Legislation and Compliance update May 2010 - Adverse Action Agitation

By Michael Klazema on 5/18/2010

We all know the adverse action process: before making a negative hiring (or promotion, assignment, or retention) decision based on a consumer report, you must send a pre-adverse action notice that contains a copy of the report and a statement of consumer rights. At this point, an applicant may dispute the report. If the applicant doesn’t dispute the report, you must send an adverse action notice to the applicant, notifying him of the decision and his rights. This is all in addition to the various state-mandated letters often required.

If this process isn’t followed, severe fines could easily result as they did in July of 2004 for two casinos: Imperial Palace, Inc. and Imperial Palace of Mississippi, Inc. Each utilized credit reports in taking adverse action and each failed to supply applicants with the necessary notices, resulting in a $325,000 out-of-court settlement.

While this is well and good, a case recently appeared that is causing consternation in the business world because the employer is being sued even though they delivered adverse action notices. Why? Because of the timing.

In a lawsuit filed on March 14, 2008, Mandy Burghy alleged that her former employer, the Dayton Racquet Club, had taken adverse action against her without providing her with a copy of her report. According to the suit, Burghy was called in for a meeting with the general manager and her direct supervisor to “discuss the results of the credit check that had been performed and how it might affect Burghy’s employment going forward.” It seems likely that the general manager didn’t mean to do anything wrong and was proactively addressing a problem with an applicant. But Burghy argues that she was fired in this meeting, which occurred on the same day that her employer sent a pre-adverse action letter stating that she could dispute the report and that no decision had yet been made. If the general manager, in fact, told her that she was being fired without first giving her the pre-adverse action notice, those actions clearly violate the Fair Credit Reporting Act, despite any good intentions.

Of the five items delineated in the suit, this contention over adverse action is the only one that is being allowed to continue in litigation. This does not necessarily mean that the Dayton Racquet Club was in the wrong, but it means that the case is going to trial unless they settle.

All of this leads to one very simple conclusion: You have to be careful about who you are talking to, what you are saying and when you are saying it. Most importantly, you have to let the adverse action process take place before making a decision. To not do so means running the risk of a lawsuit and the cost of defending the suit, even if you later win it.

Source: Mandy Burghy V. Dayton Racquet Club, Inc. 2010 WL 728282 (S.D. Ohio). US District Court.  Westlaw. 20 June 2010

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