impartial investigator viewed the individuals while they spoke, great weight should be given to the investigator’s conclusion. Prior to 1999, employers investigating claims of sexual harassment had no reason to consider anything other than the guidelines issued by the EEOC and court decisions. Recent developments, however, have created a need for employers to re-think their investigation strategy. THE IMPACT OF THE FAIR CREDIT REPORTING ACT Congress enacted the Fair Credit Reporting Act of 1970 in response to the inaccurate and improper use of credit transaction records. Its intent was to require consumer reporting agencies to adopt reasonable procedures for meeting the needs of the business community in a manner which is fair and equitable to the consumer, and which ensured confidentiality. In 1997, Congress amended the FCRA in such a way as to increase an employer’s responsibilities when using information acquired from these agencies. Of the many terms defined within the FCRA (as amended), three are particularly critical for our discussion: (1) consumer reports, (2) investigative consumer reports, and (3) consumer reporting agencies. A “consumer report” contains information detailing an employee’s character, general reputation, or personal characteristics. When this information is obtained through personal interviews, the report is deemed an “investigative consumer report.” When an outside investigator is compensated to prepare such reports, that investigator is considered a “consumer reporting agency.” [FOOTNOTE 11] The full impact on employers of the 1997 amendments to the FCRA first came to light in April of 1999 when the FTC staff issued an informal opinion letter in response to a question posed by an attorney from the state of Washington: Does the FCRA apply to outside investigators performing sexual harassment investigations? The staff opinion letter determined that “outside organizations utilized by employers to assist in their investigations of harassment claims ‘assemble or evaluate’ information.” Accordingly, these outside investigators are considered to be consumer reporting agencies involved in producing investigative consumer reports. [FOOTNOTE 12]Whether this extension of the FCRA was intended by Congress is unknown, but we strongly doubt Congress foresaw this result. Clearly, this letter opinion has major implications for employers choosing to outsource investigations of harassment. As interpreted by the FTC staff, the 1997 amendments to the FCRA greatly increased the burdens on businesses using an outside investigator to conduct workplace investigations. Employers must now be aware of their duties at a number of critical stages: (1) before an investigation is initiated, (2) when an outside investigator is commissioned, and (3) when an adverse employment action is contemplated or taken. At each of these stages, the employer’s duties involve issues of either notification or authorization. THE PRE-INVESTIGATION STAGE Employers are now required to provide multiple notices to the person accused of harassment. In the pre-investigation stage, the first disclosure requires employers to provide written notice to employees, using clear and conspicuous language, that a consumer or investigative report may be obtained for subsequent employment purposes. This notice must be separate and apart from any other disclosures that the employer might make to the employee. The employee must give his or her written consent before any investigation can be initiated. THE INVESTIGATION STAGE When an employer deems an investigation appropriate, a second duty to disclose arises. This second disclosure must be made within three days of requesting an investigative report from the outside investigator, now deemed to be a “consumer reporting agency.” Within this notice, the employee must receive a third disclosure of his or her right to request information on the nature and scope of the investigation. Should such a request be made, the employer must describe, in writing, the nature and scope of the investigation within five days of the request. The employer must also certify to the outside investigator that all required disclosures have been made to the subject of the investigation. For a business community overburdened with the reporting and compliance costs of governmental regulations, these added disclosure requirements further complicate the already delicate task of conducting sexual harassment investigations. THE POST INVESTIGATION STAGE Because the FCRA attempts to provide individuals with an opportunity to correct inaccurate or incomplete information, a copy of the investigator’s report must be given to the employee if the employer plans to discipline the employee based in whole or in part on information contained within that report. Additionally, the employer must provide the employee with a copy of his or her rights under the FCRA, in a form prescribed by the FTC. The FTC staff indicates there should be a five-day waiting period between the time the employee receives notice of intended adverse action and the employer actually taking action. [FOOTNOTE 13] When an adverse employment action is taken, the employee must be provided with oral, written, or electronic notice of such action. This adverse action notice will include the name, address, and telephone number of the outside investigator that compiled the report. Also contained in that notice is a statement that the outside investigator did not make the adverse employment action, and is unable to provide the employee with the