April 25, 2016

By Tim Bonansinga, J.D. SPHR

First in a series of articles on the multiple implications of Spokeo v Robins.

The case Spokeo v Robins started as a claim alleging a technical violation of the “Fair Credit Act” accuracy and opportunity to cure requirements.

Congress enhancements to the FCRA were enacted in part because of the many instances of “gross inaccuracy” by Data Brokers who sell background information to employers. One example of misfeasance in that industry is the discovery that “USIS”, one of the federal contractors who sell background reports to government agencies for hiring decision-making, had failed completely to provide reasonably accurate products. That discovery and the congressional audit that resulted put USIS out of business when their multi-billion dollar government contracts were cancelled.

Spokeo is an Internet Data Broker who sells background reports to employers. In the case currently awaiting a decision by the US Supreme Court,  Mr. Robins did not get the job he applied for. Robins obtained a copy of the background report created by Spokeo and discovered it contained “grossly inaccurate” statements about him. Of course, the employer was not about to admit they had used the inaccurate report as part of the hiring decision. That will always be an impossible burden for a plaintiff.

The gist of the case is that although precedent and tradition states that a plaintiff must be able to allege “concrete injury” for “standing” to bring a case before the federal courts, the Ninth Circuit Appellate Court decided that a mere violation of a technical requirement of the FCRA was enough injury to give Robins jurisdiction. As often happens with congressional legislative products, the language of the “Act” was not crystal clear. If you could poll congress today, I doubt that more than a very few legislators would actually know what they signed off on.

So, you say: “What’s the big deal?”

Class Action Alarm

It is a big deal on a number of levels. Many top Legal and Human Resources consultants claim the US Supreme Court’s upcoming decision could have huge negative consequences. Admittedly, most of those who are sounding the alarm are thinking primarily about an opening of the door to class action litigation which could force huge legal defense costs and settlement pay-outs.

The issue of Class Actions is indeed huge and negative for employers and their Insurance Carriers.

But we at Inter-connect Employment Services were first attracted to “Spokeo” by the potential new impact on the “Fair Credit Reporting Act”. We have spent a lot of time and resources tracking the statutory language, the legislative history and the explosion of litigation relating to technical compliance with the changes to the FCRA.

In order to get a truly objective feel for the issues and the practical compliance problems for ourselves and our clients we consulted with top employment law firms, risk management experts and insurance brokers. We invested in webinars where we invited our clients in an attempt to discuss and educate about the issues and maintain documented compliance systems.

But, reviewing the Spokeo complaint, some of the briefs and the oral arguments it became obvious that the trickle-down implications of “Spokeo” go beyond the Class Action and FCRA compliance issues. For example, unless the Supreme Court completely ducks them, the following other issues will be alive:

  • Contractual relationships and bargaining power with data brokers
  • Joint Employers status
  • False Light Defamation and Reputation Claims
  • Privacy and Information Security

I will break the issues down and discuss them in future articles as well as analyze the Supreme Court’s decision when it comes down soon.

Article 1 in the Series – Compliance with the FCRA and the Class Action Threat

In this article I’m going to explore some of the upfront issues relating to employer compliance with the FCRA. When the Supreme Court issues its final opinion I will then analyze and report on the decision for its practical and strategic consequences.

The changes to the FCRA have already resulted in some serious practical changes to the normal process of due diligence and the accuracy problem in the industry. To make the problem potentially worse we are beginning to see some employers moving toward a so-called “Bargain Laborer Strategy” for their staffing.

Case Study

Thinking about the implications I began to imagine a fictionalized case study for a small to intermediate but growing manufacturing company we will call “Super Ride”. They make component parts for off-road sporting vehicles. Their market covers the world.

I imagined Super Ride’s Director of Human Resources thinking about the consequences of a major restructuring that had just occurred in his company and was already affecting their hiring system for the production lines.

In the past, “Super Ride“had a serious problem with their reputation for safety which badly hurt their recruiting efforts but also their relationships with insurance carriers and OSHA enforcers. In response to serious concerns relating to a high rate of injuries (many of them fraudulent), increasing insurance premiums, OSHA inspections and fines, “Super Ride” brought in a top of the line firm to conduct job analysis, advanced screening and hiring assessments and major safety programs. There was a remarkable positive change. Injuries went down dramatically. Workers Compensation Fraud was litigated, not settled which reduced the incidence to near zero. Productivity soared.

