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Independent contractors are self‑employed professionals who provide services to businesses under a contractual agreement rather than an employment relationship. They maintain control over how work is performed, supply their own tools and resources, and are responsible for their own taxes and business expenses. Unlike employees, independent contractors are classified based on a holistic, multifactor analysis that evaluates control, independence, financial risk, and the nature of the working relationship.

This classification affects tax obligations

Are independent contractors considered employees under the FCRA?

Unfortunately, there is no clear answer.

The Federal Trade Commission (FTC) in its most recent staff report (in 2011) states that “employment purpose” is interpreted broadly and may apply to situations where individuals are not technically employees. Reports on consumers who are clearly not employees under traditional common law principles can nevertheless be construed as consumer reports for employment purposes.

It is up to the employer to determine the purpose of the background check based on its particular facts and circumstances. Some points to consider include:

1) Is the individual free from control and direction in connection with the performance of the service?

2) Is the service performed outside of the usual course of business of the employer?

3) Is the individual customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed?

If the answer is “yes,” then most likely a report on the individual would not be under the FCRA’s employment purpose.

While a few recent district court decisions have held that the FCRA employment purpose does not apply to contractors, the FTC has not budged on its stance that employees and nontraditional workers alike are protected under the FCRA.

Where there are gray areas, the conservative approach is to follow the employment purpose requirements but modify disclosure and authorization forms and other documents to reflect an independent contractor status.

April 13th, 2022|Categories: Compliance Corner for Employment Decisions|Tags: , , |

Independent contractors and the FCRA

Must employers provide the protections required by the Fair Credit Reporting Act (FCRA) to prospective independent contractors? 

Not according to a new decision from an Iowa court (see Smith v. Mutual of Omaha Insurance Company, No. 4:17-cv-00443 (S.D. Iowa Oct. 4, 2018)) which grappled with the question in the context of a lawsuit filed by an individual against an insurance company where he applied to contract as a salesperson but was rejected because of a falsely reported felony in his background check. The plaintiff accused the insurance company of violating the FCRA by failing to provide him with the statutorily required prior notice that the background check resulted in his not being hired.    

The insurance company asked the court to dismiss the lawsuit, claiming that the FCRA only requires such notice when an applicant seeks to be hired as an employee, and not as an independent contractor. Since the plaintiff applied for an independent contractor position, he was not entitled to the protections of the statute, the insurance company argued. 

The plaintiff countered that he was applying to be an employee of the insurance company and that it was too early to dismiss the case, as further discovery was needed. In the alternative, he argued that the FCRA should still govern his relationship even as an independent contractor.

In ruling on the FCRA issue, Judge John Jarvey began with the language of the law. The FCRA is a broad statute, Judge Jarvey said, and some of its most stringent protections apply when a background check is being obtained “for employment purposes.” 

The definitions section of the FCRA, at 15 U.S.C. § 1681a(h), states that “

[t]he term ‘employment purposes’ when used in connection with a consumer report means a report used for the purpose of evaluating a consumer for employment, promotion, reassignment or retention as an employee.” This text “makes clear that the pre-adverse action notice requirement only applies when a consumer report is used for employment purposes,” Judge Jarvey wrote. “The meaning of ‘employment purposes’ is specifically defined in the statute, and it is defined as being ‘used for the purpose of evaluating a consumer for employment, promotion, reassignment or retention as an employee.’”  District courts in Ohio and Wisconsin have reached the same conclusion, Judge Jarvey noted, citing the decisions for support. 

Notably, the Federal Trade Commission (FTC) in its 2011 staff report entitled “40 Years of Experience with the Fair Credit Reporting Act” provided a seemingly contrasting interpretation. The FTC stated that “the term ‘employment purposes’ is interpreted liberally to effectuate the broad remedial purpose of the FCRA and 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’s view can be reconciled with that of Judge Jarvey’s by taking the approach that the applicability of FCRA’s requirements depends on the facts and circumstances of the particular relationship, rather than the formal designation of someone as an independent contractor. 

