Whether a Prospective Private Employer May Deny Employment Based Solely on a Bankruptcy Filing

Whether a Prospective Private Employer May Deny Employment Based Solely on a Bankruptcy Filing

This Emerging Issues Analysis considers two circuit court decisions holding that Bankruptcy Code section 525(b) does not prohibit private employers from discriminating against job applicants who have filed bankruptcy. Section 525(a) does prohibit governmental employers from so discriminating, but the differences in the language of subsections (a) and (b) does not, in the author's view, justify the different results.

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The Courts of Appeals for the Third and Fifth Circuits Have Agreed That Private Employers Are Not Prohibited from Discriminating Against Prospective Employees Based on a Prior Bankruptcy Filing

Title 11 of the United States Code prohibits private employers from both terminating employment or discriminating with respect to employment against an individual who has been a debtor under the Bankruptcy Code. 11 U.S.C. § 525(b). Two courts of appeals independently considered cases of alleged discrimination by private employers that did not hire individuals who had been debtors. Both courts held that hiring decisions are not impacted by Bankruptcy Code section 525(b). Burnett v. Stewart Title, Inc. (In re Burnett), 635 F.3d 169 (5th Cir. Mar. 4, 2011) [enhanced version available to lexis.com subscribers / unenhanced version available from lexisONE Free Case Law]; Rea v. Federated Investors, 627 F.3d 937 (3d Cir. Dec. 15, 2010) [enhanced version / unenhanced version].

The Full Statutory Framework on No Discrimination

Bankruptcy Code section 525 was originally adopted as part of the Bankruptcy Reform Act of 1978, which ushered in the new Bankruptcy Code. It prohibited governmental units from discriminating against prior bankruptcy debtors by either denying employment to, terminating the employment of, or discriminating with respect to employment.

The Bankruptcy Amendments and Federal Judgeship Act of 1984 added, as section 525(b), a prohibition against employment discrimination by private employers. In doing so, the original prohibition against discrimination by governmental units became section 525(a). However, there was a noticeable textual difference in what was prohibited by the two subsections. Section 525(a) refers to discrimination in hiring and termination, as well as a catch all prohibition against all discrimination with respect to employment. New section 525(b), on the other hand, refers only to discrimination in termination, as well as the catch-all against all discrimination with respect to employment.

In Section 525(b), the General Is So Broad It Necessarily Includes the Specific

Is it possible that the general all inclusive language prohibiting all discrimination "with respect to employment" might not cover decisions to hire someone who is currently not an employee or the decision to terminate an employee? One who thinks quickly about the matter without giving it much thought would come to the conclusion that the decision to hire and the decision to fire must indeed be "with respect to employment." Both directly and immediately impact the employment of the individual and the employee mix of the employer. To be sure, I asked several attorneys specializing in employment law whether they believed that hiring and firing decisions were within the meaning of "with respect to employment," without giving the specifics of any statute or case, and all of them immediately said yes and also indicated that they did not believe there was any doubt about the matter.

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