When working with service networks composed of independent contractors, the question of whether they need an FCRA compliant background check has come up regularly.
Unfortunately, the answer to the question of whether the Fair Credit Reporting Act (FCRA) applies to their background checks has not necessarily become clearer for organizations in the past 20 years. As the use of independent contractors, or extended and contingent workforces, continues to increase, this question of FCRA compliant background checks, and the answer, are becoming more important.
The challenge arises from the language in the statute itself, and the recent decisions of some courts that support the position that contractors are not the same as employees under the FCRA. In the search for clarity, the PlusOne Solutions screening team often advocates a hybrid approach to the application of the FCRA when conducting background checks on contractors.
This means complying with the principles of the FCRA, while ensuring the language used and other activities related to the contractor do not unintentionally create the perception of an employment relationship with the individual who is the subject of the background check. The risk of assuming the FCRA does not apply is far greater than any effort it would take to comply with the Act. Therefore, this position that contractors do fall under the definition of employment as it relates to the FCRA, has become the common approach taken by most background screening organizations.
The definition contained in the FCRA, regarding “employment purposes” reads as “a report used to evaluate consumers [the individual] for employment, promotion, reassignment or retention as an employee.” 15 U.S.C. § 1681a(h). This definition, while silent on the application to contractors, reads clearly that it is only applicable to the employment context. However, this has been coupled with conflicting information provided by the Federal Trade Commission’s (FTC) own advisory opinions which have generally stated that employment provisions should be applied broadly, to include more than the traditional employment context and encompass classifications like contractors, freelancers, agents or even volunteers.
Additionally, when the FTC issued their 2011 staff report “40 Years of Experience with the Fair Credit Reporting Act” when addressing permissible purpose, they offered that the term “employment purposes” may be interpreted liberally to effectuate the broad remedial purpose of the FCRA”, and “it may apply to situations where an entity uses individuals who are not technically employees to perform duties.” This was likely related to the case Hoke v. Retail Credit Corp., 521 F.2d 1079 (4th Cir. 1975) which found courts “are not constrained to limit its application by the common-law concept of master and servant” which means the FCRA could apply to contractors.
More recently, however, the courts have taken a plain text reading when interpreting the FCRA in such cases as Smith v. Omaha Insurance Company, No. 4:17-cv-00443 (SD Iowa 2018), Lamson v. EMS Energy Marketing Service Inc, No. 2:2011cv00663 – Document 38 (E.D. Wis. 2012) and Johnson v. Sherwin-Williams Co., 152 F.Supp. 3d 1021 (N.D. Ohio 2015). In these cases, the courts have applied a more common law approach, which does not include independent contractors in their definition of employment purposes. That is where confusion abounds and results in the determination that the FCRA does not apply.
The FCRA is predicated on the approach that an individual has a right to access the information gathered about them, specifically when that information will create an adverse impact on them. Allowing the individual participation in the process and access to their information is not likely to be viewed negatively by the individual or the courts. Treating contractors as employees per the purposes of the FCRA requires caution and where possible, a defined policy and ensuring there is no ambiguity about the status of the working relationship. This consumer-focused handling of background checks is never a bad thing and compliance is not particularly burdensome which gives rise to the thought “why not comply?”
There are obligations under the FCRA that will apply regardless of whether an organization uses an employment classification for contractors. For example, obtaining consent from the individual, or compiling accurate reports. To also include the additional obligations when applying the “employment purposes” edict on the overall process, is not difficult for organizations and will guard against the possibility of being accused of a hyper-technical violation of the FCRA that may result in a class-action lawsuit.
The challenge inherent in taking the position that the FCRA applies to independent contractors and the use of FCRA compliant background checks is to ensure no unintended consequences are created within the relationship with the individual. This means confirming the language in the disclosure and authorization does not refer to “employment” or engagement “as an employee,” to look at all other background check documentation, adverse letters, and contracting documents to ensure there is no misunderstanding of the relationship. This includes any wage and labor interpretation of a relationship being considered employment, the challenge of a co-employment relationship being applied, and other misclassification claims.
Most importantly, contractors should continue to be background screened as they represent your organization, and that carries risk and liability. Background screening protects your business, brand, reputation and may often be a contractual requirement to deliver service. The hybrid approach suggested above creates the most consumer-focused way to gather and handle background check information, while ensuring all written documents with the contractor reflect the proper nature of the relationship and create the necessary guardrails to protect against the contractor being deemed an employee and all the obligations that entails.
With luck, the FTC will catch up to case law and provide more specific guidance to organizations on how to handle contractors and the FCRA, but until then, the hybrid approach strikes the right balance of mitigating risk and consumer protection, without undue hardship to the organizations that choose to comply.
Contents are provided for information purposes only and should not be construed as legal advice. Users are reminded to seek legal counsel with respect to their obligations and use of PlusOne Solutions services.
PlusOne Solutions has been an industry leader in the risk management field by specializing in compliance programs that meet the complex challenges of geographically dispersed contractors, vendors, and employee networks. PlusOne Solutions protects companies from possible financial, legal, and reputational risks associated with contractor and vendor relationships while creating safer work environments. To learn more, visit https://www.PlusOneSolutions.net.
sign up for the newsletter. Questions or comments? We want to hear from you.
What is the Fair Credit Reporting Act? First enacted in 1970, the...Read More
A comprehensive background check is an essential part of an organization’s employee...Read More
When working with new prospects and customers, we often get the question “How...Read More