Volunteers and Independent Contractors May Be Entitled to Protection under the Fair Credit Reporting Act

Editor’s Note: Most churches make extensive use of volunteers in their children’s ministries. Churches need good policies to guide in the selection and supervision of volunteers. A good policy will mandate background checks for all volunteers.

John Doe pastors a growing congregation by the name of Growing Church (“GC”). GC operates a host of programs, including men’s and women’s bible studies, a ministry to the teenagers, and a thriving children’s ministry. Recently, one of the church members approached Pastor John and suggested that GC start doing criminal background checks on all the volunteers who interact with the church’s teenagers and children. Pastor John along with the elders agreed, and GC immediately took steps to implement screening procedures on all of its volunteers.

When the first round of results came back from the consumer reporting agency, Pastor John was surprised to see that a new member who volunteered in the nursery had a four-year-old misdemeanor conviction for assault. After some deliberation, the church’s elders agreed that this woman should not serve with the children. After arranging a meeting, the elders informed her they could not allow her to volunteer in the nursery because of this conviction. The woman was visibly upset and even threatened to hire a lawyer, alleging multiple violations of her rights under the Fair Credit Reporting Act (“FCRA”).1

Question: Did the church err by failing to comply with the FCRA?
Answer: Unfortunately, the answer is “Maybe.”

The Federal Trade Commission (“FTC”) has indicated that the FCRA may apply to volunteers and independent contractors in the same manner that it applies to employees. If it does apply to volunteers, then GC should have obtained the volunteer’s authorization to request a consumer report, sent the volunteer a summary of her rights under the FCRA, and issued appropriate adverse action letters, among other things.

However, a recent Wisconsin district court case, Lamson v. EMS Marketing Service, Inc., casts doubt on the FTC’s interpretation, holding that the FCRA does not apply to independent contractors and, by implication, volunteers.2

I. FACTS AND PROCEDURAL BACKGROUND OF THE LAMSON DECISION
A. Facts

The dispute arose when Philip C. Lamson responded to an ad posted by EMS Energy Marketing Service, Inc. (“EMS”) that read:

$ Money, Money, Money $
Registration Workers Needed. $21+/hr. EMS an authorized vendor for AT & T has 15 positions to fill by Friday. Training available-Performance based. Call Today, Start Tomorrow! (414)755-3432

Lamson applied on October 15, 2009, and was hired after an interview on the same day.3

The next day, after Lamson had accepted the sales position, he signed an “Independent Contractor Agreement” (“the Agreement”). The Agreement specifically designated him as an independent contractor, stating in pertinent part,

You have been expressly hired as an independent contractor and not as an employee, agent, joint venturer or partner of the Company for any purposes whatsoever, including federal and state tax purposes. You shall not hold yourself out as acting in any other capacity for us. You are not authorized to bind or incur any obligation on behalf of the Company.4

The Agreement set forth specific terms of the contract, Lamson’s duties and income, and EMS’s reimbursement policy. On the same day Lamson signed the Agreement, he also signed an “Authorization to Obtain Consumer Report,” whereby he authorized EMS to “procure consumer reports in conjunction with my application to provide direct selling services to EMS.”5

One month later, Lamson was terminated. He received a letter in the mail from a consumer reporting agency indicating that EMS had obtained a criminal background report about him two weeks prior to his termination.6

B. Procedural Background

On July 12, 2011, Lamson filed suit in the Eastern District of Wisconsin, contending that EMS violated several provisions of the FCRA:

• In Count One Lamson alleged that “EMS violated the FCRA . . . because it obtained a consumer report for employment purposes . . . without providing a clear and conspicuous written notice . . . of its intent to obtain a consumer report before doing so in a document that consists solely of that disclosure.”
• In Count Three Lamson argued that “EMS violated the FCRA . . . because it failed to provide a copy of the consumer report used to make an employment decision . . . before taking an adverse action that was based in whole or in part on that report.”7
• In Count Four Lamson alleged that “EMS violated the FCRA . . . because it failed to provide . . . the summary of rights required by this section of the FCRA before taking an adverse action that was based in whole or in part on a consumer report.”8

EMS filed a motion to dismiss the case, which was denied on December 29, 2011. EMS then filed a motion for summary judgment on all claims stated in the complaint. In its motion for summary judgment, EMS contended first, that Lamson was an independent contractor, and second, that the FCRA does not apply to independent contractors. EMS also argued that even if the FCRA did apply to Lamson, he “authorized EMS to obtain the report and agreed to release EMS from any liability associated with its alleged use of the consumer report.”9

In response, Lamson stated that the facts surrounding his relationship with EMS satisfied the common law agency test, illustrating the existence of an employer-employee relationship. However, even if the court found that such a relationship did not exist, Lamson contended that the FCRA applies to independent contractors.10

II. THE DISTRICT COURT’S ANALYSIS

The District Court turned first to the statute itself, 15 U.S.C. §1681b, to determine whether independent contractors are entitled to protection under the FCRA. The statute explains what a person who wishes to obtain a consumer report must do prior to sending a request to a consumer reporting agency:

