January 2015

Trend of suing employers for technical FCRA violations continues

The threat of a multi-million potential class action lawsuit alleging technical violations of the Fair Credit Reporting Act (FCRA) continues to haunt employers, even where the plaintiffs have alleged or proven no harm.

Pursuant to the statute, employers are required to “provide prior written notice before they can procure a consumer report about any employee or applicant for employment.” Just as important, 15 U.S.C. Section 1681b(b)(2)(A)(i) adds that the notice must be given “in a document that consists solely of the disclosure.”

Seeking to take advantage of the statutory damages available under the FCRA – from $100 up to $1,000 for a willful violation – plaintiffs have challenged employers’ use of a disclosure form that combined the written notice to procure a consumer report with other information or documents, such as an application form.

The trend to sue for FCRA technical violations was started by Singleton v. Domino’s Pizza, LLC in the U.S. District Court of Maryland (case no. 8:11-cv-01823-DKC) where the court ruled that inclusion of a liability release in the employer’s disclosure/authorization form violates the FCRA. Domino’s ended up reaching a settlement with the plaintiffs in 2013 for $2.5 million.

Also taking a strict reading of the statutory language, the Western District Court of Pennsylvania ruled in 2013 in Reardon v. Closetmaid Corporation (case no. 2:0S-cv-01730) that an employer could be liable for the combination of a disclosure/authorization with a liability waiver, and granted summary judgment in favor of the roughly 1,800 job applicants.

In a more recent example, a class of applicants sued Publix Super Markets in the U.S. District Court for the Middle District of Tennessee (case no. 3:14-cv-00720) also based on a violation of the sole disclosure requirement and release of liability. With Domino’s and Closetmaid’s payouts looming over its head and a class of 90,000, Publix agreed to settle the claims for $6.8 million earlier last year.

Although these companies opted not to fight the suits on their merits, a defendant in a case filed in the U.S. District Court for the Eastern District of California (case no. 1:14-742-WBS-BAM) did and won dismissal in October 2014. Syed v. M-I LLC involved identical claims but the judge reached a contrary decision, finding that the FCRA text was not as clear-cut as the plaintiff claimed. Immediately following the subsection mandating the sole disclosure of the employer’s intent to procure a consumer report is a provision that states that the consumer’s authorization is to “be made on the document referred to in clause (i)” – “that is, the same document as the disclosure,” the court noted, and “…thus, the statute itself suggests that the term ‘solely’ is more flexible than at first it may appear…”

The Syed decision is the second one that may give hope to employers facing similar suits. (There are at least six class actions pending.) But the obvious answer for companies looking to avoid the problem entirely is simple: use a standalone disclosure/authorization form that is separate from any other information or documents.

|Employment Decisions, Lawsuit|

Beware of loopholes in reporting on securities brokers

When considering the track record of a securities broker or dealer, investors should be cognizant of loopholes in background reporting.

The Financial Industry Regulatory Authority (FINRA) oversees the regulation of brokers and operates BrokerCheck, an online database that contains disciplinary records of registered brokers. But a review by the Wall Street Journal found that BrokerCheck is sorely lacking a wealth of information about registered brokers, some of which can be found in the records of state regulators. At least 38,400 brokers have regulatory or financial red flags that appear only on state records, according to the WSJ’s investigation; of those brokers, at least 19,000 had clean BrokerCheck records. One significant area omitted by FINRA: internal reviews.

The WSJ identified 4,346 brokers with one or more internal reviews reported on their state records but not on BrokerCheck. Other regulatory red flags not spotted on FINRA’s database: personal bankruptcies filed more than 10 years ago, judgments and liens that have been satisfied, and certain employment terminations.

FINRA’s records do include complaints against brokers, regulatory actions, terminations for cause, and personal bankruptcies filed within the last decade, which the agency says is consistent with the Fair Credit Reporting Act. But in light of the gaps – and a proposal from FINRA to the Securities and Exchange Commission to expand the obligations of financial institutions with regard to the background screening of applicants (https://scherzer.co/sec-considers-background-check-rule-proposed-by-finra/) – investors should consider checking state regulatory records to form a more complete picture of a broker’s history.