Yet, recently a new headquarters group was brought in to bring costs down. Staffing decisions were moved to a new group of combined purchasing and accounting. A directive was issued that for the future the HR Staffing Strategy was strictly “Bargain Labor” and that lowest price was to be the only factor in all production level hiring decisions.

Mark, the Human Resources Director, is now really sweating these changes. He just returned from a seminar where he heard from a consultant speaker about the potentially huge consequences of a case called “Spokeo”, which is currently in the US Supreme Court.

The HR and Legal attendees were lit up about the potential danger from increasing class action cases where individual plaintiffs would not have to allege “concrete injury” as a result of technical violations such as an inaccurate background report.

Suddenly, he became worried about the impact on his company that the new “Bargain Laborer Strategy” was likely to have. There had been a change in staffing policy in his company.  With the recent headquarters changes in his company, recruiting “quality performers” was going to be hard enough. They had recently gone through some major changes involving restructuring, lay-offs, cost cutting, and budgeting adjustments for background costs. Accountants and purchasing were now in charge.

Mark thought to himself. These guys do not understand how dangerous and risky hiring can be in the new world. Cost cutting in hiring could be very dangerous. How was he going to educate management and get some protection back in place? Production will fall, injury reports will go up, and these new FCRA requirements posed a whole new danger.

The new bargain staffing firm, as far as he knew, did some kind of background checks, at least they said they did. He really didn’t know. He decided to look at the contract he had with them. There it was. They did background checks but didn’t make any guarantees that they were right or anything. And they didn’t say anything about this new FCRA rule which required strict compliance. He heard that it gave new hires a right to see those background reports and correct them if they were not accurate. Now that could get pretty expensive and if they had the right to ask for documents and make changes if they found something wrong that would blow the “time” factor all to hell.

Mark thought, I’m going to have to review all those contracts. Our metrics have gone from quality and safety to strictly time and cost. This job is getting to be impossible. How am I going to satisfy all those screamers and whiners from purchasing and the line supervisors who just want a body yesterday, whose idea of backgrounding is Gertrude the gossip making some calls to her vast network and hunting them down on social media. None of Gertrude’s stuff ever goes in the file of course.  But what is the risk? Could I be personally liable if Gertrude is wrong?

Mark is getting desperate. Who could he talk to about this?  This “Spokeo” case has really got him worried.

Risk Management, Staffing and the Bargain Laborer Strategy

Our fictional Mark, the HR Director, should indeed be worried about the implications of Spokeo v Robins. I have little doubt that the Supreme Court will uphold the FCRA requirements for “accuracy” in background reporting. The legislature has already done employers a bit of a favor by creating a “Safe Harbor” with the “Proxy for Accuracy” by allowing a candidate the opportunity to cure errors and make corrections.

But still, the practical implication of this “Bargain Laborer Strategy” relies purely on cutting corners in the one area where it is dangerous on many levels to cut costs related to quality, performance and trust in the workforce. People who work in recruiting know that the only truly sustainable competitive advantage for business comes from the quality and superior performance of your workforce.

Even though employers seem completely concerned with legal and regulatory compliance, it is still surprising that a number of employers seem to be drifting to the Bargain Laborer Strategy. Accounting and purchasing seem to believe there are people waiting in long lines just to go to work. Wrong! Sourcing and recruiting of quality performers who match the true requirements of jobs has never been more difficult. Sourcing is labor intensive and expensive. Return on investment depends on a quality match.

In addition to making sourcing even harder, the Bargain Laborer Strategy also completely wrecks any chance for an engaged productive culture in the workforce.  Here is what happens in relatively short order when you as an employer adopt the strategy:

  • You acquire employees who do not demand much consideration at all because they cannot get any other jobs. Currently, we are going through one of the toughest markets for sourcing qualified employees in the last 20 years. Qualified, well-matched candidates have many options.
  • Your low cost bargain labor providers must cut their own costs internally as well to meet bargain basement pricing. For example, they cannot afford to invest their time or obtain expert resources for documented written job analyses to highlight the essentials of the jobs leaving you exposed to discrimination complaints as well as no decision-matrix.
  • They cannot afford to prepare job profile specifications to match candidates to the job analysis or prepare structured interviews leaving you completely without a metric to know if the candidate is truly qualified or poses a risk in the workplace.
  • They cannot afford to use advanced sourcing methods leaving themselves reliant on the best available personnel at the unemployment office.
  • They cannot afford to do pre-referral matching, screening or due diligence leaving you at risk to dangerous people on the job or to those who may have a propensity to commit workers compensation fraud.
  • Finally, they leave you fully exposed to their omissions because you will be considered a “joint employer” with them.

