Employers Using Artificial Intelligence for Employment Decisions Must Follow FCRA

Why This Story Matters:

The Consumer Financial Protection Bureau (CFPB) is warning companies using third-party consumer reports including background checks, Artificial Intelligence (AI), or algorithmic scores about workers that they must follow the Fair Credit Reporting Act (FCRA) that regulates employment screening. Employers need to be aware of FCRA responsibilities.

CFPB Issues Guidance on Artificial Intelligence (AI) in Employment Decisions

​​​​​​On October 24, 2024, the Consumer Financial Protection Bureau (CFPB) – which enforces the Fair Credit Reporting Act (FCRA) that regulates background checks in the United States – issued guidance to warn companies using third-party consumer reports including “black box” Artificial Intelligence (AI) or algorithmic scores about workers that they must follow the FCRA.

The Consumer Financial Protection Circular 2024-06 issued by the CFPB in October 2024 presented the question: “Can an employer make employment decisions utilizing background dossiers, algorithmic scores, and other third-party consumer reports about workers without adhering to the Fair Credit Reporting Act (FCRA)?” The CFPB response to that question?

“No. Similar to credit reports and credit scores used by lenders to make lending decisions, background dossiers—such as those that convey scores about workers—that are obtained from third parties and used by employers to make hiring, promotion, reassignment, or retention decisions are often governed by the FCRA,” the guidance stated.

“Many background dossiers that are compiled from databases collecting public records, employment history, collective-bargaining activity, or other information about a worker are “consumer reports” under the FCRA. Other types of consumer reports may include, for example, reports that convey scores assessing a current worker’s risk level or performance.”

Employers using consumer reports “must comply with FCRA obligations, including the requirement to obtain a worker’s permission to procure a consumer report, the obligation to provide notices before and upon taking adverse actions, and a prohibition on using consumer reports for purposes other than the permissible purposes described in the FCRA.”

The third-party providers furnishing these reports are “consumer reporting agencies” regulated by the FCRA, which imposes an obligation to follow reasonable procedures to assure maximum possible accuracy, a requirement to disclose information in a worker’s file to the worker upon request, and a requirement to investigate worker disputes alleging inaccuracies.

“Workers shouldn’t be subject to unchecked surveillance or have their careers determined by opaque third-party reports without basic protections,” CFPB Director Rohit Chopra stated in a press release about the guidance. “The kind of scoring and profiling we’ve long seen in credit markets is now creeping into employment and other aspects of our lives.”

Use of Consumer Reports by Employers to Make Employment Decisions

The CFPB guidance addresses the use of third-party consumer reports by employers to make employment decisions about their workers that increasingly extend beyond traditional background checks and may encompass a wide range of information and assessments about workers. Currently, according to the press release, such consumer reports may be used to:

• Predict worker behavior: This includes assessing the likelihood of workers engaging in union organizing activities or estimating the probability that a worker will leave their job, potentially influencing management decisions about staff retention and engagement strategies.
• Reassigning workers: Automated systems may use data on worker performance, availability, and historical patterns to reassign team members.
• Issue warnings or other disciplinary actions: These consumer reports might flag potential performance issues, leading to automated warnings or recommendations for disciplinary measures (potentially including firing) without direct human oversight.
• Evaluate social media activity: Some reports may include analysis of workers’ social media presence, potentially impacting hiring or other decisions.

“While background checks have long been a part of employment and hiring practices, the emergence of new technologies has expanded the scope and depth of worker tracking. These reports often contain sensitive information unknown to workers, which can significantly impact hiring decisions, job assignments, and career advancement,” the press release stated.

FCRA Protections With Respect to Consumer Reports

Congress passed the FCRA in 1970 in response to concerns about companies that assemble and sell detailed information about consumers. In doing so, Congress was particularly cognizant of the impact of so-called “credit reporting” on consumers’ employment. According to the press release, the FCRA’s protections with respect to consumer reports include:

• Consent: Workers often have no idea that this personal information is being collected about them or used by employers. The CFPB circular makes clear that when companies provide these reports, the law requires employers to obtain worker consent before purchasing them. This ensures that workers will be aware of and can make informed decisions about the use of their personal information in employment contexts.
• Transparency: One of the top complaints from workers is that they do not even know what information is in these dossiers. The CFPB circular emphasizes that employers are required to provide detailed information to workers when taking adverse action — including firing, denials of promotions, and demotions or other reassignments — based on the reports. This allows workers to understand the basis for employment decisions and challenge any inaccuracies that may have influenced the decisions.
• Disputes: Workers also complain that this critical information is often wrong. The CFPB circular makes clear that when a worker disputes what is in a report, companies are required to correct or delete inaccurate, incomplete, or unverifiable information. This process is crucial for ensuring that workers are not unfairly penalized due to errors in these reports and have the opportunity to set the record straight.
• Limits: It is often unclear what employers are doing with the information they obtain or if they are using it for other purposes beyond worker evaluation. The CFPB circular makes clear that employers can only use these reports for purposes that are allowed under the law. For example, employers generally cannot sell this information on the open market or use it to market financial products to their workers.

“These protections are essential in an era where worker data is increasingly commodified and used to make critical employment decisions. By enforcing these rights, the CFPB aims to ensure that workers have control over their personal information and are protected from abuses,” explained the press release from the CFPB.

ClearStar Helps Employers Comply With the FCRA

ClearStar – a global workforce screening company specializing in background checks, drug testing, and occupational health services – is the only screening firm providing a real-time compliance solution. ClearStar’s Assured Compliance® program manages local, state, and federal (FCRA) notice, disclosure, consent, and adverse action requirements for job candidates.

• Real-Time Compliance: One size does not fit all. Disclosures, notices, and consents are presented to candidates in a fully automated solution as required by local, state, and federal (FCRA) laws.
• Dynamic Disclosures: Candidates are presented only with relevant disclosures based on where they live and will be working to minimize confusion.
• Adverse Action Management: ClearStar’s robust adverse action management module minimizes compliance challenges for employers and makes navigating complicated requirements a breeze, even in jurisdictions requiring additional steps.
• Updated as Laws Change: Compliance with local, state, and federal laws is a constantly changing landscape that can be challenging. ClearStar publishes a monthly compliance update and adapts our technology in response to regulatory and legislative changes.
• Strong and Clear Audit Trail: A transparent process is important. Candidates can access a copy of their specific notices, disclosures, and the consent they signed. This also creates a reliable audit trail for employers.
• ClearStar is Global: Our technology supports candidates who have lived or worked outside of the United States.

ClearStar is a global Human Resources technology company offering “better, easier, faster, and safer” background screening solutions. ClearStar has provided innovative technology solutions to businesses in the human capital management industry from its corporate offices in Alpharetta, Georgia, since 1995. For more information, contact ClearStar.

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Thomas Ahearn - Digital Content Editor

Thomas Ahearn is a Digital Content Editor at ClearStar, a leading Human Resources technology company specializing in background checks, drug testing, and occupational health screening. He writes about a variety of topics in the background screening industry including Artificial Intelligence (AI), "Ban the Box," class action lawsuits, credit reports, criminal records, drug testing, Equal Employment Opportunity Commission (EEOC), Fair Credit Reporting Act (FCRA), identity theft, privacy, social media screening, and workplace violence.

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