Insights
Publications

Are You Background Checking Your Contractors? If So, Exercise Caution.

June 12, 2019 Articles

Employers who use background checks in their hiring processes are likely aware of the various requirements under the Fair Credit Reporting Act (FCRA) and analogous state statutes. They must provide clear disclosures and obtain a signed authorization from employees and applicants before they obtain any third-party consumer reports on the individuals. While these laws typically aim to protect the rights of employees and employee candidates, an open question remains whether employers should extend the precautions to non-employees they engage for service, such as independent contractors, volunteers, and board members. With the unsettled law and ever-present rise of independent contractors in the workforce, employers in California should consider applying their disclosure practice uniformly to all such individuals.

The plain language of the FCRA states that the protections only pertain to consumer reports obtained for “employment purposes.” However, applicable authorities have historically interpreted the statute liberally “to effectuate the broad remedial purpose of the Act.” See F.T.C., Advisory Opinion to Allison (1998). For example, in 1998 the Federal Trade Commission (FTC) advised that independent contractor truck drivers should be subject to the applicable provisions of the FCRA. It emphasized that because the operational entity was obtaining the background reports for hiring or consideration of hiring, this fell under the widely defined “employment purposes” under the statute. See also Hoke v. Retail Credit Corporation, 521 F.2d 1079, 1082 (4th Cir. 1975), cert. denied, 423 U.S. 1087 (1976) (when information was given by a consumer reporting agency to the Texas Board of Medical Examiners to assess a physician’s application for a medical license, this was considered an “employment purpose”).

The FTC continues to maintain this position. Whenever consumer reports are used to evaluate whether or not to engage an individual for service, the FCRA is implicated. In a more recent overview by the FTC, the agency re-emphasized this fact:

Because the term "employment purposes" is interpreted liberally to effectuate the broad remedial purpose of the FCRA, it may apply to situations where an entity uses individuals who are not technically employees to perform duties. Thus, it includes a trucking company that obtains consumer reports on individual drivers who own and operate their own equipment; a title insurance company that obtains consumer reports on individuals with whom it frequently enters into contracts to sell its insurance, examine title, and close real property transactions; or a nonprofit organization staffed in whole or in part by volunteers.

40 Years of Experience with the Fair Credit Reporting Act, (FTC, July 2011), 32.

While this may seem unambiguous, district courts in Iowa, Ohio, and Wisconsin have questioned this reasoning and published opinions to the contrary. These courts turned to the common-law definition of employees to hold that the FCRA requirements did not apply to non-employees. See Smith v. Mutual of Omaha Insurance Company, 2018 WL 6921119, *4 (S.D. Iowa 2018); Johnson v. Sherwin-Williams Co., 152 F. Supp. 3d 1021, 1026-27 (N.D. Ohio 2015); Lamson v. EMS Energy Marketing Service, Inc., 868 F. Supp. 2d 804, 816 (E.D. Wis. 2012).

California courts, on the other hand, remain persuaded by the FTC’s guidance, and have expressly rejected the reasoning from the Wisconsin court in Lamson. In Prescott v. HireRight Solutions, Inc., the court found that the plain text of the FCRA did “not limit the pre-adverse action notice requirements to employers” and held that the provision applied to other entities. 2014 WL 12781292, *8 (C.D. Cal. 2014). On a similar note, the court in Dunford v. American DataBank, LLC declined to expressly follow Lamson, holding that the applicability of the FCRA protections remained an open question. 64 F. Supp. 3d 1378 (N.D. Cal. 2014).

Takeaway

As more and more companies in the gig economy opt to utilize independent contractors to perform services, California businesses should remain aware of these FCRA and analogous state law protections. While this issue has not yet been addressed on the appellate level, it is apparent that California courts are more inclined to extend FCRA provisions to non-employees. The California Civil Code has an identical definition for “consumers” and “employment purposes,” and the same logic will likely follow.

Background checks have become less expensive and more commonly used, but are not legally required. If they are used however, legal disclosure and authorization requirements must be followed. Out of an abundance of caution, employers should apply their disclosure and authorization practices uniformly to both employees and non-employees they are engaging for service.

Firm Highlights

Event

Employment Law Updates for Nonprofits in the New Normal (Webinar)

Join Rebecca Stephens and Jaya Bajaj in the discussion on Employment Law Updates for Nonprofits in the New Normal. Nonprofit organizations are subject to both state and federal employment laws and regulations. The past few...

Read More
Publication

Coronavirus and the Workplace: Is Your Business Prepared?

The outbreak of the novel coronavirus (COVID-19) implicates numerous legal obligations for employers, including leave, medical privacy, and discrimination. Employers should prepare to implement policies that strike a balance between ensuring safety and fostering...

Read More
Publication

Use Caution When Laying off Employees Without a Return to Work Date

Employers who have laid off workers in recent weeks due to the shelter-in-place orders should be aware of little-known requirements regarding final paychecks.  Even if employees are being furloughed with the expectation of returning to...

Read More
Publication

Families First Coronavirus Response Act - Posting Requirement for Employers

The recently enacted Families First Coronavirus Response Act (“FFCRA”) requires private employers with fewer than 500 employees to post a notice by April 1 summarizing the benefits available to employees under the FFCRA. For employers...

Read More
Publication

Coronavirus and the Workplace: Key Legal Updates for Employers

With the spread of COVID-19 and the rapidly evolving federal, state, and local government response, it can be difficult for employers to keep up with their rights and obligations. This week, California’s Governor Gavin...

Read More
Publication

7 Tips for Creating a COVID-19 Essential Business Travel Policy

As states are relaxing COVID-19-related restrictions, employers should remain cautious about business travel. California’s public health orders still limit travel to an “urgent matter” or that which is “essential to your permitted work.” Given...

Read More
Publication

Unlimited Vacation Policies Present Potential Pitfalls for California Employers

As unlimited vacation policies increase in popularity, California employers must be careful to avoid legal pitfalls in drafting and implementation. In the first California appellate decision to address unlimited vacation policies, the court held that...

Read More
Publication

Coronavirus and Employee Privacy Laws: What Employers Should Know

The outbreak of the novel coronavirus (COVID-19) presents challenging medical privacy issues for employers. Employers must observe their employees’ continued legal right to privacy—including under the Americans with Disabilities Act (ADA), HIPAA, and/or relevant...

Read More
Publication

Coronavirus and the Workplace: Guidance for Employers Resuming Operations

As states and localities begin to relax shelter-in-place requirements and allow businesses to reopen, the coronavirus pandemic presents new challenges for employers. In addition to operational and logistical questions surrounding reopening, employers must navigate...

Read More
News

Coronavirus: Can tech allay the dangers of the Bay Area office of the future?

Rebecca Stephens spoke to the San Francisco Chronicle about legal considerations that could potentially hinder a return to physical work as much as technological ones. Link to the article: https://www.sfchronicle.com/business/article/Coronavirus-Can-tech-allay-the-dangers-of-the-15246378.php

Read More