specific reasons why the adverse action was taken. The employee must also be provided with notice of his or her rights under the FCRA to obtain a free copy of the report from the outside investigator within 60 days, and that the accused has the right to dispute the accuracy or completeness of the information contained therein. MANAGING THE OUTSOURCING DILEMMA Outsourcing investigations to specialists helps to minimize the economic risks associated with adverse employment decisions based on faulty or incomplete investigations conducted in-house. Because of the FCRA’s intrusion, the decision to outsource investigations of harassment immediately places additional compliance burdens on these employers. For example, the assurance of confidentiality during investigations is critical for obtaining the cooperation of individuals who might be of assistance in providing data to be used in assessing the allegations and crafting an appropriate response. The FCRA’s requirement that sources of information, favorable and unfavorable, be disclosed to the employee under investigation will possibly have a chilling effect on the willingness of employees to cooperate in the investigation for fear of retaliation. Employers may think twice about using outside investigative services, but this would only increase the attendant risks associated with performing in-house investigations conducted by non-specialists — a Catch-22 to be sure! When an organization chooses to use outside professional investigative services, it is incumbent upon the organization to educate itself about — and immediately implement — the provisions of the FCRA, especially in light of the FTC’s recent opinion. Moreover, willful noncompliance leaves companies vulnerable to punitive damages. An organization may limit its liability associated with violating the FCRA by taking the following actions: Institute notification procedures. To comply with the FCRA’s notification requirements, but without drawing unnecessary attention in any subsequent investigation, employers should require that all job applicants sign an authorization for conducting an investigation. Similarly, for current employees, the organization should have everyone sign a blanket authorization. The FTC staff has suggested that such one-time disclosures and authorizations are adequate for employers to obtain consumer reports about applicants and current employees at any time during the application process or during an employee’s tenure. [FOOTNOTE 14]These blanket disclosures and prior written authorizations may cause employees to request access to any investigation obtained on them. The company will need to weigh the investigative benefits against the potential administrative costs associated with this tactic. Utilize surveillance-only investigation. Outside investigators can be asked to conduct surveillance only, using direct observation (perhaps aided by videotape) exclusively. The most burdensome of the FCRA’s provisions only apply when an outside investigator uses personal interviews to gather information. This surveillance-only tactic, however, would surely be of limited value in determining and assessing the facts (or fictions) of a particular complaint of harassment. Request redacted reports. When confronting the alleged harasser, the company employing outside investigative assistance must be prepared to provide the employee with a copy of any written report provided by the investigator. Because the FCRA prohibits employers from editing a report from an outside investigator after the investigator submits the report, an employer utilizing outside investigators might request directly that the investigator submit only a redacted report. Nothing in the FCRA requires that outside investigators identify the sources relied upon in creating the report. While ensuring confidentiality, this tactic also has dubious value in assessing the facts of the case, and for crafting an appropriate resolution and remedy. Taking an adverse employment action without the ability to “name names” leaves the employer vulnerable to claims of defamation or wrongful discharge. Establish guidelines for the report. The report needs to be prepared with the understanding that it contains no more information than is necessary for the employer to make a fair and appropriate decision. The investigator must understand that the prepared report will be provided to the employee under investigation, and both the investigator and the employee should be aware of the possible consequences of such a required disclosure. A PROPOSAL FOR CHANGES IN PUBLIC POLICY The proliferation of legislation affecting the workplace creates compliance dilemmas for all organizations. This is especially true when overlapping legislation seeks to accomplish different public policy goals. The previously cited FTC staff letter opinions purport to be consistent with the legislative intent of the modifications to the FCRA. If true, then it may be difficult to lobby for meaningful reform. Arguably, though, there is little evidence to conclude that Congress anticipated (or intended) that the provisions of the FCRA would be brought to bear on employers seeking to comply with the EEOC’s desire to eliminate harassment from the workplace. It appears that the FTC’s interpretation of the FCRA represents an unnecessary intrusion into an employer’s good-faith efforts to establish and implement effective processes for investigating complaints of harassment. The disclosures and notifications now required by the FCRA both unfairly and inappropriately