Conducting Background Checks On Contingent Workers

By: Douglas K. Rosenblum , Jennifer R. Russell

Employers have an obligation to exercise due diligence in determining not only who they hire, but also who they allow on their premises to perform work.  This includes not only regular employees, but also independent contractors and other contingent workers, including freelancers, consultants and long-term temps.  Employers have significantly increased their use of contingent workers in recent years, since such workers enable employers to enjoy savings in terms of tax withholding, Medicare and FICA contributions and unemployment and workers’ compensation premiums when the workers are used and classified properly, and since they offer employers the opportunity to utilize uniquely skilled, top talent in their workforce, all while allowing the worker to enjoy flexibility and work-life balance.  Staffing Industry Analysts, a global advisor on contingent work, recently reported that temporary help jobs were up 6.7% from last year.  This number can only be expected to rise in light of advancing technology and the globalization of the marketplace.

Use of contingent workers, however, raises the question of whether or not employers are free to conduct background checks on such workers.  Indeed, employers’ use of background checks has also increased in recent years.  The AAIM Employers Association, a St-Louis-based provider of business services to over 1,600 employers, also recently reported that, of the companies it serves, the number conducting background checks more than doubled last year.  That was an overall increase of 166% in the usage of background checks in the past 3 years.  This increase has been attributed to the need to protect employer property and assets, other employees and customers, potential liability for negligent hiring and the overall ease of access to information via the Internet.

Federal Law on Background Checks

For some industries, federal law requires background checks of both employees and independent contractors. Truck drivers, including independent contractors, must undergo a background check as required by Federal Motor Carrier Safety Act regulations. Indeed, in one recent case in New Hampshire, independent contractor drivers hired to deliver pharmaceuticals were required to first pass a background check, drug test and motor vehicle records check before delivering the products.  Appeal of Aspen Contracting NE, LLC, 164 N.H. 88 (2012).  There are, however, no federal laws or regulations applying to all contingent workers.

In 2011, the U.S. Supreme Court held in National Aeronautics and Space Administration v. Nelson, 131 S. Ct. 746, that a background check of independent contractors was a reasonable employment-related inquiry and did not violate any claimed right to informational privacy by NASA’s independent contractors, which supports the use of such checks when justified by the job in question.  In April 2012, the U.S. Equal Employment Opportunity Commission (“EEOC”) issued revised employer guidelines on the use of criminal background checks and proclaimed that it will act under its Title VII enforcement powers against employers that use background checks that have a disparate impact on African-American and Hispanic applicants.  Since that time, the EEOC has continued to investigate and file lawsuits against employers challenging the use of background checks, but has not been successful.  For instance, in EEOC v. Freeman, No. RWT 09cv2573, 2013 WL 4464553 (D. Md. Aug. 9, 2013), the judge noted that the “[c]areful and appropriate use” of background checks is “an important and, in many cases essential, part of the employment process of employers throughout the United States,” including the EEOC itself.

Notably, the EEOC does not preclude employers from conducting background checks on contingent workers.  Overall, both the EEOC and the Third Circuit maintain that employers can conduct a criminal background check if it is job-related for the position in question and consistent with business necessity. The Third Circuit has required employers to provide empirical evidence and expert testimony to support the business necessity defense.  Employers should also target their screening and not impose a blanket policy of rejecting applicants by considering at least the nature of the crime, the time elapsed and the nature of the job.  Employers should also be careful to avoid any inconsistencies in the hiring process, as they can be used as evidence to establish that a protected characteristic motivated an employer’s decision.

The federal Fair Credit Reporting Act, 15 U.S.C.A. §§ 1681, et seq. (“FCRA”), provides requirements for the collection, assembly and use of consumer report information contained in background checks. The FCRA defines “employment purposes” as “a report used for the purposes of evaluating a consumer for employment, promotion, reassignment or retention as an employee.”  The Federal Trade Commission (“FTC”), which enforces and interprets the FCRA, issued an informal staff opinion in 1988 stating that the term “employment purposes” includes independent contractors.  This was also the ruling by the Fourth Circuit Court of Appeals in Hoke v. Retail Credit Corp., 521 F.2d 1079, 1082 (4th Cir. 1975), cert. denied, 423 U.S. 1087 (1978), which based its decision in part upon the broad remedial purposes of the FCRA. Therefore, federal law appears to permit background checks for contingent workers under federal law, but the FCRA standards must be followed.

