Employer Investigations of Employee Misconduct in relation to the Fair Credit Reporting Act

Testimony of the National Consumer Law Center and U.S. Public Interest Research Group (PIRG) before the Subcommittee on Financial Institutions and Consumer Credit of the House Committee on Banking and Financial Services

Madame Chairwoman, and Members of the Committee, on behalf of our low income clients, the National Consumer Law Center¹ thanks you for inviting us to testify today regarding appropriate changes to the Fair Credit Reporting Act ("FCRA")in relation to third party investigations of employees. Our testimony is also on behalf of the U.S. Public Interest Research Group² , which represents its members and all consumers on credit reporting and other issues. As you may know, we at the National Consumer Law Center are lawyers expert in the consumer credit laws. As the subject of this hearing also requires an understanding of the interactions between employees and employers in the workplace, we have worked closely with the AFL-CIO to develop the recommendations that we make to you today.³

The first and most important point that we want to emphasis is that the privacy protections in the FCRA were applied to the employment arena deliberately and appropriately because of serious abuses of employees. The investigated employee may be the wrongdoer or the victim. We cannot proceed to carve out broad scale exceptions to this important law on the assumption that every investigated employee is guilty. If not guilty, the employee may be more than just mistakenly accused. The accusation against the employee may be malicious and vindictive, because the employee is a woman in a male environment, a union organizer, a minority person, or simply disliked by someone. Any introduction of increased secrecy in employers' third party investigations must be balanced by an understanding that the secrecy can foster injustice as well as help ferret out injustice.

Historical Application of FCRA to Investigative Reports for Employment Purposes

Since its first enactment in 1971, the Fair Credit Reporting Act has applied to employment.⁴ In fact, a great deal of the original impetus for the legislation was not errors in standardized factual credit reports, although those were a growing problem; it was to rein the investigative reporting industry. When Senator William Proxmire, former chairman of the Senate Banking Committee, introduced the bill in 1969 that became the Fair Credit Reporting Act when finally passed in 1970, he pointed to the devastating impacts on consumers in employment related investigations that can be caused by erroneous information that the FCRA was designed to address. According to the Congressional Record, Senator Proximire said, in 1969:

The changes made in the 1996 amendments to the FCRA relating to employment were deliberate as well. The Senate Committee Report considering the employment-related FCRA amendments of S. 783 refers repeatedly to use of consumer reports on "current employees" and makes clear that Congress realized that consumer reports could be used in the context of workplace misconduct, as "where the employer believes that the fraudulent or criminal activity [of an employee] is ongoing and directly related to the employment involved."⁶ The news media at the time was filled with stories of employer related abuses of investigatory reports. For example, a Newsday article, from December, 1991, cited the following horror story:

The changes made to the Fair Credit Reporting Act were clearly in direct response to these and similar horror stories. Changes to the only significant federal law protecting the privacy and accuracy of information gathered on consumers should not be made lightly.

Concerns with H.R. 3408 (Sessions-TX), the Fair Credit Reporting Act Amendments of 1999.

The articulated basis for H.R. 3408 is the extent to which the application of the FCRA's requirements stymie employer's third party investigations into employee misconduct. The problems cited include the need to request the consumer to consent to the investigation, the consumer's right to a copy of the report when adverse action is taken, and the impact that could have on possible victims of a consumer's harassment. We understand that there is a need for a limited exemption in certain circumstances from the full application of the FCRA to investigatory reports for employment purposes, however, H.R. 3408 would eviscerate the FCRA.

H.R. 3408 would add two new subparagraphs to Section 603(d)(2)(A) -- the section on exclusions from the definition of a "consumer report" covered by the Act. The first proposed subparagraph is overly broad, but at least it addresses the stated problem. The second subparagraph has nothing to do with the employment related investigations and would exempt all types of reports prepared for litigation, insurance, fraud, or any other violation of law, from the protections of the Act. As any report can be prepared for one or more of the stated reasons, almost all consumer reports, and certainly all investigative reports would be exempt from the law. The effect of adding this subparagraph is similar to wiping the law off the statute books altogether.

Our Recommendation for Legislative Change to Address the issues Raised by Third Party Investigations Related to Employment.

As the AFL-CIO points out in their comments to the Committee, third-party investigations of employees continue to pose a threat to worker's rights in many workplaces. Therefore, any amendment to the FCRA carving out exemptions for these investigations should be narrowly crafted so as to specifically address the proven problems, and go no further.

