Can An Employer Use a Potential Employee’s Bankruptcy Against Him?

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Besides the social stigma of filing for bankruptcy, bankrupt debtors, both those who are enduring and have completed the bankruptcy process, will need to contend with potential employment discrimination. Current and potential employers may have concerns about the debtor’s character, thereby hurting a debtor’s chances of continuing or securing employment.

Congressional Response

In response to post-bankruptcy employment discrimination, Congress enacted section 525 of the U.S. Bankruptcy Code. Specifically, the Code in section 525(a) provides that “a governmental unit may not…deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under this title or a bankrupt or a debtor under the Bankruptcy Act.” In section 525(b) the Code provides that “[n]o private employer may terminate the employment of, or discriminate with respect to employment against, an individual who is or has been a debtor under this title, a debtor or bankrupt under the Bankruptcy Act, or an individual associated with such debtor or bankrupt, solely because such debtor or bankrupt.”

Congress added subsection (a) in 1978 to prevent government agencies from unfairly discriminating against debtors filing for bankruptcy. In 1971, the United States Supreme Court ruled that a state could not suspend the driver’s license of a debtor who had an automotive-related tort judgment discharged in bankruptcy. This eventually propelled Congress to create debtor protections concerning other debtor-government relations. In 1984, Congress extended debtor-government employer protections to private employers.

The Myers Case

Plaintiff Eric Myers filed for Chapter 7 bankruptcy in January of 2008. Around the same time, Myers moved his family to Florida to live with his parents. His debts were fully discharged in May of 2008. At some point, Myers heard about an opening at one of Defendant TooJay’s restaurants and applied.

Myers tried out at the restaurant and TooJay’s expressed interest in hiring him. After that, Myers notified his then employer that he was resigning so that he could start at TooJay’s. A little more than a week later, TooJay’s informed Myers that it would not hire him because TooJay’s, as a matter of company policy, did not hire those who filed for bankruptcy.

Myers claimed that 525(b) barred TooJay’s from discriminatory hiring practices. The District Court ruled in favor of TooJay’s, citing the language in 525 wherein the code bars a government agency from denying employment based on a bankruptcy filing but lacks similar language when discussing a private employer. Therefore, section 525 permits private employers to discriminate in hiring based on prior bankruptcy.

On appeal, the Eleventh Circuit upheld the ruling based on the disparate statutory language between subsections (a) and (b). The Fifth Circuit applied the same logic to a similar case.

Based on the above, a private employer can discriminate against a potential employee simply because that employee filed for bankruptcy.

A Different View

However, in the case Leary v Warnaco from the Southern District of New York, the court concluded that 525(b) prohibits an employer from discriminating against a potential employee post-bankruptcy. The court based its ruling on the language in 525(b) “discriminate with respect to employment against” is broadly phrased and therefore protects bankrupt job applicants as well. It also applied the “fresh start” policy of bankruptcy, which should prohibit employment discrimination against debtors who successfully gained a bankruptcy discharge. Although 525(b), when compared to 525(a), lacks the express language of “deny employment to,” the court attributed the omission to “scrivener’s error.”

To summarize, the statute is not clear. Most courts look to the plain language in 525(b), which is not as explicit as 525(a), suggesting that the code does not bar employers from discriminating hiring practices against post-bankruptcy debtors. Therefore, an employer would legally be allowed to not hire a potential employee because that potential employee filed for bankruptcy. In contrast, one court holds that 525(b) is broad and therefore provides protection for post-bankruptcy job seekers.

Contact a Dothan Bankruptcy Attorney

If you are seeking a job and feel that you were not hired due to discrimination, you should contact the law firm of Parkman White LLP, lawyers experienced with pursuing justice for those facing unfair hiring practices.

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