What is Adverse Action? A Guide for Employers and Candidates

Have you ever applied for a job, felt confident about the interview, and then received a notice that something in your background check might prevent you from getting hired? Or perhaps you’re an employer who needs to make hiring decisions based on background check results while staying compliant with all applicable laws. Either way, you’re dealing with what’s known as “adverse action” in the employment context.

Adverse action is a critical concept in the hiring process that affects millions of job seekers and employers each year. With nearly 95% of employers now conducting some form of background screening on potential hires, understanding the proper adverse action process isn’t just good business but it’s also a legal necessity.

What is Adverse Action?

In the context of employment, adverse action refers to any negative employment decision that’s made based on information obtained through a background check. The Fair Credit Reporting Act (FCRA) establishes specific requirements for employers who take adverse action against job applicants or current employees based on consumer reports.

Adverse actions can include:

• Denying employment to a job applicant
• Terminating a current employee
• Refusing to promote an employee
• Reassigning an employee to a less desirable position
• Reducing an employee’s hours or pay
• Denying a transfer request

The key factor that makes these actions “adverse” under the FCRA is that the decision is based, at least in part, on information contained in a consumer report or background check obtained from a consumer reporting agency.

What is NOT Considered Adverse Action?

Not all negative employment decisions constitute adverse action. Employers can make legitimate business decisions for genuine reasons without triggering adverse action requirements. Some examples include:

• Declining to hire an applicant because they lack the required qualifications or experience
• Not selecting a candidate who performed poorly in interviews or skills assessments
• Making a position redundant for legitimate business reasons
• Disciplining an employee for performance issues unrelated to background check findings
• Denying employment because the applicant doesn’t have a required license or certification needed for the job

The Legal Framework for Adverse Action

The Fair Credit Reporting Act (FCRA) is the primary federal law regulating the use of consumer reports, such as background checks, in employment decisions. Enacted in 1970 and amended over time, the FCRA outlines specific procedures employers must follow when taking adverse action based on a consumer report.

In addition to the FCRA, employers must comply with Equal Employment Opportunity Commission (EEOC) guidelines, state and local “Ban-the-Box” and fair chance hiring laws, and industry-specific regulations for fields like healthcare, finance, and education. Together, these overlapping legal requirements create a complex compliance landscape that employers must carefully navigate when making adverse employment decisions.

The Complete Adverse Action Process – Step by Step

The adverse action process isn’t a single event but rather a series of carefully sequenced steps:

1. Pre-Hiring Disclosure and Authorization

Before conducting a background check, employers are required to provide the candidate with a clear, standalone disclosure, obtain written authorization, and supply a summary of rights under the Fair Credit Reporting Act (FCRA).

2. Pre-Adverse Action Notice

If information discovered in a background check may lead to a negative decision, the employer must provide:

• A statement that information in the background check may affect the employment decision
• A copy of the background check report
• A copy of “A Summary of Your Rights Under the FCRA”
• Information about the right to dispute inaccurate information
• Contact information for the consumer reporting agency

3. The Waiting Period

After sending the pre-adverse action notice, employers must wait a “reasonable” period (generally 5-7 business days) before making a final decision. During this time, candidates can review their report, address inaccuracies, provide context, or dispute findings.

4. Final Adverse Action Notice

If the employer still decides to take adverse action, they must provide a final notice including:

• A statement that adverse action has been taken based on the consumer report
• The name, address, and phone number of the consumer reporting agency
• A statement that the agency did not make the decision
• Notice of the right to dispute the accuracy of the information
• Notice of the right to obtain an additional free copy of the report within 60 days

5. Secure Disposal of Information

The FCRA requires that employers securely dispose of reports and information once they’re no longer needed, using reasonable measures to protect against unauthorized access or use of the data. This helps ensure the confidentiality of sensitive information and supports overall compliance with federal privacy standards.