Pennsylvania Law on Background Checks

Pennsylvania is one of several states with a statute applying to background checks – the Criminal History Record Information Act (“Act”), 18 Pa. C.S.A. §§ 9101, et seq.  Under the Act, employers generally may not have access to the following criminal history records to determine eligibility for employment: (1) arrest records in which 3 years have lapsed from the date of arrest, no conviction occurred, and no proceedings are pending seeking a conviction; (2) expunged or pardoned convictions; and (3) investigations, intelligence, treatment, medical or psychological matters or other nonpublic matters.  Employers may consider a prospective employee’s convictions only to the extent they relate to the applicant’s suitability for the position in question.  Applicants must also be notified in writing if they were not hired based in whole or in part on their criminal history record.  The Act does not refer specifically to contingent workers, but also does not expressly preclude employers from performing background checks on contingent workers. Indeed, as under federal law, Pennsylvania has statutes that require background checks for specific professions, including teachers, private detectives, drivers of vehicles of common carriers, health care workers, security guards and child care workers, some of which specifically refer to checks being performed on independent/third party contractors.

In addition, there is significant case law authority in Pennsylvania that supports employers’ ability to conduct background checks on contingent workers. In those cases, conducting background checks did not cause the individuals to be considered employees. For example, in Quality Care Options v. Unemployment Comp. Bd. of Review, 57 A.3d 655 (Pa. Cmwlth. 2012), an unemployment compensation matter, the Commonwealth Court found that the Board of Review incorrectly found that the claimant, a direct care worker who was an independent contractor for a staffing agency, was instead an employee entitled to benefits.  Notably, the independent contractor was required to undergo, pay for and pass a criminal background check.  The background check did not render him an employee (or render the company and its clients co-employers) in the eyes of the court. Among the facts reviewed were that the claimant had entered into an independent contractor agreement, that the client for whom the worker provided services controlled the time, place and manner of the services and supervised the claimant, not the company with whom the claimant entered into the agreement.

Indeed, it may be argued that employers should conduct such background checks, since Pennsylvania courts follow the Restatement (Second) of Torts § 411, which provides that an employer is “subject to liability for physical harm to third persons caused by his failure to exercise reasonable care to employ a competent and careful contractor (a) to do work which will involve a risk of physical harm unless it is skillfully and carefully done, or (b) to perform any duty which the employer owes to third persons.” Therefore, employers could face liability for negligent hiring if a third-party, including an employee, is injured by a contingent worker.

Conclusion

Conducting background checks of contingent workers could expose an employer to a risk of being liable as a co-employer along with any staffing firm.  Nevertheless, the risk increases only slightly, since there are many other factors that ultimately determine whether employers are considered to be a joint or co-employer. Those factors include, but are not limited to, who conducts the training, who gives daily instruction, whether there are set work hours and a set schedule at a set location, whether there is a continuing relationship between the worker and the company, how the worker is paid, whether the worker is paid for travel and other expenses, whether the worker performs work or is available to perform work for anyone else and whether the worker has signed an independent contractor agreement. Employers considering conducting background checks of their contingent workers should examine these factors to determine whether they weigh in favor of it being considered a co-employer with a staffing agency. However, whether or not an employer conducts background checks does not appear to carry much weight in this analysis.

There are also steps employers can consider to manage the co-employment risk. Employers should review agreements with staffing firms and contingent workers with legal counsel to establish the boundaries of the relationship, responsibilities and liabilities. Companies may also consider having contingent workers sign waivers prepared by legal counsel that state they are employees of the staffing firm and waive any claim to compensation or benefits from the company. Benefit plans should also explicitly and even-handedly exclude contingent workers. In addition to issuing paychecks, withholding employment taxes and providing required insurance, staffing firms should also handle setting rates of pay, negotiating work hours and conditions, handling worker complaints and providing general training, if possible.

Reprinted with permission from the September 20, 2013 issue of The Legal Intelligencer. © 2013 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

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