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

Publication

California Expands Family and Medical Leave Law to Cover Small Employers

California Governor Gavin Newsom recently signed SB 1383, which expands employees’ leave entitlements under California’s Family Rights Act and New Parent Leave Act. Effective January 1, 2021, these leave provisions will apply to employers with...

Read More
News

Farella Braun + Martel Elevates Five to Partner

Read More
Publication

Law Updates for California Employers: COVID Sick Leave Obligations, Meal-Period Rules, COBRA Benefits

New legislation and a recent court decision have significant implications for California employers. Certain California employers must now provide supplemental paid sick leave to employees who miss work for specified reasons related to the...

Read More
Event

BASF Political Speech in the Workplace

Holly Sutton is a featured panelist at the BASF Labor and Employment Section of the Barristers Club live webinar, "Political Speech in the Workplace." Details: Although the 2020 election cycle has ended, employees and...

Read More
Publication

Guidance on Directive to Defer Payroll Tax Obligations Leaves Unanswered Questions

On August 8, 2020, the President directed the Secretary of the Treasury to authorize the deferment of certain payroll tax withholding, depositing, and payment obligations otherwise incurred on wages and compensation paid between September...

Read More
Publication

Employment Law Updates for Nonprofits in the New Normal

Farella's Nonprofit Education Series features Rebecca Stephens and Jaya Bajaj discussing "Employment Law Updates for Nonprofits in the New Normal." Nonprofit organizations are subject to both state and federal employment laws and regulations. The...

Read More
Publication

California Employers Face Various New Laws in January 2021

The California Legislature passed and Governor Newsom signed several new laws covering topics ranging from COVID-19 to leaves of absence to data reporting. Most of these laws take effect January 1, so now is a...

Read More
Publication

The Election Season Is Upon Us: Guidance for Managing Political Expression in the California Workplace

In a year of extraordinary events, this election has been more divisive and controversial than any other in recent history. Many employers are grappling with how they should manage political expression in the workplace...

Read More
News

Farella Braun + Martel Ranked Among “Best Law Firms” by U.S. News & World Report and Best Lawyers

SAN FRANCISCO, November 5, 2020: Farella Braun + Martel earned national and regional rankings across a number of practice areas in the U.S. News & World Report and Best Lawyers® release of the “Best...

Read More
Publication

Equal Pay Data Reporting, An Asset for the Strategic Employer

Holly Sutton with Farella Braun + Martel, and co-speaker Erin Hastings with Seiler, discuss "Equal Pay Data Reporting, an Asset for the Strategic Employer." California’s recently passed SB973 requires certain employers to collect and...

Read More