5 Best Practices in Conducting Independent Contractor Background Screens

Legal Disclaimer: The content provided is for general informational purposes only. It should not be construed as legal advice or serve as specific guidance. AccuSourceHR, Inc. strongly encourages seeking the advice of qualified counsel prior to engaging in any legal decisions. 

Negligent employment claims, theft, drug abuse in the workplace, reputational harm, and financial liability resulting from employee acts; the number one reason employers engage in background screening and drug testing is to mitigate organizational risk associated with hiring and employing staff. Independent contractors and vendors utilized by an organization to support additional labor needs can pose the same risks as employees. However, many organizations do not maintain the same screening requirements for contract labor and vendors as defined in their employment screening programs. Employer reasoning can vary from fear of creating an inference of co-employment or misclassification, concerns about deterring top contractor and vendor talent, and lack of full awareness of the legal, financial, and reputational risks associated with utilizing vendor and contractor labor.  

According to a recent ADP report, the share of gig workers contracted by companies rose approximately 15% between 2010 and 2019. Tight labor markets and high inflation have added increased fuel to the upsurge in contract labor usage for functions previously supported by W-2 employees. And, the upward trend in contract labor shows no signs of slowing. Gig economy expert Paul Estes stated in a 2020 article for LinkedIn, “There are approximately 60 million Independent workers in the United States, representing $1.5 trillion in U.S. GDP and growing. Projections estimate that 50% of our U.S. workforce will be independent workers by 2025- 2030.” Many industry experts narrow that window to 2027. With a steady increase in contract labor expected for the foreseeable future, companies need to ensure they align their risk mitigation initiatives across all worker populations. Here are 5 best practices organizations should consider in building contractor background screening and drug testing programs. 

It is commonly held in both historic court decisions, and among the screening industry’s top legal experts, Fair Credit Reporting Act (FCRA) sections afford specific protections to “employees” apply to both W2 workers and 1099 contract labor. Therefore, organizations utilizing 1099 contractors should comply with Fair Credit Reporting Act (FCRA) requirements for screening for employment purposes. Key applicable FCRA sections include §604(2) and §604(3)(b) Permissible Purpose; §606 Investigative Consumer Reports; §613 Public record information for employment purposes; and §615 Adverse Action.  

Permissible purpose is a company’s legal, justified purpose in conducting a background check on a consumer. If a company does not have a legally permissible purpose, as defined by the FCRA, they cannot utilize a consumer reporting agency (background screening provider) to conduct the background screen. Under §604, if the permissible purpose is employment, before procuring a report, employers must provide clear and conspicuous disclosure indicating the employer may obtain a consumer report for employment purposes, and the consumer (i.e., employee) must consent in writing to the background check. The permissible purpose under §604 is different for independent contractors/vendors. The broader range “with the written instructions of the consumer” is commonly used as the purpose for the background check. In this type of disclosure, the purpose statement may read something like “Company ABC may obtain a consumer report, at your written instruction, for the purpose of granting access to Company ABC’s property to perform services.” Since permissible purpose is at the written instructions of the consumer, by its nature, disclosure, and consent should also be in writing. The disclosure and consent are the documents containing the consumer’s “written instruction.” Further, while disclosure and consent processes are similar for both 1099 contract and W-2 labor, it is best practice to use separate, distinct documents for each labor group to ensure the correct purpose is stipulated and to minimize co-employment and misclassification concerns.

§606 Investigative Consumer Reports address a specific type of background report containing information about a consumer’s character, general reputation, personal characteristics, or mode of living. The types of background screening services commonly found in investigative consumer reports include employment verifications, personal references, and professional references. For Investigative Consumer Reports, W-2 employees and 1099 contract workers are required to provide the following under FCRA §606:

1. The user clearly and accurately discloses to the consumer that it may obtain an investigative consumer report.
2. The disclosure contains a statement of the consumer’s right to request other information about the report and receive a summary of the consumer’s rights under the FCRA. 
3. The disclosure is in writing and is mailed or otherwise delivered to the consumer not later than three business days after the date on which the report was first requested.
4. The user procuring the report certifies to the consumer reporting agency that it has complied with the disclosure requirements and will comply in the event the consumer requests additional disclosures about the report