Other even more long lasting organizational impacts resulting from the “Bargain Laborer Strategy can include the following:

  • Jobs must be redesigned to fit the lowest possible level of employee engagement.
  • Organizations with this strategy must redesign work so that line managers can tightly control employee efforts. Your production floor becomes a command and control environment where each employee is given clearly defined tasks that can be learned easily.
  • The culture of the employer using this strategy takes a nose dive and the reputation of the company spreads far and wide further hurting your sourcing and recruiting efforts.
  • The new hiring strategy means management will provide nothing for these temporary hires. No attention is paid to meeting the long-term needs of these employees. Organizations with this human resource strategy don’t provide careers with clear paths for promotion and advancement. There is no sourcing or recruiting message available to attract qualified candidates.
  • Performance appraisals focuses on day to day feedback and rarely incorporates formal measures.

Discussion of Litigation History

All employers are at ever increasing risk for potentially expensive if not devastating lawsuits arising from employment practices that are out of compliance with rapidly increasing new employment laws and statutory regulations such as the FCRA. The small to medium sized businesses have far more risk than the large employer who has the resources to absorb a lawsuit and huge legal defense costs. While the Bargain Laborer Staffing Strategy may seem like the ultimate answer to accountants the true cost are far different in the long-term.

Throughout 2014 and continuing through 2015 litigation relating to procedural requirements of the “Fair Credit Reporting Act” virtually exploded.

Now the US Supreme Court will put its stamp on the issues. The primary question according to most media pundits regarding Spokeo is:

“Does a plaintiff have “standing” to bring a lawsuit for a “technical violation” of the Fair Credit Reporting Act if the individual suffered no resulting “concrete harm”?

One prominent lawyer blogger, Jon Hyman author for the Ohio Employment Blog says:

The implications of this case are huge.”

“If the Supreme Court upholds the Ninth Circuit’s interpretation of the statute (technical injury sufficient) then hundreds of years of precedent relating to the requirement of “actual injury” will be reversed and the gates for class action certification will be thrown wide open. The consequences will be a dramatic increase in cost and risk in hiring. Insurance premiums and additional mandates could increase dramatically.”

Yet, other arguments in Amicus briefs minimize the “precedent” argument. They cite a number of cases over the years where simple violations of statutory or technical requirements have been interpreted to be sufficient to establish a case and controversy for “standing”.

In my opinion the real issue is over “Power” dynamics between Congress and the Supreme Court. It will be interesting to see how the Supreme Court handles the question of who has the real power in this context.

The decision will be published sometime in the next several months. My prediction is:

  1. The Supreme Court will reverse or remand the case back to the Ninth Circuit and in doing so fortify the traditional requirement for “actual damages” but with further clarification regarding how and when violations of statutory requirements constitute “actual damages”.
  2. Strict compliance with the procedural requirements and opportunity to cure of the FCRA will be firmly installed as a “Safe Harbor” or the “proxy” for accuracy in background reports.

The legislative history and the Congressional purpose section of the statutory text are clear:

“Inaccuracy is the biggest problem of the credit checking and background checking industry”.

There are horror stories relating to how wrong background vendors get their information to prospective employers. The court will actually be doing the background industry a huge favor if they hold that the FCRA protocol is a reasonable and satisfactory proxy for accuracy.

In my opinion, although the technical requirements have caused extra compliance burdens and pose a risk to us, the FCRA’s technical requirements stand in as a very reasonable proxy for an accuracy requirement. It does not regulate how employers use background checks on applicants or employees, but instead regulates the “process requirements” for compliance through which an employer must jump to legally obtain and use these background checks in their hiring decision-making.

These FCRA process steps:

  1. Notice to the applicant or employee of the intent to obtain the background check.
  2. Consent by the applicant or employee.
  3. Certification to the consumer reporting agency of the notice and consent.
  4. Pre-adverse action disclosure to the applicant or employee beforetaking an action based on the content of the report obtained.
  5. Wait a reasonable amount of time.

