Employee Misconduct Investigations Under FCRA

On December 4, 2003, President Bush signed the Fair and Accurate Credit Transactions Act of 2003 (“FACT”) into law. 108 P.L. 159 (2003). The Act, in part, changes a controversial provision of the Fair Credit Reporting Act (“FCRA”) governing third party employee misconduct investigations. 15 U.S.C. 1681-1681u. Prior to the passage of FACT, the Federal Trade Commission (“FTC”), in interpreting a set of 1997 FCRA amendments, took the position that employers were required to obtain employee permission prior to initiating third party misconduct investigations against them, and then had to share the investigatory results with the employee prior to taking any “adverse action.” FACT removes the prior permission and pre adverse action notice requirements, and limits the information employees are entitled to receive once an “adverse action” is taken.

A. FCRA’s Prior Requirements

In September 1997, a set of FCRA amendments substantially increased employer notification and disclosure obligations when using third party “consumer reports” for “employment purposes.” Section 1681b(b)(2)(A) required employers to notify employees in writing and get their written permission prior to obtaining any “consumer report” for “employment purposes.” Once obtained, an employer was prohibited from taking “adverse action” based in whole or in part on the report until the employee was given a pre adverse action notice, including a copy of the report, along with a copy of “A Summary of Your Rights Under the Fair Credit Reporting Act.” 15 U.S.C. § 1681b(b)(3)(A).

Following receipt by the employee of the pre adverse action notification, the employer was free to take the “adverse action,” but was required to provide the employee with additional information in the form of an adverse action notice. 15 U.S.C. § 1681m(a).

In 1999, the FTC, which oversees FCRA compliance, stated in an opinion letter that the 1997 amendments applied to third party investigations of sexual harassment, even when the investigation and report are based solely on employee interviews and a review of internal company records. The letter also indicated that third party investigations of other forms of misconduct would also be covered by FCRA’s requirements. Up to that point, many employers believed that FCRA was limited to traditional credit agency reports. A wide range of employers immediately raised concerns. In particular, they were worried that witnesses would be less open if they knew their names, statements, and all other details of the investigation would be revealed to the employee being investigated. Further, employees could effectively block the investigation by denying permission. FACT resolves many of the employers’ stated concerns.

B. FCRA Relief

FACT eliminates the pre investigation notification and permission requirements. It also relieves employers from any obligation to disclose third party reports to employees prior to taking “adverse action.” Employers need only provide the employee with a summary of the third party’s findings after taking the “adverse action.” These specific changes are scheduled to take effect March 31, 2004, pending FTC and Federal Reserve Board rulemaking. Effective dates for the Fair and Accurate Credit Transactions Act of 2003, 68 Fed. Reg. 74529, 74530 (Dec. 24, 2003) (to be codified at 16 C.F.R. pt. 602).

Specifically, the new requirements relieve employers from FCRA’s permission and disclosure requirements when a “consumer report” is obtained in connection with an investigation of “suspected misconduct relating to employment; or compliance with Federal, State, or local laws and regulations, the rules of a self-regulatory organization, or any preexisting written policies of the employer.” Further, for the exemption to apply the communication cannot be made for the purpose of investigating a consumer’s credit worthiness, credit standing, or credit capacity. Also, the communication may only be provided to “the employer or an agent of the employer; to any Federal or State officer, agency, or department, or any officer, agency or department of a unit of general local government; to any self-regulatory organization with regulatory authority over the activities of the employer or employee; [or] as otherwise required by law.”

Where the report meets the requirements stated above, disclosure requirements are far less onerous. The new requirement states that:

After taking any adverse action based in whole or in part on a communication described [in the law], the employer shall disclose to the consumer a summary containing the nature and substance of the communication upon which the adverse action is based, except that the sources of information acquired solely for use in preparing [the] consumer report need not be disclosed.

C. State Law Considerations

1. Private Sector Employers

Under Connecticut law, private sector employees are entitled to review their personnel files twice each calendar year. Conn. Gen. Stat. §31-128h. A “personnel file” includes any papers, documents or reports used to determine an employee’s eligibility for employment, termination, disciplinary or other adverse personnel action. Conn. Gen. Stat. § 31-128a(3). Arguably, a third party’s report used to take adverse action under FCRA falls within the definition of “personnel file,” and is subject to disclosure. This would defeat FACT’s attempt to keep private the details of an investigation.

