In National Aeronautics and Space Administration v. Nelson, No. 09-530 (U.S. Jan. 19, 2011) [pdf], the Supreme Court concluded that employees of government contractors can be subjected to the same background checks conducted on federal civil servants, without violating the privacy protections in the Constitution. The decision specifically rejects a challenge to questions about the past use of illegal drugs, including whether prospective contractor employees had previously received treatment or counseling for drug use.
In rejecting the employee challenge to the background checks, the Court pointed out that, in requiring the checks, the government was acting in its capacity as "proprietor and manager of its internal operation." Engaging in such management functions allows the government greater latitude than if it were acting in its capacity as a sovereign over the public.
The Court determined that the standard to be used in assessing the propriety of specific background check questions is one of reasonableness. The decision highlights the government's interests in "ensuring the security of its facilities and in employing a competent, reliable workforce." It rejects the argument that the government's interest in regulating the behavior of contractor employees is less than its interest in monitoring government employees.
As to the privacy implications of allowing the government to conduct background checks of contractor employees, the Court points out that the information disclosed in the background check process is subject to the protections of the Privacy Act.