United States: Ruling Raises Important Considerations For Independent Contractor Background Screening

Last Updated: May 27 2019
Article by William Simmons and Rod M. Fliegel

A federal court's recent decision demonstrates the value in reviewing all documents related to the independent contractor background screening process to attempt to solidify potential defenses to expansive class-action claims. As previously discussed, background screening laws and claims—individual and class action—continue to rise.1 Class actions under the Fair Credit Reporting Act (FCRA) often seek statutory damages of $100-$1,000 for every person screened with allegedly non-compliant forms or procedures. These claims are often hyper-technical, meaning that this is one area of law where the old maxim "substance over form" does not necessarily apply. As the use of contingent workers and independent contractors continues to rise, the latest decision presents an opportunity to review current forms and processes and to potentially make adjustments before a lawsuit arises.

Overview of the Decision

The recent decision by the Southern District of Iowa in Smith v. Mutual of Omaha Insurance Company is an example of potential opportunities to enhance defenses to the hyper-technical FCRA class action claims businesses can face.2

In Smith, the plaintiff originally filed a FCRA lawsuit challenging the defendant's "pre-adverse action" process under 15 U.S.C. § 1681b(b)(3). Section 1681b(b)(3) generally requires businesses using consumer reports (background checks) "for employment purposes" to provide a copy of the report and summary of rights under the FCRA before taking any adverse action "based in whole or in part" on the report. The plaintiff claimed that he did not obtain a position as an insurance agent based on his background check, and that the company had failed to comply with these pre-adverse action requirements. The company defended the claim on summary judgment, however, in part on the threshold issue that the plaintiff was an independent contractor and therefore the prerequisite of "employment purposes" for Section 1681b(b)(3) to apply to the plaintiff was lacking. After reviewing the evidentiary record, the court ultimately held that the company was right—the position that the plaintiff applied for was an independent contractor position so the "employment purposes" FCRA requirements, including Section 1681b(b)(3), did not apply. The court followed several other federal district court decisions that also held that the FCRA's employment purposes requirements do not apply to contractor screening.3

Although the court's ruling should have ended the case, there was a catch. While the company's summary judgment motion was pending on the threshold FCRA coverage issue, the plaintiff amended the complaint to add an alternative theory of relief. The plaintiff now claimed that if it turned out that he was an independent contractor, and if the court agreed that the FCRA's employment purposes provisions do not apply to independent contractors, then the company had violated a separate FCRA provision, Section 1681b(f). Section 1681b(f), a rarely-litigated FCRA provision, states:

A person shall not use or obtain a consumer report for any purpose unless—

(1) the consumer report is obtained for a purpose for which the consumer report is authorized to be furnished under this section; and

(2) the purpose is certified in accordance with section 1681e of this title by a prospective user of the report through a general or specific certification.

The FCRA provides a list of "permissible purposes" for a consumer reporting agency (CRA) to prepare consumer reports for businesses. One of the "permissible purposes" is "employment purposes." Often, CRAs will have businesses "certify" to the purpose for which they will obtain consumer reports in the initial screening services agreement to comply with this and other similar FCRA requirements.

The plaintiff alleged in the amended complaint that the company had certified to the CRA that it would obtain consumer reports only for "employment purposes." The plaintiff thus claimed that if the company now asserted that his consumer report was not obtained for "employment purposes" via its independent contractor defense, then the company had violated Section 1681b(f) by obtaining a report for some other purpose that it had not certified to. The company moved to dismiss this alternative theory of relief, but the court held that the plaintiff could proceed to litigate the theory.

It is important to note that the court's decision on this point, unlike the independent contractor issue, was not on summary judgment and therefore not based on an evidentiary record. The court made no ruling on whether the plaintiff's assertions about the certification were, in fact, true. And the court noted that the company was correct, in theory, that there were other additional "permissible purposes" for which the company could have properly obtained plaintiff's report. For instance, the company could have been allowed to obtain the report "in accordance with the written instructions" of the plaintiff, which is another enumerated "permissible purpose" for obtaining reports. But the court noted that at the motion-to-dismiss stage, the court had to take the allegations as true that the company had obtained the plaintiff's report for a not-certified-to permissible purpose. Thus, the plaintiff stated a potential claim under Section 1681b(f).

Action Steps for Employers and CRAs

The cautionary tale from Smith is that employers and CRAs are best served by taking a broad view of potentially relevant documents for independent contractor screening compliance.

