Excerpted from a Troutman Sanders LLP blog by Cindy Hanson, David Anthony, Alan Wingfield, Timothy St. George and Patrick Dillard.

A court in the United States District Court for the Southern District of Iowa recently ruled that the protections applicable when consumer reports are obtained for “employment purposes” under the Fair Credit Reporting Act (FCRA) do not extend to reports obtained for independent contractors. This issue has been unsettled and both employers and background screening companies have lacked clear guidance with respect to background reports for independent contractors. The decision becomes part of a small but growing body of law providing clarity on this recurring issue of importance.

The case is Smith v. Mutual of Omaha Insurance Company, No. 4:17-cv-00443 (S.D. Iowa Oct. 4, 2018).

Requirements for reports used for “employment purposes”
Some of the FCRA’s most litigated protections apply when a consumer report is obtained for “employment purposes.” This includes obtaining the consumer’s written authorization in a “stand-alone disclosure” and providing a pre-adverse action notice and summary of rights if the consumer report will be used to make an adverse employment decision. Importantly, these steps are only required if the report is obtained for employment purposes. “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.” It’s these last three words that have caused confusion.

Given the strict requirements, employers often find themselves defending lawsuits – including class action lawsuits – under this provision of the FCRA. Some courts have even been willing to extend the requirements to consumer reporting agencies under certain circumstances. Claims based on alleged violations of these requirements have led to many multi-million dollar settlements. Yet, the courts have not reached a consensus on whether these requirements apply equally to reports obtained for independent contractors.

The Court’s Decision
Plaintiff alleged he had applied to contract with Mutual of Omaha as an insurance salesperson but had not been hired due to a falsely reported felony on his background check. He alleged Mutual of Omaha failed to provide him with the statutorily-mandated prior notice that the background check had led to his non-hiring. Mutual of Omaha moved to dismiss the claim on the basis that Smith was only applying to work as a contractor and, therefore, the FCRA’s pre-adverse action notice requirement did not apply. Plaintiff responded that he was actually applying as an employee and, even if he was a contractor, the FCRA’s requirements applied to contractors as well as employees.

In finding the FCRA’s pre-adverse action requirement did not apply to reports obtained for independent contractors, the Court first noted how the question was “altogether separate from the question of whether Smith himself would have been an employee.” The Court looked at the plain language of the statute as being limited to reports used for “evaluating a consumer . . . as an employee.” Finding this “unambiguous,” the Court concluded “the FCRA’s requirement of pre-adverse action notice only applies when an applicant applies to be an employee.” In reaching this conclusion, the Court followed the reasoning of 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).

Although the Court decided the FCRA did not apply to independent contractors, it ordered limited discovery on the issue of whether Smith qualified as an employee or independent contractor, rather than granting outright Mutual of Omaha’s Motion to Dismiss with prejudice.

An Unsettled Issue
While Judge Jarvey in the Southern District of Iowa took a common-sense approach in reading the statute, some support exists for reading “employment purposes” to encompass independent contractors. Indeed, the Federal Trade Commission noted in its 2011 staff report, 40 Years of Experience with the Fair Credit Reporting Act, that “’employment purposes’ is interpreted liberally” and it “may apply to situations where an entity uses individuals who are not technically employees to perform duties.” This theoretically could include independent contractors, agents, and volunteers, so long as the relationship is substantively analogous to employment. This interpretation seems largely based on a 1975 decision from the Fourth Circuit, Hoke v. Retail Credit Corp., 521 F.2d 1079 (4th Cir. 1975), which noted in dicta the FCRA could apply to independent contractors under some circumstances because courts “are not constrained to limit its application by the common-law concept of master and servant.” This expansive interpretation could be reconciled with Judge Jarvey’s approach by the view that whether the FCRA requirements apply depends on the facts and circumstances of a given relationship, rather than the formal designation of someone as an independent contractor.

Although one district court decision does not carry the day on this issue, employers and background screening companies alike should welcome this decision. Still, when obtaining and furnishing background reports for independent contractors, companies should be mindful that other courts may read “employment purposes” broadly and impose the FCRA’s requirements for reports on independent contractors, and that personnel formally denominated an “independent contractor” may not be treated as such in court but rather could be deemed an employee for FCRA purposes, depending on the circumstances. To limit potential lawsuits, companies may consider obtaining the applicant’s authorization for a background check and providing them notice of any adverse decision based on that background check.