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Independent Contractors vs. Employee vs. FCRA – It’s Not as Settled as You Think

It is no surprise that the Fair Credit Reporting Act (FCRA) is the subject of many lawsuits and multi-million dollar class action settlements, particularly when it comes to a consumer report being obtained for “employment purposes.” This includes the “stand-alone disclosure” requirement and the two-step adverse action process when making an adverse employment decision.  What is a surprise is that even when we think FCRA issues are settled, they can arise again and be interpreted differently than they had been before.  Specifically, the issue of whether the FCRA requirements apply to independent contractors has recently been brought back to the forefront.

Contrary to the long-standing approach of many employers, in Smith v. Mutual Omaha Insurance Company, the Southern District of Iowa held that the protections afforded when consumer reports are obtained for “employment purposes” under the FCRA do not extend to reports obtained for independent contractors.  In this case, Smith applied as an insurance salesperson contractor with Mutual Omaha.  He was not hired because of an inaccurately reported felony on his background screening report.  However, Mutual Omaha did not provide prior notice before advising him that he did not get the position.  Smith brought suit, alleging a violation of the FCRA requirement of providing a pre-adverse action notice and a summary of rights if a consumer report is used to make an adverse employment decision.  Mutual Omaha moved to dismiss on the basis that Smith was an independent contractor and not an employee, so that the FCRA’s pre-adverse action notice requirement did not apply.

“Employment purposes” is defined by the FCRA as “a report used for the purpose of evaluating a consumer for employment, promotion, reassignment or retention as an employee.” 15 U.S.C. § 1681a(h) (emphasis added).  The court looked at the plain language of the statute and found that there was no ambiguity– that the requirement applies only to employees and not independent contractors.  In doing so, the court followed the reasoning of two prior cases–the Northern District of Ohio in Johnson v. Sherwin-Williams Co., 152 F. Supp. 3d 1021 (N.D. Ohio 2015) and the Eastern District of Wisconsin in Lamson v. EMS Energy Marketing Service, Inc., 868 F. Supp. 2d 804 (E.D. Wis. 2012).

In the Lamson case, a Wisconsin federal court judge also held that the FCRA’s disclosure obligations do not apply to independent contractors. In that case, a sales representative filed suit against EMS Energy Marketing Service after he was terminated, based on claims that they failed to provide him with the written notice of his rights and a copy of the background screening report.  The court ruled that Lamson was hired as an independent contractor, not an employee, and that the language of the statute refers only to employees. As such, the FCRA’s requirements did not apply.

With these cases, it appears there is a trend that the FCRA requirements do not apply to independent contractors.  However, it wasn’t long before the Lamson case that the Federal Trade Commission issued contrary guidance on this particular subject, noting “’employment purposes’ is interpreted liberally” and it “may apply to situations where an entity uses individuals who are not technically employees to perform duties” in its 2011 staff report titled 40 Years of Experience with the Fair Credit Reporting Act.  Specifically, the FTC stated:

INDEPENDENT CONTRACTORS, AGENTS, AND VOLUNTEERS 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.

The FTC relied, in part, on the 1975 case of Hoke v. Retail Credit Corp., 521 F.2d 1079 (4th Cir. 1975), which noted that courts “are not constrained to limit its application by the common-law concept of master and servant,” so the FCRA could apply to independent contractors under some circumstances.

Based on the FTC’s liberal interpretation, many employers have proceeded with caution (and justifiably so) by applying the FCRA’s requirements to all applicants, regardless of their status as employee or independent contractor.  There is now a third ruling demonstrating this may not be necessary.  This conflict continues to beg the question – does an employer need to abide by the FCRA when it comes to independent contractors?

One may argue that in order to “play it safe” until there is a definite answer to this question, an employer should merely treat everyone the same whether they are independent contractors or employees.  However, this could contradict a long-standing employment law doctrine, which differentiates the two categories.  If an employer treats an intended independent contractor as an employee for FCRA purposes, could they be deemed an employee for other purposes?  This leads down a path filled with issues of interpretation and sources of potential litigation.

There is also the question about state requirements.  Other than the FCRA, certain states, such as Pennsylvania, California, and Massachusetts, to name a few, also have their own requirements when it comes to pre-adverse action notices.  Are they going to fall under the broader interpretation or the narrower one, as exemplified in the Smith case?  As far as statutory construction, all three state statutes specifically use the word “employment.”   For example, Pennsylvania mentions “employment applicant” and “suitability for employment,” while California says “position of employment” and Massachusetts uses “employment decision.”  Following the reasoning of the Southern District of Iowa, it would appear that these statutes apply to employees and not independent contractors.  However, the courts in these (and other) states do not have to follow Iowa’s reasoning and could make their own decision, independent of the ruling in the Smith case.

Ultimately, this is one district court’s opinion, but the evolution of this issue demands attention.  Other courts could take the broader interpretation that “employment purposes” includes the work of independent contractors, depending on the circumstances.  Until there is more clarification, employers may consider treating independent contractors the same way they would treat employees for the purpose of the FCRA’s requirements.  In doing so, they would be well-advised to create a separate background screening policy for independent contractors, rather than including them in the employee background screening policy.  Modifying forms to refer to the applicant as an independent contractor and not as an employee could help to avoid the question of the status of that work relationship for other reasons later.

At Hire Image, we understand the various issues surrounding the FCRA, including the distinction between employees and independent contractors.  Additionally, our disclosures and authorizations already cover contractors and volunteers.  Contact us to discuss your situation and ways in which we can help.


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