What Does Adverse Action Mean for Your Business? 20 May 2019


Can applicants sue you for not hiring them? Yes, if you don’t use the right process. Wells Fargo was sued for denying employment to an applicant based on the individual’s background check results.

While this is legal, the process it used wasn’t. Instead of following an adverse action process, the bank simply didn’t hire the candidate. What’s wrong with that?

Anytime your hiring decision rests on background check results, you need to follow an adverse action process.

While adverse action adds another step to your hiring process, its benefits more than make up for it. Let’s discover what adverse action is, why you need to use an adverse action process, and how you can create your own.

Adverse Action and Background Checks Go Hand in Hand

Adverse action means deciding not to hire someone based on the results of a background check. It doesn’t matter if you’re considering a promotion, transfer, or new hire. If you make your decision based on background check results, you have to use an adverse action process.

In contrast, adverse action doesn’t include a decision not to hire based on the applicant’s interview or resume. It only comes into play when your decision is due to the results of a background check.

Adding an adverse action process to your hiring procedure may seem too troublesome. Is it really necessary? Do you need an adverse action process?

An Adverse Action Process Is Legally Required

Having an adverse action process is absolutely necessary. Using one keeps your business out of legal trouble. The Fair Credit Reporting Act requires companies to follow a legally regulated adverse action process. Ignoring these requirements can open your company up to a lawsuit.

Even huge companies have suffered lawsuits because they didn’t follow adverse action requirements. For example, Amazon didn’t give applicants a copy of their background check results. This lapse caused the company to get hit with not one but three adverse action lawsuits in one year.

Several states also have fair chance hiring laws. These laws require you to consider more than just an applicant’s criminal history. You have to decide if the crime affects the applicant’s ability to do the job. You’re also required to listen to the candidate’s side of the story.

Adverse action doesn’t just keep your business safe from legal problems. It also helps you make better hiring decisions.

Adverse Action Gives Your Small Business More Hiring Options

Adverse action makes it easier to find the right hire. It gives applicants a chance to explain the circumstances or dispute inaccurate information. As a result, you get a second look at skilled candidates.

Your small business needs every talented applicant it can get. The current job market has such a limited talent pool that companies are struggling to find qualified candidates. One survey found that 49 percent of small business owners can’t find the talent they need.

Adverse action stops you from immediately eliminating qualified people from your hiring pool. With a broader pool of applicants, you have a better chance of finding the right person for the job.

Preparing for adverse action is essential to keep your business healthy. How can you develop your own adverse action process?

Business owner signing a pre-adverse action notice

Create an Adverse Action Process for Your Business

Adverse action may seem like a complicated process. Once you know the legal requirements, however, setting up your own process is pretty simple. Here are some basic guidelines to use to create an adverse action process for your business:

  • Before confirming any hiring decision, send a pre-adverse action notice. Include a copy of the background check results and “A Summary of Your Rights Under the Fair Credit Reporting Act.”
  • Allow enough time for a response, at least 5–10 days. Some cities and states require more time than others, so check your state and local adverse action laws.
  • If the applicant disputes or explains the background check results, consider that information carefully when making your final decision.
  • If you decide in favor of the individual, tell your new employee the excellent news.
  • If you decide not to hire the applicant, send an adverse action notice.
    • Include the name, address, and contact information of the background check company.
    • Provide a statement saying that the background check company didn’t make the hiring decision.  
    • Explain that the applicant has the right to dispute the accuracy of the background check results with the screening company.
    • State that the applicant can request a free copy of their consumer information from the background check company within the next 60 days.

Following these guidelines makes creating your adverse action process easy. Having an adverse action process lets you focus on finding your next hire.  

Adverse Action Helps Your Business’s Hiring Plan

Adverse action may mean a negative hiring decision, but the process can be positive for your business. Using an adverse action process protects your small business from legal trouble. It also increases your pool of talented candidates.

Adverse action can be a tricky subject to get right. To avoid a lawsuit, you must follow every single step. Thankfully, the more you understand about adverse action, the better equipped you’ll be to deal with it. Now that you know how to set up your own adverse action process, your small business is ready for any applicant.