[A] person may not procure a consumer report, or cause a consumer report to be procured, for employment purposes with respect to any consumer, unless . . . (i) a clear and conspicuous disclosure has been made in writing to the consumer at any time before the report is procured or caused to be procured, in a document that consists solely of the disclosure, that a consumer report may be obtained for employment purposes; and (ii) the consumer has authorized in writing . . . the procurement of the report by that person.11

The statute goes on to explain that the subject of the consumer report is entitled to additional protections if the requesting individual takes adverse action based on the report:

[I]n using a consumer report for employment purposes, before taking any adverse action based in whole or in part on the report, the person intending to take such adverse action shall provide to the consumer to whom the report relates . . . (i) a copy of the report; and (ii) a description in writing of the rights of the consumer under this titled, as prescribed by the Bureau under section 609(c)(3).12

Most importantly, the FCRA defines “employment purposes” as a “report used for the purposes of evaluating a consumer report for employment, promotion, reassignment or retention as an employee.”13

The Court found that the statute unambiguously applied only to those persons requesting and using a consumer report “for the purpose of evaluating a consumer for employment, promotion, reassignment or retention as an employee.” Thus, the Court needed to determine whether EMS had obtained the consumer report for the purpose of evaluating Lamson as an employee or an independent contractor.

A. Employee vs. Independent Contractor

Lamson reasoned that even though he signed an Independent Contractor Agreement, a close look at his relationship with EMS review would reveal that he was actually an employee. And as an employee, EMS should have complied with the FCRA when obtaining his consumer report and subsequently taking adverse action against him.14

The Court applied a twelve factor common law test to determine whether Lamson was an employee.15 This involved a careful analysis of “all of the incidents of the relationship . . . with no one factor being decisive,” including the following:

1. the task to be accomplished;
2. the source of instrumentalities and tools;
3. the location of the work;
4. the duration of the relationship of the parties;
5. the right of the hiring party to assign additional projects;
6. the extent of the hired party’s discretion;
7. the method of payment;
8. the hiring party’s role in hiring and paying assistants;
9. the regular business of the hiring party;
10. whether the hiring party is in business;
11. the provision of employee benefits; and
12. the tax treatment of the hired party.16

At the conclusion of the Court’s item-by-item analysis, it determined that Lamson was indeed an independent contractor under the common law test. Thus, it concluded, the FCRA did not apply when EMS requested and obtained a consumer report on Lamson for the sales position.17

B. FCRA’s Application to Independent Contractors

In the alternative, Lamson argued that even if the District Court found that he was an independent contractor, the FCRA applies to him in that capacity as well. To support this argument, Lamson cited Hoke v. Retail Credit Corporation and two informal opinion letters issued by the FTC.18

The Supreme Court in Hoke held that a report obtained by a board of medical examiners “to aid in its assessment of the plaintiff’s application for a license to practice medicine in Texas was a consumer report,” entitling the plaintiff to protection under the FCRA. Believing that Congress intended a broad interpretation of the FCRA, the Court did not wish to “limit its application by the common-law concept of master and servant.” The Hoke Court bolstered its position by stating that “as an employee,” as it’s used in the FCRA, modified only “retention” and did not apply to the words “employment, promotion, [or] reassignment.”19

Lamson submitted, in addition, two informal opinion letters issued by the FTC in 1998. In the first letter, the FTC cited Hoke’s rationale and concluded that “a trucking operation that uses consumer reports to evaluate whether to engage individuals as drivers must comply with the applicable provisions of the FCRA pertaining to consumer reports obtained for employment purposes.”20 In a second letter, the FTC reached a similar conclusion, asserting that a title insurance company that uses consumer reports to screen individuals who “sell its insurance, examine title, and close real property transactions” must also comply with the FCRA, even if those individuals are hired as independent contractors.21

The District Court found both letters unpersuasive, asserting (1) that they are merely the interpretations of FTC staff attorneys and (2) that they are not binding on the FTC. Moreover, both letters relied on the reasoning of Hoke, which the District Court believed was overruled by the Darden decision. Quoting language from Darden, the District Court explained that the Court in Hoke had veered from the established common law meaning of “employee” by expanding its definition to include independent contractors: “In the past, when Congress has used the term ‘employee’ without defining it, we have concluded that Congress intended to describe the conventional master-servant relationship as understood by common-law agency doctrine.”22 Under this definition, a report obtained for “employment purposes” encompasses only those reports pertaining to employees, not independent contractors. Thus, the District Court concluded that Congress did not intend for the FCRA to apply when a consumer report is obtained on behalf of independent contractors.23

III. RECENT FTC GUIDANCE

In July 2011, the same month the Lamson case commenced, the FTC published a report titled, “Forty Years of Experience with the Fair Credit Reporting Act.”24 In that Report, the FTC summarized its interpretations of key FCRA provisions. The Report offered guidance on the FCRA’s use of “employment purposes,” citing the Supreme Court’s decision in Hoke along with the two 1998 FTC letters discussed above:

Independent Contractors, Agents, and Volunteers

Because the term “employment purposes” is interpreted liberally to effectuate the broad remedial purpose of the FCRA, it 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.25

The Report contradicts the District Court’s decision in Lamson and takes the middle ground, stating that the FCRA may apply to independent contractors, agents, and volunteers. The FTC incorporated the reasoning of the two 1998 letters into its definition of employment purposes, specifically mentioning the trucking company and title insurance company examples.