Tellingly, the Smith court looked to a variety of documents to determine that the position for which Smith had sought to be engaged was a contractor position. The court reviewed the application documents Smith completed, his independent contractor agreement, his background check disclosure and authorization, evidence about discussions regarding the opportunity, and other evidence regarding how the position would function if Smith had obtained it. The key documents repeatedly referred to Smith "contracting" with the company, and this consistency helped buttress the company's independent contractor FCRA defense.4

On the other hand, the court's decision on the plaintiff's added Section 1681b(f) claim shows that language used in other documents such as the contract between the CRA and company may also be relevant to the overall FCRA compliance analysis. Because the court's decision on this claim was non-evidentiary, it is unclear exactly what these communications will reveal. But the court's logic suggests the claim would fail if the screening contract specified that the business might seek independent contractor screening reports for permissible purposes other than "employment purposes." Of course, there may be other defenses available that were not yet before the court to consider.

Because of the potential focus on contract documents signaled by the Smith court, it can be helpful for CRAs and employers to work cooperatively on language consistency for the full array of potentially-relevant screening documents to best ensure defenses. It may also make sense for human resources personnel or in-house counsel with background check compliance expertise to be involved in contract discussions rather than having the contracts reviewed only by a vendor procurement generalist.

Importantly, the independent contractor defense may apply to class actions under several other FCRA provisions. There are an array of requirements that apply only to "employment purposed" reports, such as a special certification requirement (Section 1681b(b)(1)), "stand alone disclosure" (Section 1681b(b)(2)), and special notices or procedures for reporting public records to employers (Section 1681k). Many putative nationwide class action cases have specifically targeted these provisions. If the language of potentially-relevant documents clearly and consistently reflects a bona-fide independent contractor screening relationship, both the CRA and employer may have defenses that can be decided as a matter of law, i.e., without an expensive jury trial, for these claims.

But contractor and contingent workforce screening is a complicated compliance area, particularly because of the overlay of additional state and local legal requirements and because plaintiffs (as Smith eventually did) often claim that they are misclassified as independent contractors. Moreover, the Supreme Court has not definitively ruled that independent contractor screening is not "employment purposes" screening. These and other factors mean that there is often not a "one size fits all" approach to independent contractor screening forms and processes. Experienced counsel, compliance and human resources personnel familiar with the "360-degree" background screening litigation risks can help to brainstorm an approach and work to identify potentially-relevant documents to review based on the business's specific operations.


1 See Rod M. Fliegel, The Ninth Circuit Adopts an Expansive Reading of the FCRA's Provision Governing Background Check Disclosures, Littler ASAP (Jan. 29, 2019); Rod M. Fliegel and William J. Simmons, Third Circuit Holds Individual Plaintiffs Lack Standing for Some Alleged Violations of the FCRA's Pre-Adverse Action Notice Requirement, Littler Insight (Sept. 11, 2018); Rod M. Fliegel and Julie A. Stockton, Eighth Circuit Holds Individual Plaintiff Lacks Standing for Alleged Violations of the FCRA's Authorization and Disclosure Requirement, Littler Insight (Sept. 10, 2018); Rod M. Fliegel, Seventh Circuit Holds Class Action Plaintiff Had Standing for an Alleged Violation of the FCRA's "Pre-Adverse Action" Notice Provision, Littler ASAP (Aug. 30, 2018); Rod M. Fliegel, The Ninth Circuit Holds Plaintiff Lacked Standing for an Alleged Violation of the FCRA's "Pre-Adverse Action" Notice Provision, Littler ASAP (July 18, 2018); Rod M. Fliegel, Phillip Gordon and Barbara Cusumano, Rod Fliegel and Jennifer Mora, Weathering the Sea Change in Fair Credit Reporting Act Litigation in 2014, Littler Insight (Jan. 6, 2014); Rod Fliegel, Jennifer Mora and William Simmons, The Swelling Tide of Fair Credit Reporting Act (FCRA) Class Actions: Practical Risk-Mitigating Measures for Employers, Littler Report (Aug. 1, 2014).

2 Smith v. Mutual of Omaha Insurance Company, No. 4:17-cv-00443-JAJ (S.D. Iowa May 1, 2019).

3 Johnson v. Sherwin-Williams Co., 152 F. Supp. 3d 1021 (N.D. Ohio 2015); Lamson v. EMS Energy Marketing Service, Inc., 868 F. Supp. 2d 804 (E.D. Wis. 2012).

4 It probably did not help the plaintiff that his own original complaint had claimed he applied for an independent contractor position. In an example of the sort of legal maneuvering that occurs frequently in high-stakes FCRA class actions, once the plaintiff was apprised of the potentially powerful independent contractor defense, the plaintiff then amended his complaint to claim that he had really applied for an employment position.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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