In response to the WSJ’s inquiry, FINRA launched a review of its database and said the agency is studying the current rules about the information disclosed on BrokerCheck. The agency is also attempting to patch a separate loophole by coordinating its efforts with state insurance regulators. Following reports that insurance and securities regulators struggle to share data – and that individuals take advantage of the gap by continuing to sell insurance products despite losing a securities license, for example – FINRA vowed to take action. Beginning this month, the agency said it will provide a monthly report of its disciplinary actions against securities brokers not only to state securities regulators but state insurance regulators as well.

|Educational Series|

Medical marijuana laws put employers in a tough spot

The growing number of jurisdictions permitting medical marijuana is putting employers in a tough position. One the one hand, marijuana remains illegal under federal law and a workforce under the influence isn’t much of a workforce at all. On the other hand, 23 states and the District of Columbia now permit the use of marijuana for regulated medical purposes and some state laws include anti-discrimination provisions prohibiting employers from taking action against employees based on their status as a registered medical marijuana user.

A first-of-its-kind lawsuit demonstrates the conundrum. In December, the American Civil Liberties Union filed suit in a Rhode Island state court on behalf of an individual who allegedly was denied an internship after she disclosed that she lawfully carried a medical marijuana card for severe migraines.

According to the complaint, the company told the applicant that she had been rejected because of her status as a cardholder, and despite promises not to bring medical marijuana on the premises or come to work under the influence, the applicant was denied the position.

The lawsuit charges that the company violated Rhode Island’s medical marijuana law which prohibits schools, employers, and landlords from refusing “to enroll, employ, or lease to, or otherwise penalize, a person solely for his or her status as a cardholder.” The complaint – which also includes allegations of disability discrimination under state law – seeks compensatory and punitive damages.

Employers in states permitting medical marijuana would be well-advised to review their relevant law when considering marijuana use or marijuana-related criminal records in employment decisions. While Rhode Island is not alone in including an anti-discrimination requirement in its law, joined by Arizona, Connecticut, Delaware, Illinois, Maine, Minnesota, Nevada, and New York, other states – including California, Massachusetts, and New York – are clear that employers have no obligation to accommodate an employee’s medical marijuana use or permit them to work under the influence.

Read the complaint.

|Employment Decisions|

OFAC getting more common in contract terms and background checks

Do you know what OFAC is about? OFAC is the acronym of the U.S. Department of Treasury’s Office of Foreign Assets Control, and its function is to administer and enforce sanctions against countries or individuals (like terrorists or narcotics traffickers) with actions ranging from trade restrictions to the blocking of assets.

For U.S. companies, the agency’s enforcement applies to banks, insurers, and others in the financial industry that may be involved in covered dealings, which include engaging in transactions prohibited by Congress such as trade with an embargoed country or with a specially designated national (SDN).

Violations of regulations, which extend to all U.S. citizens, can result in substantial fines and penalties. Criminal penalties can reach up to $20 million and imprisonment up to 30 years; civil fees can range from up to $65,000 to $1,075,000 per violation, depending on the activity at issue.

OFAC has significantly stepped up its enforcement efforts that have resulted in sizable settlement agreements with U.S. entities, and thus companies increasingly are incorporating sanctions compliance language based on OFAC regulations into contracts and agreements, as well as including OFAC checks in their employment-purpose background screening or in connection with business transaction due diligence.

Contract terms requiring a party to affirm that it is not the subject of any OFAC sanctions status, that no OFAC investigations are in process, or that it does not engage in transactions with countries like Iran or North Korea, are becoming standard. Some deals also include a provision attesting that a company is not owned by an individual on the list of SDNs, that the company is not based or located in an embargoed country, or to assure that the monies used to make an investment or purchase were not provided by a sanctioned country or individual. Of course, it is also important to conduct background checks to confirm these representations at the start of the contract and at reasonable intervals thereafter.

The use of compliance language does not insulate a company from OFAC liability. While such a provision may create a contract-based remedy to recover monetary damages based on a fine or settlement with the agency, the clause cannot eliminate liability. Like any other governmental regulator, OFAC is not bound by private contract and can take action even with such terms in place.

Learn more about OFAC.