Given the still remaining disputed issue of whether or not the plaintiff would have been an employee or an independent contractor for the insurance company, the court ordered limited discovery on the issue and declined to dismiss the suit. 

January 2nd, 2019|Categories: Compliance Corner for Employment Decisions|Tags: , , |

Background screening of independent contractors

The issue of worker misclassification is a hot topic for employers, with state and federal authorities as well as class action suits challenging whether a worker is an employee or an independent contractor. But what about the differences in background screening for independent contractors? Are they subject to the same disclosure and authorization requirements, adverse action notices, and dispute rights that apply to employees?

The answer: it depends.

While the Fair Credit Reporting Act (FCRA) doesn’t directly address independent contractors, the Federal Trade Commission (FTC) has issued two advisory opinions stating that they should be afforded the same rights as employees. The FTC also reiterated this view in its staff report published in July 2011, stating that the FCRA’s broad definition of the term “employment purposes” extends beyond traditional employment relationships. (FTC Staff Report at 32.)

The Allison Letter (a response to an inquiry from a Georgia worker named Herman L. Allison) addressed the issue in the context of a trucking company that hired drivers who owned and operated their own equipment. Characterizing the situation as a “business relationship” and not an “employment relationship,” Allison asked whether the protections of the FCRA still applied.

Taking a broad interpretation of the term “employment,” the FTC said that treating independent contractors differently than employees would hamper the goals of the FCRA. Even a homeowner who conducts a background check on a handyman or other worker hired as an independent contractor should follow the FCRA requirements, the agency wrote.

In a second letter, the FTC considered a query from Harris K. Solomon, an attorney in Florida. A client wished to conduct background checks on individuals selling its insurance products and handling title exams. Again, the agency said the checks would trigger the requirements of the FCRA.

The FTC’s advisory letters – both issued in 1998 – as well as the staff report, are advisory and non-binding on other parties. But they provide insight into how federal authorities would address the rights and protections owed to an independent contractor as the subject of a background check.

However, on the other end of the spectrum, a Wisconsin federal court judge in 2012 held that the disclosure obligations of the FCRA do not apply to independent contractor relationships. The case involved a sales rep who sued EMS Energy Marketing Service after he was terminated. The plaintiff claimed that the company failed to provide him with either the written notice of his rights or a copy of the report as required by the statute. But the court granted summary judgment for the employer, ruling that Lamson was hired as an independent contractor, not an employee, and therefore, the FCRA did not apply. The language of the statute refers only to employees and if a worker is not an employee “it necessarily follows that he or she is not covered by the FCRA,” the court wrote in Lamson v. EMS Energy Marketing Service. The court also distinguished the FTC letters as advisory opinions, adding that the “letters, in and of themselves, are of limited, if any, persuasive power.”

To read the Allison Letter, click here.

To read the Solomon Letter, click here.

December 3rd, 2014|Categories: Commercial Transactions Due Diligence|Tags: , , , |

Supreme Court ruling extends SOX whistleblower protection to private contractors

On March 4, 2014, the Supreme Court in a split decision ruled that employees of private companies servicing public companies are covered by the whistleblower protections of Sarbanes Oxley Act of 2002 (“SOX”)

[U.S., No. 12-3, 3-4-14]. In this case, two employees of a private company contracted by a publicly-traded mutual fund alleged that they were terminated in retaliation for raising fraud issues about the fund. With this decision, the Supreme Court has expanded the universe of companies regulated by the SOX whistleblower provision from about 5,000 public companies to potentially millions of private ones, including the smallest of businesses. Employers of every size and type have to be prepared for potential SOX whistleblower retaliation claims if they are a contractor or subcontractor of a publicly traded company.

March 29th, 2014|Categories: Compliance Corner for Employment Decisions|Tags: , |
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