Interestingly, the phrase, “a nonprofit organization staffed in whole or in part by volunteers,” was not derived from any previous opinion letter or any other FTC publication. It appears that the FTC intentionally incorporated this phrase into its definition of employment purposes to place churches, non-profits, and other organizations on notice that it may view independent contractors and volunteers in the same manner as it does employees. Even though the Report does not provide clear guidance on the issue, it provides a glimpse into the FTC’s current perspective on the applicability of the FCRA.

IV. CONCLUSION

So what are churches, non-profits, and other organizations to do? Those operating in the Eastern District of Wisconsin may rely with some confidence on the Lamson decision. Non-profits and other organizations outside this District cannot be sure how other courts will apply the FCRA because this issue has not been litigated elsewhere.

Practically speaking, the FTC has yet to file suit against a non-profit for failing to comply with the FCRA when denying an opportunity to a volunteer. This may be because the FTC has not had an opportunity to do so, or it may be because it recognizes that its interpretation of “employment purposes” rests on shaky legal reasoning in light of the Lamson decision.

In the meantime, organizations should consider creating and implementing screening policies that comply with the FCRA when performing background checks on volunteers while we wait on further guidance from the FTC and the courts.

Non-profits should consult with experienced legal counsel to draft screening policies that comply with the guidelines outlined in state and federal law. If you have a question about whether the FCRA applies to your organization or a related issue, we invite you to contact our office to discuss your legal concern. The foregoing article was provided for general information. Seek specific legal advice for your situation. The attorneys of Bea & VandenBerk are experienced in representing organizations in matters involving non-profits and volunteers. If you have any questions, please do not hesitate to contact us.

Jacob L. Zerkle, JD

This article is provided for general information and should not be relied upon as legal advice for a specific situation. If you are in need of specific advice or legal representation, please do not hesitate to contact us.
©2014 Bea & VandenBerk

ENDNOTES
1. “Fair Credit Reporting Act” is a misleading title for this legislation, because the Act generally applies to requests for credit and criminal history information. Both ideas are contained in the Act’s definition of “consumer report,” as stated below:
The term “consumer report” means any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumer’s eligibility for
(A) credit or insurance to be used primarily for personal, family, or
household purposes;
(B) employment purposes; or
(C) any other purpose authorized under section 604 [§ 1681b].
Fair Credit Reporting Act, 15 U.S.C. §1681a(d)(1).
2. 868 F. Supp. 2d 804 (E.D. Wis. 2012). The issue of whether the FCRA applies when a person requests a consumer report on a volunteer was not before the District Court in Lamson. However, the Court’s reasoning is equally as relevant to volunteers, because the FTC has indicated in its latest report that volunteers and independent contractors are entitled to the same protections under the FCRA. Thus, if independent contractors are not protected by the FCRA, then volunteers are likely not either.
3. Id. at 806.
4. Id. at 807.
5. Id. at 806.
6. Id.
7. Lamson withdrew Count Two of the complaint before the District Court issued its decision.
8. Lamson, 868 F. Supp. 2d at 805.
9. Id. at 805, 810.
10. Id. at 810.
11. Id. at 809 (quoting FCRA §1681b(b)(2)(A)).
12. Id. at 810 (quoting FCRA §1681b(b)(3)(A)).
13. Id. (quoting FCRA 1681a(h)).
14. Id.
15. Id. at 813.
16. Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318 U.S. 318, 323-24 (1992). This 12-factor test is used by courts in ERISA cases and is similar to the 10-factor Restatement test.
17. Lamson, 868 F. Supp. 2d at 813-16.
18. Id. at 816-17 (citing 521 F.2d 1079 (4th Cir. 1975), cert. denied, 423 U.S. 1087 (1976); Ronald G. Isaac, Advisory Opinion to Allison, FEDERAL TRADE COMMISSION (Feb. 23, 1998); and Thomas E. Kane, Advisory Opinion to Solomon, FEDERAL TRADE COMMISSION (Oct. 27, 1998)).
19. Hoke, 521 F.2d at 1082.
20. Isaac, supra note 18.
21. Kane, supra note 18.
22. Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318 U.S. 318, 323-24 (1992).
23. Lamson, 868 F. Supp. 2d at 817-18.
24. Forty Years of Experience with the Fair Credit Reporting Act, FEDERAL TRADE COMMISSION 32 (2011) (footnotes omitted).
25. Id.