Does the FCRA Apply to Background Checks for Independent Contractors?

​Does the federal Fair Credit Reporting Act (FCRA) apply to the employment background checks of independent contractors? It depends on whom you ask. Recent court decisions have held that it does not, but the U.S. Federal Trade Commission (FTC) has not budged on its stance that employees and nontraditional workers alike are protected under the FCRA.

Because there's no clear answer, experts recommend a hybrid compliance model to avoid misclassification liability.

The Issue  

The U.S. District Court for the Northern District of Georgia is the latest to rule that screening independent contractors does not trigger the requirements for a background check for "employment purposes" under the law. Those requirements include obtaining the person's written authorization in a stand-alone disclosure and providing a pre-adverse action notice and summary of rights if the report leads to adverse action against the subject.

"It's an unsettled area, and the recent decisions don't align with the FTC guidance on this issue," said Alonzo Martinez, associate counsel for compliance at background-screening firm HireRight.

Tyler Browne, lead product counsel at Checkr, a screening firm known for having gig-economy companies as clients, explained that certain provisions of the FCRA apply regardless of whether screened individuals are classified as employees or independent contractors. "Some form of consent is still required, and consumer reporting agencies still have an obligation to prepare accurate reports," he said. "But employment-purpose screenings entail much more substantial requirements."

He added that the FTC's advisory opinions have generally stated that employment provisions should be applied broadly, to more than the traditional employment classifications, but recently, some courts have taken a more plain-text approach to the language in the FCRA.

Beginning with a case in 2012 (Lamson v. EMS Energy Mktg. Serv. Inc.), a handful of district courts have ruled that the FCRA defines "employment purposes" as "used for the purpose of evaluating consumers for employment … as an employee." The Georgia court decided that "ultimately, because employee or employment is not otherwise defined in FCRA, this court is required to apply the common law meaning of employment, which does not include independent contractors."

The FTC has not responded to this trend in case law, but it has issued contrary guidance in the past, said Rod Fliegel, an attorney in the San Francisco office of employment law firm Littler.

The agency issued a document in 2011 compiling several opinion letter summaries and that broadly construed that the FCRA's permissible employment purpose may extend to nontraditional workers who are not technically employees, such as independent contractors, freelancers, temps and volunteers.  

[SHRM members-only toolkit: Conducting Background Investigations and Reference Checks] 

What Should HR Do?

Traditionally, many employers have played it safe and applied the FCRA's requirements to all applicants, regardless of their employment status. But as more courts rule that employers do not have to comply with all employment-purpose requirements when screening independent contractors, employers question whether they should continue to screen these workers as "employees"—in light of increased misclassification claims.

"The rub is that complying with the FCRA's employment-purpose screening provisions may be seen to give the appearance that employers are creating evidence that they are treating their independent contractors like employees," Fliegel said. "On the other hand, if you don't comply with the FCRA because you're worried about misclassification, do you run into an FCRA lawsuit? If, as an employer, I'm seeing the high volume of FCRA class actions, how much comfort do I have in relying on a handful of district court opinions?"

The decision an organization makes will likely depend on its workforce composition and how it balances competing interests.

"I think employers need to adopt a hybrid compliance model," Martinez said. He added that employers should create a separate screening policy for independent contractors in which HR provides disclosure and attains authorization from the worker under a nonemployment permissible purpose, such as the option to screen "with the written instructions of the consumer."  

"Then follow the FCRA's employment-purpose pre-adverse and adverse action requirements as applicable, providing the opportunity to review the report and offering an opportunity to dispute the accuracy or completeness of the report prior to taking final adverse action," he said.

Modifying forms to refer to the worker as an independent contractor and not as an employee while also complying with the employment-purpose provisions of the FCRA should cover both bases, experts agreed.

"In practice, this means providing written disclosures in a stand-alone document but perhaps removing the word 'employee' and replacing it with something that better defines the relationship," Browne said.

Fliegel explained, "Some companies will follow the FCRA procedures for employees and independent contractors alike, because at the end of the day, the FCRA requirements are not that onerous. They add transparency to the process."

He cautioned that some courts may still read employment purposes broadly and apply the FCRA's protections to independent contractors. In those cases, the court may conduct an inquiry into the worker's relationship with the organization.

"Employers and consumer reporting agencies are best served by taking a broad view of potentially relevant documents for independent contractor screening compliance," Fliegel said.

Courts may review application documents, employment agreements and contracts, background-check disclosures and authorizations, and any evidence regarding the job.