We think the approach outlined by the Federal Trade Commission in the Chairman's letter to Congressman Sessions of March 31, 2000 is a good place to start. We appreciate the careful delineation of sections of the Act which the FTC proposes to eliminate for compliance with employment related investigative reports. Specifically, the FTC proposes only to avoid the requirements for the consumer's notice and consent8 before an investigative report is requested, and the consumer's right to receive a full copy of the report prior to adverse action being taken, and allow the employer to provide a "summary containing the nature and substance of the information" in the report instead. We endorse this limited approach to amending the FCRA.⁹ We would also recommend some additional specific protections:

• There should be some notice of the investigation required in the event of no adverse action. Under current law, employees get a notice of the investigation before it is launched. If there is no requirement for this notice, employees should be informed of the investigation at some reasonable point in time (say 30 days) after it is initiated even if there is no adverse action taken. Without some notice to the consumer required, employers would be permitted to contract for third party investigations of their own employees without any notice ever. Fishing expeditions and attempts to deter union organizing would be unregulated.

• The nature and substance of the summary report should allow the affected consumer a meaningful disclosure of information. While we all agree that the protection of victims of racial and sexual harassment dictates that victims' names or other identifying information should not be disclosed to the investigation's target, that employee should have the right to receive all other relevant information which is being used as basis for adverse employment action. There are certainly many stories of consumers and employees who have been the victims of incorrect reports, it is therefore essential to ensure that consumers have the right to receive sufficient information of what is in the report to be able to challenge gross inaccuracies. For example, employees may be terminated from employment as a result of an arrest which never led to a conviction, the arrest was due to a mistaken identity, the arrest occurred when a personal foe filed a baseless criminal complaint and charges were dropped as soon as the police conducted an initial inquiry, or the arrest occurred when the individual was a juvenile.¹⁰

• Third party investigations should be limited to specifically named illegal activities. The stated need for these changes is the deterrent effect the application of FCRA requirements has in civil rights cases. Allowing investigations to proceed without the protections of the FCRA for other allegations of illegal activities should be clearly justified, as well.

Conclusion

Representatives of the National Consumer Law Center and U.S. PIRG have been participating in meetings with other interested parties on this matter, including the AFL-CIO, the Lawyers Committee for Civil Rights Under, and other groups representing victims of civil rights violations. These meetings have yielded basic agreement that there should be an amendment to address the problems raised by the application of the FCRA to investigations of civil rights violations. As to what that amendment should say, we are close, but have reached no final agreement.

This group has also had one meeting with employer representatives. No clear consensus was arrived at during this meeting. The National Consumer Law Center and U.S. PIRG will continue to meet with all of these groups to try to arrive at a consensus proposal to deal with the issues raised by the application of the FCRA to third party investigations initiated by employers.

Appendix 1

Our Proposals for Additional Amendments to the Fair Credit Reporting Act.

The Fair Credit Reporting Act is the only significant federal law that protects the privacy of American consumers and ensures accuracy in the information which is gathered by corporations about us all. Unfortunately, as has been recognized by this Congress, and by the Clinton Administration,¹¹ there are numerous loopholes in this law, that must be closed to protect American consumer fully. The flaws in the FCRA must be addressed. Some of the more essential problems in this important federal law which this Congress should include in any legislation amending this Act, include:

1. Prohibiting affiliate sharing of information without the consumer's specific consent.

One bitter compromise in the 1996 amendments, opposed by consumer groups and the Federal Trade Commission, was the new language that allows financial firms to share confidential experience and transaction information among affiliates. The provision did not have the benefit of either hearings or an adequate record. Acceptance of the provision was presented by the financial industry as its quid pro quo for the supposedly onerous new compliance requirements that the act would place on them. Since enactment of the 1996 FCRA amendments, the picture on affiliate sharing is clearer and the need for amendments to protect consumer privacy even greater, as shown by the ongoing debate over financial privacy.

In our view, the sharing of experience and transaction information among affiliates for secondary purposes unrelated to a consumer’s account should not be allowed unless the consumer consents. Language in HR 3320 (Markey-Barton) would continue to allow affiliate sharing for account-related purposes, but not for such secondary purposes, unless the consumer consents.

2. Establish furnisher liability for the submission of false information or willful failure to comply with the Act.

Businesses who furnish information to the credit reporting agencies should be liable to consumers for providing false or inaccurate information, especially when done willfully. Reporting agencies rely unquestioningly on the information furnished by creditors and others. Yet, the Act currently protects creditors from all liability for furnishing inaccurate information -- even if the consumer has repeatedly informed the creditor of errors, or the information is blatantly wrong, or the information is furnished spitefully.¹² Furnishers should be liable, like everyone else, for violations of the Act. Not only does the FCRA not provide consumers an avenue to redress furnishers malfeasance, it immunizes furnishers from liability for civil actions consumers otherwise would have against furnishers under state law. ¹³

3. Require credit bureaus to provide a free report to consumers on request to detect identity theft early and to improve accuracy.

