Job Applicant Not Hired By Private Employer Because Of Bankruptcy Has No Discrimination Claim Under Bankruptcy Code

Labor and Employment Law Weekly Update (Week of March 21, 2011)

Job applicants' claims for discrimination under the federal bankruptcy code are not recognized against private employers that deny employment because the applicants filed for bankruptcy. Two recent federal appeals courts have upheld this rule — Rea v. Federated Investors (3d Cir. Dec, 15, 2010) (http://tinyurl.com/4vn8vud) and Burnett v. Stewart Title, Inc. (In re Burnett) (5^th Cir. Mar. 4, 2011) (http://tinyurl.com/4djx9eh). In both cases, the private employer initially selected the applicant for employment and later either refused to hire or outright rescinded the offer to the applicant after learning of the applicant's bankruptcy filing.

Each court reached its conclusion by reading the plain language of the statute and inferring legislative intent. Each court noted that 11 U.S.C. § 525(a) (http://tinyurl.com/4m3d7tu) (which applies to public employers) expressly prohibits an employer from both "deny[ing] employment to" (i.e., rejecting an application) and "terminat[ing] the employment of" an employee — whereas 11 U.S.C. § 525(b) (http://tinyurl.com/4m3d7tu) (which applies to private employers) only expressly prohibits "terminat[ing] the employment of" an employee. Thus, the courts reasoned, Congress must have intended no prohibition against private employers rejecting an application for employment based on a bankruptcy. Both courts rejected a contrary holding in the district court of Leary v. Warnaco (S.D.N.Y. 2000) (http://tinyurl.com/4dbutqr), which reasoned that § 525(b) merely contained a scrivener's error. Both cases stated the "overwhelming authority" is that § 525(b) does not prohibit such hiring decisions by private employers — characterizing Leary as a "solitary view."

The Rea and Burnett decisions mean that private employers with businesses located solely within areas governed by the Third and Fifth Circuits have strong grounds to avoid a claim for discrimination under the bankruptcy code for refusal to hire based on the applicant's bankruptcy. However, contrary district court authority exists in at least New York, and this issue does not appear to be expressly resolved in all circuits. Thus, private employers are cautioned to speak with legal counsel before relying on such bankruptcy information. Further, employers are cautioned that the Rea and Burnett decisions do not address other legal theories, including, for instance, employees or applicants arguing such pre-employment decisions are pretext and/or have a disparate impact on protected classes and such information is not job-related.

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