March 15, 2019
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.
August 24, 2018
On August 20, 2018, the Supreme Court of California held that the state’s Investigative Consumer Reporting Agencies Act (“ICRAA”) was not unconstitutionally vague as applied to employer background checks, despite some overlap with another state statute, the Consumer Credit Reporting Agencies Act (“CCRAA”). In Connor v. First Student, Inc., a conflict between two courts of appeal about whether the ICRAA applied if a background screener did not obtain the information from personal interviews was resolved. The case had a long and interesting history and had been pending for eight years.
While the statutes involved in this case have some differences, including the information they govern, the obligations and limitations they impose, and the remedies they provide for violations, they have something important in common. Both the ICRAA and the CCRAA govern reports that contain information relating to character and creditworthiness, which was based on public information and personal interviews and used during the employment background screening process. As such, the background check involved in this case was found to be an investigative consumer report under the ICRAA, triggering its application, and even though the CCRAA also applied, the defendants were not exempt from the requirements under ICRAA before conducting the background check.
Key takeaways from the court’s ruling in Connor include:
(1) partial overlap between two statutes does not render one unconstitutionally vague; and
(2) the ICRAA and CCRAA can coexist, as both acts are sufficiently clear, and each regulates information that the other does not.
With this decision, California companies should confirm with their background screener whether or not they fall under the ICRAA and are complying with its provisions, as well as with the CCRAA.
May 8, 2017
FCRA compliance violations have been the subject of frivolous lawsuits brought against employers. A recent Virginia Federal Court found that a plaintiff lacked standing to sue a company for obtaining his consumer report without a permissible purpose (Dilday v. DIRECTV).
At the heart of this case, the plaintiff claimed that DIRECTV obtained his consumer report from Equifax, but that he never had an account with DIRECTV. Contending that Equifax didn’t have a lawful or reasonable basis to believe that DIRECTV had a purpose to obtain and use his consumer report, he is entitled to damages. However, the plaintiff failed to plead exactly what those damages were.
Let’s back up just a bit. You may recall the Spokeo, Inc. v. Robins case that involved whether a person can bring a lawsuit when a company violates a federal privacy law. To do this, a plaintiff must have “standing” to sue. Spokeo argued that the case should be dismissed because the plaintiff didn’t prove “a concrete injury” (i.e. real and not abstract) due to a violation of the FCRA involving the publication of the plaintiff’s inaccurate personal information. The U.S. Court disagreed and denied Spokeo’s motion to dismiss, and Thomas Robins prevailed, suing Spokeo for willful violations of FCRA charging that the inaccurate information harmed his employment prospects. Because data brokers sell tremendous amounts of sensitive consumer data, often without verifying its accuracy or completeness, inaccurate data can have dramatically negative effects on individual consumers. The Court maintained the ability of consumers to use privacy and consumer protection laws to hold data collectors accountable for misuse of personal data. With the growing problem of data breaches and identify theft in the U.S., federal privacy laws are more critical than ever.
The notion that the FCRA creates a broad right to privacy and that FCRA violations cause “privacy issues” was rejected in Dilday. The judge noted “[w]hen a plaintiff alleges a statutory violation, he usually must plead an additional injury in order to satisfy the concreteness requirement” discussed in the Spokeo case. He further explained that while sometimes a violation of a statutory right is itself a concrete injury, the situation was a narrow exception where Congress codified a cause of action with intangible harms where recovery was permitted at common law.
The court went on to say that the right to privacy protected at common law was a narrow right applied only when highly offensive information became a matter of widespread, public knowledge. However, providing a consumer report to a user does not fall within that category. The Plaintiff could have only proceeded if the statutory violations were sufficient to constitute a concrete injury. However, the allegations did not themselves constitute an injury-in-fact in this case.
Hire Image is hopeful that more opinions such as this in favor of employers are to come. However, it does not mean that employers can now simply ignore FCRA compliance. Perhaps frivolous lawsuits and intense scrutiny on conducting background checks may subside but, until then, following the rules is critical. For more information on FCRA compliance click here.
May 27, 2016
Take even just a quick glance at the Hire Image newsfeed, and you won’t be able to miss the barrage of stories about employers with class action lawsuits alleging violations of the Fair Credit Reporting Act (FCRA) to newer and more restrictive state, county, or city-specific laws that impose additional responsibilities during the hiring process. The legal requirements by which employers must abide are becoming increasingly convoluted and duplicative as laws are implemented at every level of government. Over the past year, many large employers, Wells Fargo, Chuck E. Cheese, and Home Depot to name just a few, have been tripped up by avoidable mistakes. From background check disclosure forms riddled with extra information, to the lack of a signed authorization, or improper adverse action steps, judges determined that basic FCRA rules had been broken.
Imagine adding into the mix all of the special requirements associated with local laws, and the risk of non-compliance increases exponentially. Much like a pilot ensures a safer flight by completing a pre-flight checklist EVERY time, HR professionals can reduce the risk in their background screening programs by committing to following a step by step process. Hire Image has developed COMPLY to clarify the required steps and provide a repeatable process that should be applied with every background check.