The percentage of reports containing serious errors remains staggeringly high. The proven best way to gain accuracy is to provide copies of credit reports to consumers. In the commercial world, Don & Bradstreet mails free copies unsolicited.

Only six states¹⁴ grant consumers the right to a free credit report annually on request from each of the Big Three credit bureaus: Equifax, Experian and Trans Union. All consumers should have the ability to request a copy of their credit report from the consumer reporting agencies at least once a year to check for fraud and for other inaccuracies. This right is especially important since federal law allows credit reports to be sold for credit, insurance and other "permissible purposes" to any business without a consumer’s consent, except in Vermont, where oral consent is required. Bills with a provision for free credit reports include H.R. 1015, Roybal-Allard, and H.R. 4311, Rep. Hooley.

The FCRA, as amended in 1996, only enables consumers who have recently been denied credit, are unemployed, indigent, or believe themselves victims of identity theft to obtain a free copy of their credit report. Federal law otherwise allows credit reporting agencies to charge $8.50 for a credit report. A few states limit the charge to a lower amount.

4. Provide credit scores and credit score explanations as part of credit reports.

Recently, the online bank called E-Loan began a program to teach its customers about credit scores. The credit reporting agencies, and their credit score contractor, Fair Isaacs, shut the program down. Consumers should have access to their credit scores, which are the mathematical representation of their credit reports and other application information. Most creditors use credit scores, not credit reports, to make credit decisions. Further, instant credit offers are a primary precursor to identity theft and consumers deserve more information about how they are used, yet credit scores are not required to be disclosed as part of credit reports. Proposed legislation by Rep. Chris Cannon HR 2856, would make credit scores part of credit reports.

5. Close the "credit header" loophole:

As part of its negotiations in a 1994 consent decree with TRW (now Experian) that properly prohibited target marketing from credit reports, the FTC erred when it defined certain sensitive personal information contained in credit reports as exempt from the definition of credit report. Under this loophole, the credit bureaus now traffic widely in "credit headers," which include the demographic information found in a credit report that is not associated with a specific credit trade line or public record.

Credit headers may include names, addresses, dates of birth, previous addresses, telephone numbers and Social Security numbers. Credit header databases are resold by the Big Three credit bureaus in bulk and used for a variety of products. Many information brokers operate websites that sell credit headers, along with public records information. Such products often include Social Security numbers, which can be obtained by identity thieves.

Several federal proposals would close the credit header loophole. HR 4311, has been proposed by Rep. Darlene Hooley, Rep. Jerry Kleczka has a broader proposal, HR 1450, to close the credit header loophole and further restrict the use of Social Security numbers.

Appendix 2

Written Testimony Submitted by Deborah Greenfield and Damon Silvers, Associate General Counsels of the American Federation of Labor and Congress of Industrial Organizations, to the House Subcommittee on Financial Institutions and Consumer Credit of the House Banking and Financial Services Committee

Hearing on

the Effect of the Fair Credit Reporting Act on Employer Investigations of Employee Misconduct

May 4, 2000

The AFL-CIO would like to thank the Subcommittee on Financial Institutions and Consumer Credit for the opportunity to submit written comments on this important issue. The AFL-CIO and its member unions are strongly committed to protecting workers both from harassment and discrimination and from invasions of privacy or retaliatory investigations by employers. The Fair Credit Reporting Act is an important measure that protects working families against a variety of abuses in and out of the workplace, abuses which have become ever more dangerous in the age of the Internet. Workers should have legal protections against intrusive and abusive workplace investigations by their employer or their employer’s agents.

The labor movement strongly supports the use of third party investigators by employers in the context of allegations of sexual or other discriminatory harassment or employment discrimination by individual managers. It is often the case that third party investigators are the only avenue through which an organization can discover the truth about conduct by persons in positions of authority within that organization.

The AFL-CIO believes that this Subcommittee should seek to address the obstacles that the Fair Credit Reporting Act places in the way of responsible third party investigations but also preserve both the rights the Act guarantees to all consumers and certain specific rights the Act seeks to provide to employee targets of third-party investigations. We agree with the Equal Employment Opportunity Commission that full application of the FCRA in its current form to investigations of discrimination under Title VII has a chilling effect on statutory enforcement. We do not, however, favor either a broad exemption for employment-related investigations or a complete exemption from all requirements of the Act for Title VII-related investigations.

