The Eleventh Circuit’s recent decision in Galarza v. One Call Claims, LLC sent ripples through compliance and risk management circles. At its core, the case addressed whether three insurance adjusters labeled as independent contractors were actually employees under the Fair Labor Standards Act (FLSA). The court applied the economic realities test and concluded that a jury could reasonably find these workers were employees, reversing the district court’s summary judgment in favor of the companies. Five of six factors favored employee status, including:

  • Control over work: The companies dictated schedules, monitored performance, and approved overtime.
  • Economic dependence: Adjusters worked exclusively for the companies for nearly two years.
  • Integral role: Their work was central to the companies’ operations.
  • Permanency: Long-term, exclusive engagements suggested employment rather than independent contracting.

Why This Matters for Employment Background Screening

While the Galarza case was decided under the FLSA, it raises a critical question for compliance professionals: Should independent contractors be treated as employees for purposes of the Fair Credit Reporting Act (FCRA)?

Under the FCRA, requirements such as stand-alone disclosures, written authorization, and pre-adverse action notices apply when a consumer report is obtained for “employment purposes.” The statute defines this as evaluating a consumer for employment, promotion, reassignment, or retention as an employee. Although Federal Trade Commission (FTC) staff reports have suggested that the FCRA’s “employment purpose” provision may extend to certain independent contractors, courts have generally taken a narrower view. For example, in Smith v. Mutual of Omaha (S.D. Iowa), the court held that background screening for contractor roles did not trigger the FCRA’s employment-related protections.

However, the Galarza decision underscores a practical risk: labels don’t control legal outcomes. If a contractor is later deemed an employee under an “economic realities” or similar test, a company could face exposure—not just under wage laws, but potentially under FCRA if the screening process didn’t meet employment-purpose requirements.

Compliance Takeaways

  1. Don’t Rely on Labels Alone
    Contracts calling someone an “independent contractor” won’t shield you if the working relationship looks like employment. Courts focus on substance over form.
  2. Assess Classification Before Screening
    If the role involves long-term, exclusive work under significant control, treat the individual as an employee for FCRA compliance. This means providing proper disclosures, obtaining written consent, and following adverse action procedures.
  3. Update Policies and Vendor Agreements
    Ensure your background screening policies clearly address contractor roles and include contingency plans if classification changes.
  4. Monitor Legal Trends
    The Eleventh Circuit’s ruling aligns with broader enforcement trends emphasizing misclassification risks. Expect more scrutiny in wage-and-hour and consumer reporting contexts.

Bottom Line

The Galarza case is a wake-up call: misclassification isn’t just a wage-and-hour issue—it’s a compliance risk that touches background screening and FCRA obligations. When in doubt, err on the side of treating high-control, long-term contractors as employees for screening purposes. It’s a small step that can prevent big liability.

 

Disclaimer: This communication is for general informational purposes only and does not constitute legal advice. The summary provided in this alert does not, and cannot, cover in detail what employers need to know about the amendments to the Philadelphia Fair Chance Law or how to incorporate its requirements into their hiring process. No recipient should act or refrain from acting based on any information provided here without advice from a qualified attorney licensed in the applicable jurisdiction.