Can an Employee Be Fired or a Job Applicant Be Rejected Because of a Bankruptcy Filing?
The Anti Discrimination Provisions of Section 525 of the Bankruptcy Code

By Griffin S. Dunham

In 2010, our court system experienced 1,536,799 individual bankruptcy filings. Every filer had a story, and every story had a consequence. Whether the effects were as basic as poor credit or as serious as catastrophic healthcare costs, receiving a "clean slate" and discharge of pre-petition debt had its fair share of repercussions. A few specific repercussions were either the inability to find a job or the inability to maintain a job. Employers can equate bankruptcy to financial irresponsibility, and financial irresponsibility can be incompatible with a successful business model. This can cause a business owner or human resources department to implement protocols for dealing with current and prospective employees with a bankruptcy filing under their belt. The question becomes, quite simply, is this fair?

There are reasonable arguments on both sides of the issue. An employer may argue that if a current or prospective employee cannot keep her personal affairs in order, then she cannot be trusted to keep the company's affairs in order. An employee or prospective employee may argue that it is not fair to be punished for exercising a legal right. Depending on the circumstances, both positions can be correct. This article examines when it is permissible and when it is not permissible to discriminate against an individual on the basis of a bankruptcy filing.

Section 525 of the Bankruptcy Code (11 U.S.C. 525) states:

(b) No 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--

(1) is or has been a debtor under this title or a debtor or bankrupt under the Bankruptcy Act;
(2) has been insolvent before the commencement of a case under this title or during the case but before the grant or denial of a discharge; or
(3) has not paid a debt that is dischargeable in a case under this title or that was discharged under the Bankruptcy Act.

Litigation in connection with this subsection has been limited. However, recent appellate court decisions have discussed how Section 525 provides both freedoms and restrictions to employers. Two issues have specifically been addressed: (i) what the term "discriminate with respect to employment against" an individual means in Section 525(b), i.e., does this language apply to prospective employees, and (ii) whether the term "solely" requires a finding that no other factors contributed to a bankruptcy-based discrimination.

I. Whether Section 525 Creates a Private Right of Action for Prospective Employees

The plain language of Section 525(b) is clear that current employees enjoy protection from discrimination based on filing for bankruptcy. But what about job applicants, or applicants that have been conditionally approved for hiring? The minor differences in Congress' word choice between subsections (a) and (b) of Section 525 has major consequences. Subsection (a) is similar to subsection (b), but applies to governmental employers instead of private employers. Both state that the government may not "discriminate with respect to employment against" bankruptcy filers. However, unlike subsection (b), subsection (a) includes language that the government may not "deny employment to" a debtor or former debtor. The exclusion of the "deny employment to" language has left some wondering why it was excluded. Until recently, there was no major precedent explaining the effect of the exclusion in subsection (b).

In Rea v. Federated Investors, 627 F.3d 937 (3rd Cir. 2010), a former bankruptcy debtor sued his prospective private employer for violating the anti-discrimination provisions of Section 525 by refusing to hire him solely on the basis of a prior bankruptcy filing. The employer admitted to the discrimination. The issue was whether Section 525(b) applied to prospective employees. The former debtor argued that the term "discrimination with respect to employment" was broad enough to encompass discrimination in the denial of employment. The Third Circuit disagreed. It relied upon the basic principles of statutory construction that "where Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposefully in the disparate inclusion or exclusion." It explained why "deny employment to" was not included in subsection (b) and held that Congress intended private employers to not be prohibited from denying employment to prospective employees who were former debtors. "We will not contravene congressional intent by implying statutory language that Congress omitted."

The Rea decision was the first Court of Appeals to address the issue, although not the last. Soon after the Rea decision, earlier this year the Fifth Circuit agreed with the Third Circuit. See In re Burnett, 635 F.3d 169 (5th Cir. 2011) (permitting employer to rescind job offer after learning of prospective employee's pending bankruptcy; adopting Rea rationale). Although there is some authority for the former debtors' positions in Rea and Burnett (see, e.g., Leary v. Warnaco, Inc., 251 B.R. 656 (S.D.N.Y. 2000)), the majority of authority favors the decision in Rea and Burnett. See Burnett v. Stewart Title, Inc., 431 B.R. 894 (S.D. Tex. 2010); Myers v. TooJay's Mgmt. Corp., 419 B.R. 51 (M.D. Fla. 2009); In re Stinson, 285 B.R. 239 (Bankr. W.D. Va. 2002).

II. Whether the term "solely" requires a finding that no other factors contributed to a bankruptcy-based termination

"Section 525(b) of the Bankruptcy Code specifically and emphatically prohibits discrimination by an employer based on the employee's having taken advantage of a right created by federal statutes, i.e., the right to file for bankruptcy protection from creditors." In re Bradford, 181 B.R. 910, 915 (Bankr. E.D. Tenn. 1995). The term "solely" means what it says - to be successful, the termination must have been based solely upon a bankruptcy filing. White v. Kentuckiana Livestock Market, Inc., 397 f.3d 420, 426 (6th Cir. 2005). The employee must prove that the employer "applied some different rule, condition or treatment based solely on one of the bankruptcy related characteristics listed in the statute." In re Browning, 176 B.R. 805, 807 (Bankr. M.D. Tenn. 1995) (concluding that bankruptcy neutral attendance policy did not violate Section 525(b) when debtor employee was disciplined for attending a meeting of creditors). The use of the term "solely" results in a factual battle that favors an employer; the employee has the burden of showing that the employer had no other basis for discrimination other than the bankruptcy.

III. Conclusion

The litigation surrounding Section 525 is instructive to employers, employees, and prospective employees alike. Although employees enjoy the protection of Section 525, they do so only to the extent that their employer discriminated against them "solely" because of a bankruptcy filing. This can be a difficult case to make if the employee has a disciplinary history or record of poor performance. Unlike current employees, prospective employees of private companies do not appear to have any Section 525 protections. Congress had the goal of protecting the bankrupt and not permitting the discrimination against individuals who exercise a federal right, but such sections are not so broad to extend to private employee applicants.