H.R. 3408, the Fair Credit Reporting Act Amendments of 1999, is neither narrowly crafted nor does it provide meaningful protection to employees facing third party investigations in the workplace. While we are not entirely satisfied with the details of the Federal Trade Commission approach in its letters to the Committee, we believe the agency’s basic philosophy of maintaining some FCRA protections for employee targets of third party investigations is sound. Again, while we differ on a number of important specifics, we believe that philosophical approach is shared by the Society of Human Resource Management and other employer groups that have been working on this issue.

Unfortunately, some employers use investigations as a surveillance tool to deter employees from exercising their rights in the workplace, including enforcing laws such as the Fair Labor Standards Act, and from exercising their rights under the National Labor Relations Act to organize unions. As others have noted, investigations themselves can contribute to workplace discrimination against non-traditional supervisors, or they can be a means by which employers pursue personal vendettas or seek to obtain private information about their employees in general. At the time of the passage of the FCRA, much of the focus in the press was on abusive investigative practices undertaken by Delta Airlines, a largely non-union airline, in interviewing former Pan Am flight attendants who had been union members for jobs after Delta bought Pan Am’s routes.

Under the pretext of investigating allegations or suspicions of theft, product tampering, drug use, racial or sexual harassment, and other illegal conduct, third party investigators gain access to a wide range of information about workers. Some investigations focus on particular individuals. Others cast a much broader net under the guise of enforcing anti-theft or anti-drug policies. Regardless of which type of investigation an employer conducts, much of the information gathered remains unverified, and much of it is the product of coercive and deceptive techniques.

Improper third party investigators present a particular threat to workers’ rights that is significantly greater than that posed by employer investigations. Professional investigators are adept at mining the wealth of information available on the Internet that can be obtained on individuals. They have the resources and expertise to conduct wide ranging interviews outside the workplace that lie beyond the capabilities of the typical employer. They often have operatives trained to pose as employees for the purpose of collecting information from other employees. They have access to surveillance technology that the typical employer does not have. It is entirely appropriate that the FCRA seeks to provide certain protections for consumers in as well as out of the workplace against the abuse of these formidable tools.

Many union contracts do provide protections to employees in the form of just cause clauses, arbitrations of disputes, and other protections against adverse action. But the vast majority of the workforce does not enjoy those protections, including by definition any employee seeking to organize a union. Of course, even a union contract provides limited protection against intrusive surveillance about which the employee and her union are unaware.

Among the specific incidents involving improper investigations that the AFL-CIO is aware of are (1) a major employer who hired a private investigator to pose as an employee during an organizing drive, ostensibly to investigate drug use, but who submitted extensive reports on attitudes toward the union among specific employees; (2) a major employer whose supervisors called in union activists during an organizing effort, read to them from their credit reports, and queried them as to why someone with so many debts would undertake something so risky as getting involved with a union; (3) a food distribution company, whose workers were organizing a union, which responded to an employee ’s discovery of a rodent’s nest in a box of the company’s products by conducting an investigation into alleged product tampering, which led to the employer disciplining one union activist and threatening an entire department with layoff; the Food and Drug Administration conducted an investigation and found no evidence of tampering and the National Labor Relations Board has issued a complaint charging that the discipline and threats were part of an unlawful effort to intimidate employees who were involved in forming a union.

The AFL-CIO believes that what is unusual about these incidents is not that they happened, but that they came to light. While we do not wish to suggest that the majority of employer investigations are improperly motivated, we believe the conduct is sufficiently widespread that workers need certain basic protections when they are the subject of third party investigations. Because employees in the typical case are completely unaware they have been the target of an improper investigation, requirements of good faith or the production at the request of the employee of "summaries" (proposals for which are vague as to their content) are not meaningful safeguards.

Nonetheless, we believe that the chilling effect of the FCRA on Title VII investigations can be mitigated while leaving in place the necessary protections for employees. Application of the FCRA to such pretextual investigations can deter or even cure this type of investigation, particularly through the statute’s notice provisions. Indeed, absent the type of notice provided under the FCRA, the typical pretextual investigation may never come to the attention of the affected employee, but the information gained thereby will arm the employer with powerful weapons to interfere with workers’ protected rights.

Notice and a meaningful summary of the investigation to the employee target should be required for all third party investigations, whether they lead to adverse action or not. Such notice should be made in a timely enough fashion that the employee can act to protect her privacy or enforce her rights. Notice to the employee need not name witnesses, involve other information that would compromise the ability of the employer to conduct the investigation, or be made prior to the investigation’s commencement.

We also believe that any solution should craft substantive protections guaranteeing employees some level of accuracy and care in third party investigations, as the FCRA does now. We believe such protections can be crafted so as not to deter employers from the responsible use of investigators in cases of harassment and discrimination.

