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

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.