If the court reverses the Ninth Circuit and holds that “actual injury” must be proven the major practical impact will be simply an approval of the process steps we already take. But it will also formalize and lengthen the “turn-around time” for providing background reports.

It is a bit harder to predict how the Supreme Court will handle the so-called “political” “statutory interpretation” and “Power” dynamics between the legislative and judicial branches of government.

In order to put this in additional context for prediction and risk analysis planning I’ve reviewed the text of the statute, the legislative history, and the “oral arguments” at the Supreme Court.

The oral arguments by topic or theme:

Purpose of the statute:

Justice Kagan:  “Congress said we’re concerned about following the kinds of procedures that will make sure that there are accurate credit reports. … It’s all over the legislative history. The most serious problem is inaccurate and misleading information.”

Legal Precedent and Congress:

Chief Justice Roberts: “Injury in fact is precedent over two centuries. Can Congress expand beyond where the Court has gone in defining things that should qualify as sufficient injury to trigger Article III Jurisdiction? There is a question whether Congress has done that. … This is dealing with the requirement of case or controversy which has always been recognized as at the core of Article II Jurisdiction. And we have a legion of cases that say you have to have actual injury. That’s what makes it a decision appropriate for resolution by the Judicial Branch. And it seems a little bit more important than saying you can challenge particular statutes.”

What is “tangible harm?”

“In the False Light cases, the restatement has a comment that I think this is a Restatement (Second) of Torts 652E, 8 comment (c) that’s very on point. It says, ‘Complete and Perfect accuracy in published reports concerning any individual is seldom attainable by any reasonable effort. And minor errors, such as a wrong address or a mistake in the date of the employment or similar, unimportant details, would not…”


The Supreme Court’s decision in this case will clarify whether plaintiffs may be granted Article III standing based on the violation of a federal statute.

Spokeo, contends that historically, the Article III standing rule requires a showing of imminent and concrete harm and that Robins fails to satisfy this requirement.

Conversely, Robins argues that the mere violation of a federal statute confers a right of action in a plaintiff without the need to show concrete harm. The Supreme Court’s decision in this case will impact large corporations’ involvement in class action lawsuits and a corporation’s likelihood of settling claims to avoid significant financial consequences.

What I believe Congress intended to do with the FCRA rules was to require following of reasonable procedures to assure maximum possible accuracy in respect to any consumer.

It is clear that preventative practices through documentation and adding a little more time to the hiring process for corrections by employment candidates are the new name of the game regarding the accuracy of background reports. The “Spokeo” decision is highly unlikely to change any of that.

The huge danger, especially to smaller companies is if the Supreme Court upholds the decision of the Ninth Circuit, without directions for evidentiary interpretation, regarding no need for showing “actual injury” there will be a real survival issue for some businesses who become targets of well-funded class actions by aggressive plaintiffs’ counsel or government agencies. Legal defense costs alone are astronomical. Defense of these cases require expert counsel capable of an effective defense and mitigation. Insurance carriers will also add checklists and requirements and reserve huge amounts because of the unknowns in these types of cases. They may do that anyway.

Legal opinion letters and absolute predictions are hard to come by at this time. Some experts who do not appreciate the importance of accurate information in hiring decision making will even tell you to have nothing to do with background services because the risks of litigation are too great. Yet, we cannot lose sight of the critical importance of proper due diligence backgrounding (not the USIS method) in the hiring process for security reasons. There are a number of other strategic and compliance reasons of critical importance.

Beyond the strategic imperative for hiring top performers, negligent hiring is still a viable and potentially a very dangerous risk to employers.

Strategic Staffing requires maximizing efforts to provide far more accuracy in reports on candidates for employment. The Bargain Laborer Strategy is not a viable strategy when the quality of your workforce is the only sustainable competitive advantage left to employers.

I really am anxious for the Supreme Court to deliver its opinion. The Second Article in the series will leave a lot to consider.


Tim Bonansinga J.D., SPHR. Tim Bonansinga is co-owner of Inter-connect Employment Services LLC. He specializes in organizational development, employment law, including job analysis, sourcing, recruiting and matching employees to the right jobs. Prior to that he was General Counsel for an international telecommunications company.

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