Q. I recently discovered that an employee who handles my company’s accounts receivable has filed for bankruptcy. Can I discharge this employee?
A. Under the Federal Bankruptcy Act, passed in 1984, the fact that an individual has filed for bankruptcy is not a legal reason for rejecting an applicant or for firing a current employee.
The statute makes it illegal to terminate or discriminate against an individual because he or she has been a debtor under the Bankruptcy Act.
The limited number of court rulings that have addressed this provision in the Bankruptcy Act have been willing to apply a retrospective “but-for” analysis to determine whether the bankruptcy information was the reason for an adverse employment decision. In such cases, the courts essentially ask, “If it hadn’t been for the employee’s bankruptcy, would he or she have been terminated anyway?”
Thus, an employer that obtains information indicating that an applicant or current employee has filed for bankruptcy should base any adverse employment decision only on facts independent of the bankruptcy filing—and make sure that clear documentation exists to establish this explanation.