Employers faced with this situation may want to consider two avenues to keep more than the FCRA required summary out of employee hands. First, a preemption argument should be considered that FCRA preempts state law and employees are not entitled to greater information than permitted by federal law. FCRA preempts state law to the extent state law is inconsistent with any provision of FCRA. 15 U.S.C. § 1681t(a). In addition, requirements may not be imposed under state law with respect to any subject matter regulated under 15 U.S.C. § 1681m(a), which governs adverse action based on third party consumer reports. 15 U.S.C. § 1681t(b)(1)(C).

Second, Connecticut law provides an exception for documents “being developed or prepared for use in civil, criminal or grievance procedures.” Conn. Gen. Stat. § 31-128a(3). Investigative reports prepared in response to complaints or internal grievances may fall within the exception.

2. Public Sector Employers

Public sector employers are subject to a slightly different analysis. Public employees may access their personnel files through the Connecticut Freedom of Information Act (“FOIA”). Conn. Gen. Stat. § 1-210. The Connecticut Supreme Court has held that internal investigative reports involving alleged employee misconduct are part of an employee’s personnel file. City of Hartford v. Freedom of Information Commission, 201 Conn. 421, 433 (1986). Extending this concept to investigatory reports obtained from third parties seems plausible. As a result, public employees may be able to obtain copies of third party reports under Connecticut FOIA, unless preempted by FCRA, or exempted by some FOIA exception.

The preemption argument available to private sector employers should apply equally to public sector employers as FCRA covers public employers. In addition, FOIA exempts from disclosure “records pertaining to strategy and negotiations with respect to pending claims or pending litigation to which the public agency is a party until such litigation or claim has been finally adjudicated or otherwise settled.” Conn. Gen. Stat. § 1-210(b)(4).

While this language appears narrower on its face that that contained in the private sector law, the Connecticut Supreme Court has held that the passage does not require actual “legal action” to have been filed for the exception to apply. Furhman v. Freedom of Information Commission, 243 Conn. 427, 432-34 (1997) (noting that pending litigation includes an agency’s consideration of action to enforce or implement legal relief or a legal right, and citing Conn. Gen. Stat. § 1-200(9)(C)). Therefore, an investigation triggered by something short of a complaint or charge, such as a grievance or an internal complaint may suffice for the exception to apply. This would be similar to the private sector statute provision. Conversely, while the FOIA exception expires at the time the matter is finally “adjudicated or settled,” no such expiration is contemplated under the private sector law.

Until greater judicial guidance is available, both private and public employers may want to instruct third parties to report their findings in a way that omits identifying language to the extent possible, while still giving employers enough information to take appropriate action. The details left out of the report, but retained by the third party investigator may still be subject to discovery in future litigation, but would not be accessible to employees through either FCRA or state personnel file disclosure statutes.

D. NLRA Considerations

Union employers may also want to consider another preemption argument based on the National Labor Relations Act, 29, U.S.C. § 151 et seq. In Anheuser-Busch, Inc. and IBEW, 237 N.L.R.B. 982 (1978), the Board held that witness statements do not have to be disclosed to union representative or employee/grievants. Where such statements are part of a report furnished by a third party, and may be construed as part of a personnel file under Connecticut law, the Board’s position may help establish that such disclosure is not required.

E. Conclusion

Employers may now hire third party investigators to conduct workplace misconduct investigations without securing prior permission of those being investigated. Also, while employees have a right to a summary of findings after “adverse action” is taken, they no longer have the right to see the report prior to the action being taken.

Unsettled is whether under state laws employees may gain access to the entire report or just the FACT required summary following the implementation of the adverse action. Employees may be barred from receiving the entire report under federal preemption doctrine, and state personnel file statute exceptions.

Connecticut employers will continue to face uncertainty until the courts clear up some of the open issues surrounding the post adverse action disclosure of investigative reports. Only a ruling that full disclosure is not necessary will permit professional, unbiased third parties to investigate sensitive matters without violating the confidences of those participating in the investigation.