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Pizza Hut Delivered an FCRA Class Action for Use of Background Reports

Written by Allison Reddoch on February 10, 2015

Pizza Hut became the latest major restaurant chain to come under fire for how it screens potential hires. The lawsuit, filed in New York federal court, accuses Pizza Hut of violating the Fair Credit Reporting Act (“FCRA”), which regulates employers’ use of background reports during the hiring process.

The FCRA is widely-known as the federal law that regulates the exchange of credit information between credit bureaus and lenders. For decades, most lawsuits targeted the nation-wide credit reporting agencies (“CRAs”) and claims against employers were rare. However, since early 2014, there have been approximately thirty FCRA class-action lawsuits brought against employers in the retail, restaurant, theater, manufacturing, and transportation industries.

This recent rise in FCRA class actions is likely due to the plaintiff’s bar view that the FCRA’s remedial provisions are “class action friendly.” An applicant or employee may sue an employer for “negligent” or “willful” non-compliance with the FCRA. Class actions typically allege willful non-compliance because plaintiffs can pursue statutory damages (ranging from $100 to $1,000) for each alleged “willful” violation. In contrast, plaintiffs may only recover “actual damages” for alleged “negligent” violations. Typically, because an employer’s violation of the FCRA concerns paperwork defects, actual damages are nominal at best. Further, the U.S. Supreme Court’s 2013 ruling that individualized damages issues may preclude class certification in certain cases may have had the unintended effect of increasing the FCRA’s appeal to class action lawyers. Many believe that the statutory damages under the FCRA make class certification easier to obtain because individualized damages assessments are unnecessary. Lastly, and quite possibly most appealing to the plaintiffs’ bar, is that the FCRA allows prevailing plaintiffs to recover their attorneys’ fees.

Of course, the headline catching, high dollar settlements have also driven the increase in FCRA class action litigation. In October 2014, grocery chain Publix Super Markets, Inc. and discount retail chain Dollar General Corp. agreed to settle FCRA class actions for $6.8 million and $4 million respectively. While these settlement figures are dwarfed by the number of high-profile settlements in cases brought against CRAs, the plaintiff’s bar remains steadfast in their pursuit of class claims against employers.

The lawsuit filed against Pizza Hut is illustrative of the most popular claims brought against employers; namely that the employer’s background check disclosure form contains “extraneous” language, such as a release of liability, which is not permitted under the FCRA. Another common cause of action attacks an employer’s failure to provide any pre-adverse action notice, or if notice is provided, the employer failed to wait an appropriate amount of time before taking final adverse action against an individual.

To mitigate any chance of FCRA litigation, employers should first review their written disclosure to ensure that it is “clear and conspicuous” to the applicant or employee that a consumer report may be obtained as part of the hiring, retention, or promotion process. The disclosure must also be a stand-alone document. If the employer intends to take an adverse action, even if only based in part on the report’s content, the employer must provide a “pre-adverse action notice” to the individual as well as a copy of the consumer report and the statutory Summary of Rights. If the employer takes the adverse action, meaning it denies employment or takes any other employment action that adversely affects any current or prospective employee, the employer must provide a second adverse action notice, which must include specific text. While the FCRA is silent concerning the minimum amount of time an employer must wait between delivering the pre-adverse action notice and adverse action notice, courts have generally found five business days reasonable.

While there is never any guaranteed protection that your company won’t share the FCRA spotlight with Pizza Hut, Michaels, Paramount Pictures, Whole Foods, Dollar General, Publix Super Market, or LinkedIn, creating and implementing policies and procedures that ensure compliance with the technical requirements of the FCRA will go far in defending against any claims that your company “willfully” violated the FCRA.