In addition, the AFL-CIO favors an amendment that only carves a narrow exemption from the more onerous aspects of the FRCA for third party investigations conducted pursuant to an employer ’s obligations under Title VII and other statutes that explicitly mandate a third party investigation into employee misconduct. With respect to this second category, we believe it is important to specify the precise statutes at issue. We think it is very difficult, if not impossible, to craft "generic" language that captures only this narrow class of investigations.

The AFL-CIO believes that working together all the interested parties to this matter can arrive at a solution that allows responsible employers to use professional investigators to comply with their obligations to prevent workplace harassment and discrimination and protects employees against abusive and intrusive investigations. We have been involved in preliminary discussions with representatives of employers, investigative firms, civil rights, and consumer groups. Those discussions, while at an early stage, appear to us to have a good chance of leading to a broad consensus as to how Congress might best proceed in this matter.

In conclusion, the AFL-CIO would like to thank the Chair for allowing us the opportunity to contribute to the written record of this hearing, and we look forward to working with the Subcommittee to address the important issues posed by the confluence of the FCRA and our civil rights laws.

_________

1 The National Consumer Law Center is a nonprofit organization specializing in consumer credit issues on behalf of low-income people. We work with thousands of legal services, government and private attorneys around the country, representing low-income and elderly individuals, who request our assistance with the analysis of credit transactions to determine appropriate claims and defenses their clients might have. As a result of our daily contact with these practicing attorneys, we have seen numerous examples of invasions of privacy, embarrassment, loss of credit opportunity, employment and other harms that have hurt individual consumers as the result of violations of the Fair Credit Reporting Act. It is from this vantage point--many years of dealing with the abusive transactions thrust upon the less sophisticated and less powerful in our communities--that we supply this testimony today. Fair Credit Reporting Act Fourth Edition (NCLC 1998), and Fair Credit Reporting Act 1999 Supplement (NCLC 1999) is one of twelve practice treatises which NCLC publishes and annually supplements. These books as well as our newsletter, NCLC Reports Consumer Credit & Usury Ed., describes the federal and state law currently protecting all types of consumer loan transactions.

2 U.S. PIRG serves as the national lobbying office for state Public Interest Research Groups. PIRGs are non-profit, non-partisan research and advocacy groups with office around the country. Since 1991, U.S. PIRG has published four reports on credit report accuracy, most recently "Mistakes Do Happen" (March 1998) and three reports on credit report-related identity theft, most recently "Nowhere To Turn" (May 2000). Contact Ed Mierzwinski, Director of Consumer Protection, for more information.

3 We attach to this testimony separate comments provided by the AFL-CIO which deal more specifically with the issues in the workplace raised by this hearing. See Appendix 2.

4 15 U.S.C. § 1681a(d), FCRA § 603(d).

5 115 Cong. Rec. 2411 (Jan.31, 1969).

6 S. Rep. 486, 103d Cong., 1st Sess. 50 (1993).

7 Real Bad Vibes, Newsday, December 10, 1991, at 50. Also see, Elaine Rivera, Hiring Firm Settles With State, Will Alter Interview Questions, Newsday, August 7, 1992, at 4; Lee A. Daniels, Delta Is Accused Of Discrimination In Job Interviews, New York Times February 14, 1992, at B4; Elaine Rivera, Former Pan Am Employees File Complaints Over Delta Interviews, Newsday, December 17, 1991 at 87; Elaine Rivera, Delta Warned Over Job Quiz, Newsday, November 8, 1991 at 7.

8 However, these requirements could already be effectively avoided by employers who give blanket notices and request blanket consent forms to all consumers. Haynes, FTC Informal Staff Opinion Letter, Dec. 18, 1997.

9 We also specifically support the other protections recommended by the FTC in the Chairman's letter, including the requirement that an employer certify the need to avoid the requirements of the FCRA for certain employment related investigations. See discussion on page 4 of the Chairman's letter, Robert Pitofsky, Chairman of the Federal Trade Commission, Letter to the Honorable Pete Sessions, March 31, 2000.

10 See e.g. Wiggins v. Equifax Services, Inc., 848 F. Supp. 213 (D.D.C. 1993).

11 See Announcement by President Clinton in his commencement address to Eastern Michigan University graduates, April 30, 2000.

12 See generally, 15 U.S. § 1681s-2, FCRA §623.

13 15 U.S.C. §1681h(e), FCRA § 610(e).

14 Colorado, Georgia, Maryland, Massachusetts, New Jersey and Vermont. May 1, 2000