Candidate notification (stand-alone disclosure)
Obtain candidate’s signed authorization AND provide
Mandatory FCRA summary of rights and state disclosures
Pre-adverse notification (if applicable)
Leave time for candidate to dispute
You decide. Hire, or Not (send adverse action letter)
Candidate Notification
One of the most common violations cited in FCRA lawsuits has to do with a disclosure that doesn’t meet requirements. Prior to obtaining a background check report for employment purposes, a clear and conspicuous disclosure must be made in writing to the applicant, notifying them that they may be the subject of a background check. The disclosure document must consist solely of the disclosure and, therefore, should never:
- Include release of liability language or any other extraneous information
- Be embedded in other hiring documents such as the employment application
- Include state specific disclosures or notices
Obtain Candidate’s Signed Authorization
An applicant’s signed consent must be collected prior to initiating a background check. The signature can be collected on paper or electronically. If you utilize an online system that manages capturing the signature, it is important that the system meets the requirements of the Federal E-Sign Act. The Hire Image system meets these requirements, but if you use another provider or ATS system it is important to verify that their technology complies with E-Sign. Certain states require additional authorization as well.
Mandatory FCRA Summary of Rights and state disclosures
Prior to initiating a background check, applicants must receive a copy of the FCRA summary of rights. It is important that the most current version of the document is in use at all times. Even seemingly minor issues are considered a violation. Some states also require that applicants be provided with specific disclosures or notifications.
Pre-Adverse notification
If it is determined that you will not hire someone based in whole or in part on contents of the background check report, you MUST:
- Provide notice in writing to the applicant. The notice must include:
- Name, address, and toll free number of the background screening agency that produced the report.
- A statement that the background screening agency did not make the decision to take adverse action and cannot provide specific information as to why action was taken.
- Provide a copy of the FCRA summary of rights
- Provide a copy of the background check report.
- Provide information and/or documents required by state or local law- this could include but is not limited to, listing the specific information from the report that is the basis for potential action and enclosing locations specific notices.
Leave time for dispute
The FCRA states vaguely that a “reasonable” amount of time must be allowed for dispute prior to taking final adverse action. It is generally acknowledged that a reasonable amount of time is not required to exceed 5 business days from the time the applicant reviews a copy of the report. If the applicant disputes information on the background check report, the background screening agency has up to 30 days to re-investigate and submit new information if applicable. If the applicant doesn’t dispute, final adverse action can take place once the dispute period has ended. Implementing a dispute period of 7 business days will cover nearly all jurisdictional situations. However there are several locations with unique dispute time requirements.
You Decide – Hire or Not (send adverse action notice)
Once you’ve received new information from your background screening agency in the case of a dispute, or the dispute period has expired, the final decision can be made regarding whether or not employment will be denied or an offer rescinded. This final step also requires that you:
- Provide notice to the applicant in writing. The notice must include:
- Name, address, and toll free number of the background screening agency that produced the report.
- A statement that the background screening agency did not make the decision to take adverse action and cannot provide specific information as to why action was taken.
- Notice of the applicant’s right to receive a free copy of the report by submitting a written request to the consumer reporting agency no later than 60 days after receipt of the notice
- Provide information and/or documents required by state or local law- this could include but is not limited to, listing the specific information from the report that is the basis for potential action and enclosing locations specific notices.
While COMPLY can help remind you to complete each step in the background screening process, it is only a guide. Hire Image does not provide legal advice and this information doesn’t cover every possible nuance of the screening process or your legal obligations for compliance. We recommend that you work closely with your employment attorney and background screening agency to verify that your program and processes address the various laws at each level of government.
April 18, 2016
by Rebecca E. Kuehn
Responsible employers screen applicants and employees to protect the safety and welfare of their workforce and the community and to comply with state and federal law. Working with background screening companies, employers are able to identify and address possible risks. But this responsible practice may lay the groundwork for a class action lawsuit if an employer does not mind the details.
Background checks are covered by the Fair Credit Reporting Act (FCRA). Under the FCRA, an employer seeking to obtain a background check on an applicant or employee must follow certain requirements that are unique to employment: written disclosure; written consent; and, where applicable, pre-adverse action notices. Because these requirements may apply to each screening, any failure in compliance is an attractive target for class action attorneys because the violations may be numerous and similar. The best illustration of this risk is in the recent spate of class action cases concerning the written disclosure requirement.
The FCRA requires that, before an employer can obtain a report, it must provide the consumer with a “clear and conspicuous disclosure…in writing” that a consumer report may be obtained for employment purposes. The disclosure must be provided to the consumer “in a document that consists solely of the disclosure.” This last provision is the one that trips many employers up – usually because they are trying to combine other relevant notices and helpful information with the required disclosure. One word of advice: Don’t.