FCRA §613 addresses the handling of public record information for employment purposes by consumer reporting agencies (the furnisher of the consumer report). The requirements of the statute should be followed for both W-2 employees and 1099 contract workers. They are as follows: 

1. At the time such public record information is reported to the user of such consumer report, notify the consumer of the fact that public record information is being reported by the consumer reporting agency, together with the name and address of the person to whom such information is being reported; or
2. Maintain strict procedures designed to ensure that whenever public record information which is likely to have an adverse effect on a consumer’s ability to obtain employment is reported it is complete and up to date (i.e., verified at the record source)

Consumer reporting agencies have latitude in determining the method of compliance with FCRA §613. The reasoning behind the statute is to ensure when public record information is used to determine suitability for employment by an employer, the consumer either has direct notice of the public record information shared with the employer to afford them with an opportunity to dispute any information they believe is erroneous, or the consumer reporting agency adheres to defined acceptable practices to ensure any public record information provided is complete and has been verified at the source of the record (example: court where the case was adjudicated or department of motor vehicles issuing the infraction). Both courts in reviewing §613 violation claims, and industry legal experts have held the “employment purpose” language in §613 extends to include 1099 contract workers. 

FCRA §615 addresses the procedures that must be followed prior to taking adverse employment or contracting action that is based in whole or in part on the consumer report. The report user (employer or organization contracting with an independent contractor) generally must provide the consumer with:  

1. Oral, written, or electronic notice of the proposed adverse action to the consumer;
2. The name, address, and telephone number of the consumer reporting agency that furnished the report to the person*;
3. A statement that the consumer reporting agency did not make the decision to take the adverse action and is unable to provide the consumer the specific reasons why the adverse action was taken; 
4. Provide to the consumer an oral, written, or electronic notice of FCRA Summary of Rights and a free copy of their consumer report and;
5. A statement of right to dispute findings with the furnishing consumer reporting agency

*Including a toll-free telephone number established by the agency if the agency compiles and maintains files on consumers on a nationwide basis 

Once a pre-adverse letter is sent, the user must wait a designated period before sending a final adverse letter. The FCRA does not provide specific timeframe, but the generally accepted time period is 5 business days. Some local jurisdictions or states may have specific regulations addressing the time frame between the pre-adverse and adverse notifications. For example, the city of Philadelphia requires a 10-day period between pre-adverse notice and providing final adverse notice to the consumer.  

The purpose of the waiting period is to allow the consumer to review their report and dispute any findings they believe are not accurate directly with the consumer reporting agency. If a consumer files a dispute, the consumer reporting agency notifies the user, and the user must wait until dispute reinvestigation is completed by the consumer reporting agency before continuing the adverse action process. If there is no dispute, the user can send a final adverse action letter at the end of the waiting period. FCRA §615 affords the same protections to all consumers who are the subject of consumer reports (including background screens), and therefore, §615 requirements for adverse notice extend to include both 1099 contract workers and W-2 employees. 

2. Be Aware of State-specific Laws and State Fair Chance Regulations

Many states, counties, and cities have enacted employment screening legislation and regulations employers must also follow, in addition to the FCRA, when conducting background checks and drug screens for employment purposes. In numerous jurisdictions, there is either specific language referencing 1099 contract labor or there is a strong inference from the law, statute, or code’s language contract labor is meant to be included.  For example, the City of Los Angeles and City/County of San Francisco employment screening laws extend to independent contractors. New legislation is ever-evolving, and companies should monitor and understand any fair chance laws that require specific adverse action steps. 

3. Create an Independent Contractor-Specific Screening Program

Build separation in your IC screening program to ensure it is wholly separate from employment screening programs. If using the same provider for both employment and IC programs, it is best practice to separate your programs into unique sub-accounts so there is no co-mingling of records. Organizations can build their sub-accounts under a single parent account to ensure end-user access is confined to specific accounts, yet over-reaching visibility is still available to account administrators and risk mitigation professionals tasked with reviewing completed files for compliance with organizational standards. Additionally, a parent-child account configuration can also support organizational billing needs yet still ensure employee and contractor processes and records have meaningful separation.  