Common Adverse Action Mistakes and Compliance Pitfalls

Employers frequently make these costly mistakes when handling adverse action:

• Skipping the pre-adverse action notice: Some employers make the mistake of going straight to the final adverse action notice, denying candidates their right to dispute or explain information.
• Insufficient waiting periods: Rushing through the waiting period undermines the candidate’s opportunity to respond, potentially violating FCRA requirements.
• Incomplete documentation: Failing to include all required elements in pre-adverse and adverse action notices is a common compliance failure.
• Not providing the full background report: Employers must share the complete report, not just problematic sections.
• Improper disposal of sensitive information: Background check information must be securely destroyed when no longer needed.

The consequences of non-compliance can be severe. Employers face potential statutory damages of up to $1,000 per violation, actual damages, punitive damages, and attorney’s fees. Major companies like Petco, Amazon, and Frito-Lay have faced multi-million dollar settlements related to FCRA violations.

Candidate Rights and Considerations

If you receive a pre-adverse action notice as a job applicant, take these steps:

• Review the report carefully: Check for any errors or inaccuracies in your personal information, employment history, education, or criminal record.
• Dispute inaccurate information: Contact both the employer and the consumer reporting agency to dispute any errors. Gather supporting documentation to back up your claims.
• Provide context: If the report contains negative but accurate information, consider providing context or evidence of rehabilitation directly to the employer.
• Know your rights: Familiarize yourself with the FCRA and any applicable state or local fair chance hiring laws, which may provide additional protections.
• Request another copy: You’re entitled to a free copy of your report within 60 days of receiving an adverse action notice.

Remember, receiving a pre-adverse action notice doesn’t automatically mean you won’t get the job. Employers must consider individual circumstances, and your prompt response could make a difference.

Industry-Specific Considerations

Different industries face unique adverse action challenges:

• Healthcare: Subject to additional screening requirements under laws like the Elder Justice Act
• Financial Services: Extra scrutiny under FINRA regulations and the SAFE Act for certain positions
• Transportation: DOT-regulated positions have specific background check requirements
• Education: Most states require thorough background checks for employees working with minors
• Government Contractors: Often face stricter screening requirements than other employers

Small businesses face particular challenges with adverse action compliance due to limited HR resources. Working with knowledgeable background check providers can help ensure proper procedures are followed.

Technology and Adverse Action Management

Modern employers increasingly use technology to streamline the adverse action process by automating the delivery of pre-adverse and adverse action notices, tracking waiting periods and response deadlines, securely storing and disposing of sensitive information, and documenting compliance at every step. While electronic delivery of notices is allowed under the FCRA, employers must ensure they have proper consent and verification methods in place.

Conclusion

Adverse action is a vital part of the hiring process that requires careful attention to legal compliance and candidate rights. From pre-adverse notices to secure data disposal, each step is governed by strict FCRA guidelines and additional state and industry regulations. Whether you’re an employer making difficult decisions or a candidate responding to a notice, understanding the process helps ensure fairness, transparency, and compliance in today’s competitive job market.

Sapphire Check simplifies the adverse action process with automated tools, real-time tracking, and built-in compliance support, helping employers stay aligned with FCRA, EEOC, and local regulations. Don’t risk costly mistakes or missed steps. Partner with Sapphire Check for fast, reliable, and fully compliant background screening solutions. Contact us today to protect your business and support fair hiring practices.

FAQs

What does adverse action mean?

Adverse action is a negative employment decision (like not hiring or firing someone) made based on information from a background check, which triggers specific legal requirements under the FCRA. Understanding these obligations is essential for maintaining compliance and avoiding potential legal consequences.

What are adverse action examples?

Examples include denying employment, terminating a current employee, refusing a promotion, reducing hours or pay, or reassigning someone to a less desirable position based on background check results.

Can you still be hired after receiving a pre-adverse action letter?

Yes. The pre-adverse action notice initiates a process allowing you to dispute information or provide context. Employers may reconsider based on your response. Responding promptly and thoroughly can improve your chances of a favorable outcome.

How do digital background checks affect adverse action procedures?

While technology can streamline the process, the core FCRA requirements remain the same regardless of whether background checks are conducted digitally or traditionally. Employers must still follow each step carefully to ensure legal compliance and protect candidate rights.