Multiple class actions have been filed around the country against employers for including additional provisions in their written disclosures. Some examples include:
Waivers of claims/releases from liability
State law disclosures and waivers
Explanation of employer’s screening policies
Privacy policy
At-will language and hours of work
A number of cases are still in litigation, but several have settled for sums ranging from $1.75 million dollars to $13 million dollars. This is because the exposure can be very high: the FCRA permits statutory damages ranging from $100-$1000 per violation (plus attorney’s fees), and current case law has permitted these cases to proceed even in the absence of any actual damages.[1] Unlike other consumer protection statutes, the FCRA does not contain a cap on class action damages.
The lesson for employers is to review the forms that you are using, including any sample forms provided by your screening provider. Make sure that the disclosure forms do not contain any “extras.” Note: the FCRA specifically allows an employer to include the written authorization with the written disclosure, and employers may prefer to collect the consumer’s signature on a combined disclosure/authorization document as proof that the applicant was provided with the written disclosure. Just be careful that the addition of the authorization does not come with any unwanted baggage.
Rebecca E. Kuehn (rkuehn@hudco.com) is a partner in Hudson Cook, LLP’s Washington, D.C. office. Ms.Kuehn’s practice is concentrated on regulatory issues surrounding the collection, sharing, and use of consumer data, and she counsels financial institutions, consumer reporting agencies, service providers, and others in complying with federal and state laws, including the Fair Credit Reporting Act, the Gramm Leach Bliley Act, and other privacy laws and regulations. She represents clients before federal and state agencies, particularly the Federal Trade Commission and Consumer Financial Protection Bureau, in investigations and other proceedings, and has served as an expert witness in cases involving the Fair Credit Reporting Act.
4817-9324-9072, v. 1
[1] The question of whether a plaintiff has standing to bring a claim for statutory damages in the absence of any injury in fact is currently pending before the United States Supreme Court.
January 25, 2016
The on-going discussion about what is permissible in a disclosure and authorization notice (hereinafter “notice”) for Fair Credit Reporting Act (FCRA) purposes continues. In a recent federal district court case in the Northern District of Court of California (Thomas Lagos v. The Leland Stanford Junior University, 5:15-cv-04524) the judge dismissed Defendant’s motion to dismiss on the grounds that the state disclosures included with the notice could potentially mean it is not a “clear and conspicuous disclosure.”
Under the FCRA employers have an obligation to provide the job applicant with a “clear and conspicuous” written notice, in a stand-alone document, explaining to the job applicant that a background check will be conducted for employment screening purposes. Thereafter the employer must secure the job applicant’s written authorization for said background check. (15 U.S.C. § 1681b(2)(A)) Separately, several states require that certain notices be provided by the employer with respect to a pre-employment screening background check to advise residents of additional rights. For instance, California, Minnesota, Oklahoma and New York.
Litigation Posture
Plaintiff’s bar has been attacking the validity of the Notices employers provide on the grounds that they are not a “clear and conspicuous disclosure” and in a stand-alone document under the FCRA. This hinges on the argument that certain language in the Notice is extraneous, and the courts have held that in certain situations some language in the Notice can be extraneous, such as release of liability language.
Stanford Case
This case is currently stayed pending the Supreme Court’s decision in Spokeo v. Robins. However, earlier in the proceedings the judge refused to grant Defendant’s motion to dismiss stating that the Plaintiff alleged facts sufficient to state a facially plausible claim for relief. Stanford’s notice included seven state law notices informing applicants of additional rights under state law. It also included a sentence related to the offer of employment. The judge stated that the state disclosures combined with this one sentence “plausibly” violated section 1681b(b)(2)(A)(i)’s requirement for the notice to be in a document consisting “solely of the disclosure” because they are not “‘closely related’” to the FCRA disclosure. The judge stated that “it therefore is unclear how the state law notices contribute to the disclosure required by the FCRA.” (Order Denying Motion to Dismiss, p. 4)
Stanford’s notice included the following in this order: the Consumer Disclosure and Authorization Form (separate page); Additional State Law Notices (CA, ME, MA, MN, NJ, NY, WA) (on two, separate pages); Authorization of Background Investigation (separate page); A Summary of Your Rights Under the Fair Credit Reporting Act; California summary of rights; New Jersey summary of rights; New York Article 23-A; Washington summary of rights.
Montserrat Miller is a partner in the Privacy and Consumer Regulatory; Immigration; and Government Affairs Practice Groups at Arnall Golden Gregory. She assists clients with privacy and data protection-related matters, including counseling and defending companies regarding their compliance under the Fair Credit Reporting Act (FCRA), Driver’s Privacy Protection Act, Gramm-Leach-Bliley Act, Children’s Online Privacy Protection Act and state data breach statutes. Ms. Miller’s practice includes a special emphasis on the use of criminal and credit history information and compliance with the FCRA, Title VII of the Civil Rights Act of 1964 and state laws which impact the use of background checks for employment screening and tenancy purposes.
