On October 24, 2024, the Consumer Financial Protection Bureau (CFPB) released Circular 2024-06, clarifying how employers using third-party consumer reports and AI-based tools must comply with the Fair Credit Reporting Act (FCRA). This guidance underscores that FCRA applies to any report used in employment decisions, even those leveraging AI or “black box” algorithms, which may raise data privacy and transparency issues.
For more information on FCRA and their potential impact on your organization, contact our Partner, Fiona Xu, at fiona.xu@consultils.com.
Expanding Scope of Consumer Reporting
Employers increasingly rely on detailed consumer reports, which go beyond conventional background checks. Modern consumer reporting may now track an employee’s interactions, monitor task completion, assess productivity, and compile other behavioral data. This expansion includes performance-related tracking from sources like web browsing activity and keystroke patterns.
Under the FCRA, any third-party report with worker information that influences employment decisions is a “consumer report.” This means employers using such tools must adhere to FCRA’s consent, notification, and purpose limitations, protecting employees’ rights concerning how their data is handled.
FCRA Compliance Essentials for Employers
To comply with the FCRA, the CFPB circular emphasizes key employer responsibilities:
Informed Consent
Employers must obtain clear permission from employees or candidates before accessing consumer reports. This ensures individuals understand what data is being used and for what purposes.
Transparency in Decision-Making
When a report leads to adverse employment actions—such as rejection, demotion, or termination—employers are required to provide workers with a copy of the report and an opportunity to review it. The FCRA mandates employers to disclose adverse decisions and allow individuals to respond.
Correcting Errors
Should an employee dispute information in a consumer report, employers and reporting agencies must take corrective action to amend or remove inaccuracies. This prevents unwarranted consequences based on flawed data.
Purpose-Specific Use
Employers may only use consumer reports for legally permitted purposes, prohibiting the repurposing of data for unrelated functions, such as marketing.
FCRA Penalties and Legal Risks
Employers found in violation of the Fair Credit Reporting Act (FCRA) may face significant penalties, including liability for actual damages to employees or statutory damages of $100 to $1,000 per employee in cases of willful noncompliance, with potential punitive damages also possible. Class-action lawsuits are common, particularly when noncompliance affects multiple employees. Additionally, regulatory bodies like the CFPB and FTC (Federal Trade Commission) may impose fines or pursue settlements for FCRA violations, especially in instances of widespread or willful misuse of employee data, underscoring the financial impact of noncompliance.
Practical Steps for Employers to Ensure Compliance
In light of the CFPB’s circular, here are practical steps employers can take to align with FCRA requirements and manage AI tools responsibly:
Choose FCRA-Compliant Vendors
Employers should verify that third-party reporting agencies follow FCRA guidelines. Conducting due diligence on data accuracy and security practices can help reduce risks.
Audit AI Tools Regularly
AI systems should be routinely reviewed to ensure they align with FCRA’s requirements and do not inadvertently violate workers' rights. Audits can help identify any unintended biases in data collection or analysis that could impact employment decisions.
Educate HR and Management Teams
Ensuring that relevant teams understand FCRA obligations can improve compliance in hiring and employment practices. Regular training sessions can help teams implement transparent and fair data handling procedures.
Conclusion
As technology evolves, so does the legal landscape protecting employees from potential AI-related harms. By taking proactive steps now, employers can align with both current FCRA regulations and anticipated legal developments.
For more information on FCRA and their potential impact on your organization, contact our Partner, Fiona Xu, at fiona.xu@consultils.com.
Disclaimer: The materials provided on this website are for general informational purposes only and do not, and are not intended to, constitute legal advice. You should not act or refrain from acting based on any information provided here. Please consult with your own legal counsel regarding your specific situation and legal questions.
Fiona Xu, Esq. is the Partner and Head of Transactions of ILS.
She has extensive experience supporting global and high-growth technology companies on compliance and business needs. Her practice focuses on regulatory compliance across different sectors, with a focus on sector-specific regulations for artificial intelligence (AI) and medical devices. She supports multinational corporations in establishing and maintaining U.S. operations, managing legal and compliance challenges in various areas such as Privacy, Export Control, and CFIUS issues.
Email: fiona.xu@consultils.com | Phone: 626-344-8949
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