Also, avoid using employment-specific terms in independent contractor screening in both written documents and verbal communications. For example, hiring, employment, employee, onboarding, and employment screen are all terms specific to an employer-employee relationship. They are not terms that should be used in conjunction with independent contractor screening. Companies engaging in independent contractor screening should use terms like contractor, placement, engagement, and access or security screen. Using correct worker status terminology helps ensure clear intent is both communicated and understood. 

Finally, organizations should ensure they have established clear Permissible Purpose intent with their consumer reporting agency screening partner. If you are using the provider for both independent contractor and employee screening, your contract should stipulate your permissible purpose for screening is both written instruction by the consumer for your independent contractor program and employment for your employee screening. 

Organizations should be careful to avoid the inference of co-employment, especially when working with staffing providers who provide contract labor. They also should be cognizant of misclassification liability and challenges. The Internal Revenue Service and state departments of labor provide resources to help employers in determining appropriate classification. Consulting an attorney familiar with labor law is also highly recommended.  

In terms of contractor screening, there are various tactics that can help avoid the inference of co-employment and misclassification. First, consider having the independent contractor self-pay for their own background screen. If there are concerns regarding contractor engagement, if there is a requirement to self-pay, the organization can offer reimbursement as part of the contracting agreement. This helps ensure the independent contractor is responsible for their own expenses supporting a contractual agreement versus an employment relationship.  

Additionally, contracting organizations should minimize their interaction in the screening process. Organization-specific landing pages can be used for independent contractors to initiate their own individual screens. This option puts most, if not all, background screening functions on the consumer reporting agency and independent contractor with the contracting organization only engaging to establish the required screening criteria and reviewing the results for compliance with those requirements. This ensures the independent contractor has direct engagement throughout the screening process rather than the company controlling and supporting the independent contractor through the process. Where an independent contractor has a greater degree of independence and personal responsibility in a screening process, it reduces the risk of inferring an employment relationship.

5. Promote Positive Screening Experiences for Independent Contractors

Most industries are still experiencing tight labor markets, and top talent is in short supply. Ensuring the screening process is stress-free and promotes positive initial impressions for both employees and independent contractors can lead to greater workforce stability and improved worker retention. Contracting organizations should use quality technology-based systems for engagement to make processes easy and efficient for independent contractor candidates. Commonly, workers today are increasingly both mobile and tech-savvy. They want convenience and often judge a contracting organization’s fit by it. Technology should be mobile-friendly, wi-fi enabled, and support the ability to complete all aspects of screening engagement on the go from a phone, tablet, or laptop.  

Contracting organizations should promote transparent processes and ensure independent contractors feel they have a high level of control. Contractors should be able to enter their own personal data, view screens in progress and engage directly with the consumer reporting agency. Control often equals buy-in and helps reduce contractors abandoning your placement process and moving on to another opportunity if an unavoidable delay occurs in the screening process.  

Also, wherever possible, select a consumer reporting agency affording a “One Stop Shop.” Screening providers supporting the ability for candidates to schedule drug screening collection and occupational medical services at the same time they are submitting their background screening profiles adds convenience, promotes trust, and provides an overall sense of individual control.  

Additionally, ensure your independent contractors can obtain direct, quality support from your consumer reporting agency screening partner. If your company end-users have challenges reaching a live person or getting answers to their questions and support requests, the experience will be equally challenging for your independent contractor candidates. It is also important to ensure clarity in your messaging and instructions to candidates. Top consumer reporting agencies like AccuSourceHR will support flexibility in messaging and program design to ensure both meet the unique needs of your organization. 

Finally, align with a consumer reporting agency that is knowledgeable in the specific requirements of independent contractor screening programs, makes compliance resources readily available to both clients and consumers, and is committed to consistent updates and ongoing training. Your screening partner should also be committed to continuously investing in both technology and resources to ensure communication regarding evolving screening legislation is effortless.  

Want to learn more about how AccuSourceHR makes independent contractor screening easier? Contact us today at marketing@accusourcehr.com.