• Employers May Consider Applicant's Bankruptcy History In Making Hiring Decisions
  • July 12, 2004 | Authors: Hope A. Comisky; Christopher P. Zubowicz
  • Law Firm: Pepper Hamilton LLP - Philadelphia Office
  • In determining whether to hire a prospective employee, an employer may consider the applicant's financial solvency, including whether the prospective employee has filed for bankruptcy. However, the employer should be careful not to make an employment decision based solely on the applicant's status as a debtor.

    Federal bankruptcy law contains two key statutory provisions that protect employees from discriminatory treatment based on their bankruptcy history. The first, which was adopted by Congress in 1978, details several areas in which public entities cannot discriminate against certain debtors. The areas include suspension, revocation or refusal to renew a license. Specifically with respect to employment, it provides that a governmental unit may not "deny employment to, terminate the employment of, or discriminate with respect to employment against" a person solely because he or she has filed for personal bankruptcy or is insolvent. 11 U.S.C. § 525(a) (2000).

    In 1984, Congress expanded Section 525 with a new section (b), which applies to certain conduct of private employers. 11 U.S.C. § 525(b) (2000). Under Section 525(b), a private employer can not "terminate the employment of, or discriminate with respect to employment against," a person solely because the person sought the protections of federal bankruptcy law or has experienced other similar financial difficulties.

    Section 525(b) follows immediately after Section 525(a). While both sections arguably protect against the discriminatory treatment of debtors, Congress crafted Section 525(b) more narrowly than Section 525(a). Unlike the broad swath of proscribed activities in Section 525(a), Section 525(b) addresses discrimination only within the context of an employee's employment relationship with his employer.

    Congress imposed fewer restrictions on the ability of a private employer to make employment decisions based on a person's status as a debtor. While the prohibited conduct as applied to discrimination against employees is identical, Congress did not prohibit private employers from declining to hire job applicants because they filed for bankruptcy protection. Instead, the language of the statute confers greater flexibility on private companies than on public employers.

    In interpreting the statute's effect on the hiring decisions of private employers, most federal courts have followed the exact language of the statute. For instance, in Fiorani v. CACA, 192 B.R. 401 (E.D. Va. 1996), the court granted the defendants' motion to dismiss each of the plaintiff's counts alleging that he was not hired because of his prior bankruptcy filing. In so ruling, the court reviewed the scope of Section 525(b) and focused on the statute's text. It declined "to expand the statute beyond its explicit terms merely to give effect to an abstract statement of purpose." Instead, the court concluded that Congress must decide to impose liability on an employer for refusing to hire an applicant because of the applicant's bankruptcy history.

    A more recent decision, however, suggests that courts continue to struggle with a workable approach to Section 525(b). In Leary v. Warnaco, Inc., 251 B.R. 656 (S.D.N.Y. 2000), the court concluded that a private employer could not refuse to hire an applicant solely because he had filed for bankruptcy. In reversing the bankruptcy court's dismissal of the plaintiff's complaint, the court acknowledged cases, such as Fiorani, which held that Section 525(b) does not apply to private hiring decisions. In this court's view, however, these decisions adopted an improperly narrow reading of the applicable language, which placed "an absurd gloss" on the statute. Instead of adopting such a limiting approach, the court looked to Congress' intent to provide a fresh start to debtors and determined that Congress could not have meant to exclude hiring decisions from the coverage of Section 525(b).

    Given the prevailing judicial construction of this statute, and the lack of binding precedent within the Third Circuit, private employers in Pennsylvania can continue to obtain credit reports that contain information about whether an applicant filed for bankruptcy protection. However, because some courts have entertained a more expansive reading of Section 525(b), employers should base their decisions not to hire a prospective employee on various documented factors, one of which may be the job applicant's prior credit history. Employers should be careful not to reject a job applicant solely because the applicant has been involved in federal bankruptcy proceedings or is financially insolvent.