On March 31, 2004, recently enacted amendments to the Fair Credit Reporting Act (the “FCRA”) became effective. Those amendments clarify the ability of employers to use outside counsel to conduct internal investigations, including harassment and other investigations of employee misconduct, without concern about violating the FCRA.

The original purpose of the FCRA was to insure that businesses did not misuse consumer credit information. In 1996, the FCRA was amended to impose stringent notice requirements on employers who used “consumer reports” from consumer reporting agencies, (“CRAs”), when making employment decisions.

Because the terms “consumer reporting agencies” and “consumer report” were so broadly defined, there was concern that the notice provisions might apply to investigations of suspected employee misconduct whenever outside counsel or other outside experts were used.

Shortly thereafter, the Federal Trade Commission (“FTC”) added fuel to the fire when it issued an opinion letter, known as the “Vail Letter.” The Vail Letter was written in response to an attorney’s inquiry whether an outside attorney hired to perform a sexual harassment investigation was a “CRA” under the FCRA. The FTC opined that “outside organizations utilized by employers to assist in their investigations of harassment claims are CRAs,” and that reports generated in connection with such investigations were “most likely” consumer reports.

While the FTC’s position was rejected by numerous courts, employers who were unable or unwilling to conduct their investigations internally were left with a Hobson’s Choice of having to: (1) comply with the FCRA’s advance notice requirements, thereby jeopardizing the effectiveness of their investigations; or (2) not comply with the advance notice requirements of the FCRA and risk violation under the Vail Letter analysis.

The recent amendments amended the definition of “consumer report” to exclude “communications made to an employer in connection with an investigation of (i) suspected misconduct relating to employment; or (ii) compliance with Federal, State, or local laws and regulations, the rules of a self-regulatory organization, or any pre-existing written policies of the employer.” Such communications are excluded, however, only if they “are not made for the purpose of investigating a consumer’s credit worthiness, credit standing, or credit capacity” and are not shared with anyone but the employer or certain governmental representatives.

As a result, employers are no longer required to provide advance notice of an investigation to the employee being investigated whenever outside counsel is involved. Where an adverse employment action results, however, employers must still disclose to the employee “a summary containing the nature and substance of the communication upon which the adverse action is based, except that the sources of information... need not be disclosed”, nor must they be disclosed in advance of the conclusion of the investigation.

Thus, employers can, in appropriate circumstances, safely employ outside counsel to assist with internal investigations of employee misconduct, without running afoul of the FCRA.

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Robert J. Tribeck is Administrative Chair of Rhoads & Sinon’s Business and Banking Litigation Group and a member of the Firm’s Employment and Labor Law Group. For more information about the Fair Credit Reporting Act, or investigations of employee misconduct, Attorney Tribeck can be reached at (717) 237-6701 or rtribeck@rhoads-sinon.com.