The federal Fair Credit Reporting Act limits the disclosure of consumer reports to six categories of people. Of those six FCRA categories, the second and third are the most commonly utilized in the business world:
Category Two consists of consumers who request reports on themselves; and Category Three comprises seven sub-categories of people who must have a “permissible purpose” to obtain a report; one of those permissible purposes is the “employment purpose.”
Just over a month ago, a federal district court addressed what happens when these two categories converge. That is, how do you tell the difference between a situation when a consumer orders a report on herself and gives it to a third party and when an “employer” orders a report on the consumer for “employment purposes?” (Those words were put in quotation marks because they don’t mean what they mean to you and me. More on that later.)
You may be asking yourself, why this question is even relevant? Here’s why: if a consumer orders a report on himself, nobody has to give him notice that a report is being prepared, and nobody – other than the consumer reporting agency – has to get his written permission to obtain the report. This all seems rather obvious, you say to yourself. A consumer ordering a report on himself knows very well that he is ordering a report on himself! But wait a minute – here is the rub: if it is an “employer” who is wanting the report, and the employer wants to use it for “employment purposes,” then the employer has to tell the consumer it is purchasing a report about him, it has to get his written permission to do so, and it has to be sure to do so in technical compliance with the requirements of the FCRA. Fair enough, you say, but so what? Here’s what: what if a consumer orders a report on himself, gives it to the third party, and that third party is someone who will utilize the services of the consumer, even though it is not an employer? Does that third party still have to supply the technical notices to the consumer, even though he knows he ordered a report on himself and it is not for a paying job?
Here’s where the quotation marks come into play. According the Federal Trade Commission, the words “employer” and “employment context” can cover relationships that are not – well – employment relationships. For example, a non-profit charity that utilizes the services of volunteers to assist in a fund-raising fun-run for children can be considered an “employer” who is utilizing the labor of volunteers “for employment purposes.” Given that children are involved, the non-profit obviously wants to run background checks (consumer reports) on the volunteers. Does it need their permission to obtain the consumer reports? The answer is “maybe,” depending upon whether this relationship is more like the second category or the third category.
And this is where we get to the aforementioned federal case. In Dunford v. American DataBank, LLC, a city college required Miss Dunford, a nursing student, to obtain a consumer report from American DataBank upon acceptance to the nursing program. The consumer report was to include criminal history information and drug test results. The college required this consumer report because nursing students were required to complete an unpaid clinical program prior to graduating from nursing school. It was the student, however, who would request the background report from DataBank, and DataBank would send the report to the student. In turn, the student would send the report to the college. DataBank required the student to execute a Consent which contained language forbidden by the courts. And with regard to Miss Dunford in particular, DataBank disclosed adverse information in the report which it ought not to have disclosed. Notwithstanding this, Miss Dunford went ahead and gave the report to the College, which promptly disqualified her from participating in the clinical program.
So, Miss Dunford filed suit against American DataBank, claiming that the consumer report really fell into the Third Category as it was obtained for “employment purposes” and that, therefore, the failure of the language of the consent to comply with the law entitled her to recover against American DataBank. (As we discussed above, the phrase “employment purposes” can involve volunteers and other non-paid labor.) In response, American DataBank explained that its consent form was perfectly lawful under the FCRA as long as it was being used for non-employment purposes; e.g., reports falling under the Second Category, where a consumer orders a report for herself.
Miss Dunford replied by contending that the report does not really fall within the Second Category, but rather it falls into the Third Category. She pointed to evidence that American DataBank knew that the college was directing its students to obtain the reports for purposes of completing the program of education and that these reports would be, as a matter of routine, disclosed to the college. Indeed, the contract between the college and DataBank contemplated this procedure. In light of this evidence, the judge decided that a jury would have to determine whether, in fact, this was a Category Two consumer report or an attempt to do an end-run around a Category Three report by improperly clothing it in the garb of a Category Two. DataBank was unable to avoid a trial.
The practical application is two-fold. First, if you are an organization utilizing services or labor that falls outside the traditional employer-employee paradigm, be cautious before concluding you are not governed by the “employment purposes” provision of Category Three. The Federal Trade Commission reads that phrase broadly and will expect end users – such as yourself – and consumer reporting agencies to comply with all the mandates of the “employment purposes” category. This would include providing a compliant disclosure, obtaining written authorization, and engaging in the pre-adverse and adverse process where appropriate. Second, attempts to get around Category Three by characterizing it as a Category Two transaction are not looked upon with favor by the Courts, and you may ultimately have to defend such a scenario to a jury. Discretion is the better part of valor here; err on the side of providing the technical notices and utilizing the adverse action process.
In short, consult with your legal counsel to determine whether you are governed by the “employment purposes” provision of the FCRA when you obtain consumer reports on volunteers, students, or other persons that fall outside the traditional employee category.
Todd M. Higey, Esq. is General Counsel for Employment Screening Services, Inc. This article is provided only for educational purposes; it should not be relied upon as legal advice, and it should not be used, in whole or in part, as a basis for establishing employment practices or policies, nor should it be used for resolving disputes or managing risk. Every reader’s circumstances are unique and legal advice should be obtained only from a lawyer with whom the reader has established an attorney-client relationship. Copyright 2014 ©Employment Screening Services, Inc. All material contained within this publication is protected by copyright law and may not be reproduced without the express written consent of ESS.