burden the employer attempting to effectively investigate and resolve the most sensitive of workplace complaints. Organizations concerned with the FTC staff’s interpretation of the 1997 amendments to the FCRA should lobby Congress to either seek a complete exemption for using outside investigators, or consider two possible intermediate revisions. [FOOTNOTE 15] Complete exemption from the FCRA. The most direct way to provide relief to organizations using outside investigators is to simply exempt investigations involving workplace harassment and discrimination from the provisions of the FCRA. This would signal Congress’s appreciation for the unique issues that arise in addressing these significant problems. Suggested revisions. Short of seeking a complete exemption, two intermediate kinds of legislative relief should be sought. For investigations of harassment and discrimination claims, the FCRA should be amended to eliminate the requirement that the employer obtain the consent of the accused in order for an investigation to be initiated. This would alleviate the problems associated with situations in which a blanket consent was not obtained prior to the investigation. To facilitate investigations and to protect as much as possible the confidentiality of witnesses, the FCRA also should be amended to allow employers to edit or redact full investigative consumer reports. This would protect witnesses and other sources of information from possible retaliation or future harassment. Taken together, these simple proposals would effectively eliminate the dilemmas created by the overlapping and competing public policy goals of the EEOC and the FCRA. Implementation of any one of them, however, would still offer major relief to those organizations who find it necessary to utilize outside investigations in their efforts to comply with the public policy goal of eliminating harassment from the workplace. CONCLUSION The decision to outsource investigations of harassment now places an onerous set of obligations on organizations. In complying with the EEOC’s directive to conduct timely, thorough, and competent investigations, outsourcing these investigations brings the organization under the regulatory hand of the FTC and the provisions of the FCRA. We have reviewed these developments and have offered practical advice on managing the investigative process. Changes in public policy are needed to eliminate the unintended consequences of the decision to outsource investigations. This article is excerpted with permission from CCH’s Journal of Employment Discrimination Law, Fall 2000 Edition. Dr. James Morgan is a Professor of Management within the College of Business at California State University, Chico. A specialist in employment law, he received his J.D. from the University of California, Davis. Professor Morgan may be contacted at [email protected]. Dr. James Owens is an Associate Professor of Management within the College of Business at California State University, Chico. He received his J.D. from Western State University College of Law. He recently co-authored a textbook on business law. Professor Owens may be contacted at [email protected]. Dr. Glenn Gomes is a Professor of Management within the College of Business at California State University, Chico. He received his Ph.D. in Business Administration from the University of Southern California. Professor Gomes may be contacted at [email protected]. ::::FOOTNOTES:::: FN1 See, e.g., Brian Heshizer & Michael Owendorff, ” Sexual Harassment in the Workplace: A Legal Review of Recent Statutory, Administrative, and Case Law,” 7 Journal of Individual Employment Rights 199 (1998-99) and Clifford M. Koen & James D. Morgan, ” Guidelines for Conducting Effective Sexual Harassment Investigations,” 58 (6) Supervision 6 (June, 1997). FN2 Burlington Industries, Inc. v. Ellerth, 118 S.Ct. 2257 (1998). FN3 Faragher v. City of Boca Raton, 118 S.Ct. 2275 (1998). FN4Enforcement Guidance on Vicarious Employer Liability for Unlawful Harassment by Supervisors, EEOC Compliance Manual, No. 915.002 (June 18, 1999), at www.eeoc.gov/ docs/harassment.html[CCH EEOC Compliance Manual, �3116]. FN5Peter. W. Dorfman, Anthony. T. Cobb, & Roxanne Cox, ” Investigations of Sexual Harassment Allegations: Legal Means Fair– Or Does It?” 39 Human Resources Management 33 (Spring 2000). FN6Jonathan Day, ” The Problem of Perceptions: Reasons for Outsourcing the Sexual Harassment Investigation,” 27 Employment Relations Today 101 (Spring 2000). FN7Fair Credit Reporting Act, 15 U.S.C. �1681, et seq. FN8FTC Staff Opinion letter to Judi Vail, April 5, 1999, reproduced at www.ftc.gov/os/statutes/ fcra/vail.htm. FN9EEOC, Sexual Harassment Charges EEOC & FEP as Combined: FY 1992-FY 1998, at www.eeoc.gov/ stats/harass.html. FN10 Cotran v. Rollins Hudig Hall International, 17 Cal. 4th 93 (1998). FN11 See15 U.S.C. �1681a. FN12 SeeFTC staff opinion letter, note 7 above. FN13FTC Staff Opinion letter to Eric Weisberg, June 27, 1997, reproduced at www.ftc.gov/os/statutes/ fcra/weisberg.htm. FN14See, e.g., FTC Staff Opinion letter to Susan Meisinger, August 31, 1999, reproduced at www.ftc.gov/os/ statutes/fcra/meisinger.htm. FN15On November 16, 1999, 106 H.R. 3408 was introduced to amend the FCRA to exempt certain investigative reports from the definition of “consumer report.” The bill was referred to the Committee on Banking and Financial Services. The full text can be found at www.thomas.gov. � 2001, CCH INCORPORATED. All Rights Reserved.

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