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Labor: The new frontier of bankruptcy discrimination

Courts are split on whether companies can refuse to hire workers because of previous bankruptcy history

A long-standing but rarely used cause of action has recently gained new life due to extended poor economic conditions and a “buyer’s market” for employers seeking to hire workers. Distinct from the traditional forums for pursuing employment claims under the jurisdiction of either the U.S. Department of Labor or the Equal Employment Opportunity Commission, the Bankruptcy Code—specifically 11 U.S.C § 525—provides a legal cause of action for employment discrimination. The statute prohibits an employer from terminating an existing employee because the employee has filed bankruptcy. The concept is that an employee attempting to earn a living, exercising her rights for bankruptcy protection, should not be fired as a result.

The remedies afforded to employees who do suffer discrimination are the same as for Title VII claims and include past wages, future wages, compensatory and, in egregious circumstances, punitive damages. Claims made under this provision are maintained through the federal bankruptcy court with appellate rights to federal district courts. In addition, original jurisdiction claims can be venued in federal court.

Under Section 525, it is universally accepted that private and public employers cannot terminate an active employee solely because of a bankruptcy filing or utilization of bankruptcy protection. However, the primary litigation in this area involves private-sector employers’ rights to decline employment to an applicant based on previous bankruptcy history.

In the Southern District of New York, private sector employers cannot use a bankruptcy filing to discriminate in the hiring of employees. The Leary court applied what it deemed the “plain meaning” of the statute in the broad context of the “fresh start” policy animating the bankruptcy act as a whole.

Other courts that have since addressed the issue have uniformly rejected Leary’s construction of Section 525(b). In In re Stinson, the court stated that Leary ran afoul of the “cardinal rule of statutory interpretation that no provision should be construed to be entirely redundant.”

Recently, the number of trial and appeal cases in this area has dramatically increased. This is due to the increase of personal bankruptcies and employers’ ability to use online public-record searches to inexpensively locate past bankruptcies and other credit litigation as part of the hiring process. In In re Burnett, a prospective employee alleged that the dismissal of her cause of action for bankruptcy discrimination was not proper. The 5th Circuit disagreed and let stand the dismissal in the employer’s favor.

In a case of first impression, an original cause of action for pre-hire bankruptcy discrimination was filed in the Middle District of Florida. This case was not part of an underlying pending bankruptcy case. After trial on the merits, a jury found that a prospective employee who had been paid for two days for an “on the job evaluation” but who had not completed the employment process, could be denied employment based on a prior bankruptcy filing. On appeal, the 11th Circuit took the opportunity to accept the prevailing authority and specifically declined to accept the Southern District of New York’s interpretation of the Bankruptcy Code. .

Although the holding in that case would seem to indicate that private sector employers have more latitude regarding hiring options, there is tremendous disagreement by labor unions and other workers’ organizations. Several circuits have yet to weigh in on the issue, leaving the potential for an ultimate determination by the Supreme Court.

Contributing Author

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Cheryl Wilke

Cheryl Wilke is a partner in the Ft. Lauderdale office of Hinshaw & Culbertson and focuses her practice in the representation of employers in...

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