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Applicant Filed for Bankruptcy: Can You Refuse to Hire Him?

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in Case In Point,Employment Background Check,Firing,Hiring,Human Resources

Have you ever thought of not hiring an applicant because he or she had previously declared bankruptcy? Maybe you thought that was discriminatory. But a court last week said, “Don’t worry.” Private employers won’t violate the U.S. Bankruptcy Code if they refuse to hire. But firing based on bankruptcy status is another story …
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Case in Point: Dean Rea was offered a job as an IT project manager at a Pennsylvania company, pending a background check. However, the check revealed that Rea had filed for bankruptcy seven years prior. Based on this new information, the company withdrew its offer.

Rea sued for discrimination under the Bankruptcy Code, claiming it prohibits employers from discriminating based on a person’s previous bankruptcy filing. The relevant section of the code (11 U.S.C. § 525(b)) says, “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.”

The company argued that courts have consistently ruled that the Bankruptcy Code does NOT apply to discrimination in hiring, but only to termination activities.

Ruling: The U.S. Court of Appeals for the 3rd Circuit sided with the company. It dismissed the case, saying the majority of federal courts that have ruled on this issue have said the section doesn’t apply to hiring-discrimination claims.

In upholding a lower court ruling, the appeals court said, "The district court properly declined Rea's request to read the phrase ‘discrimination with respect to employment' in § 525(b) as broad enough to encompass discrimination in the denial of employment … Congress did not so provide. Neither will we.” (Rea v.  Federated   Investors, 3d Cir., 12/15/10)

Note: This ruling applies to private employers. Another section of the Bankruptcy Code says government employers are prohibited from discriminating in hiring based on a person’s previous bankruptcy filing.

3 Lessons Learned…Without Going to Court

1. Use a third party for reference checks. This strategy is a best practice to receive an objective background report.

2. No discrimination in termination. The Bankruptcy Code prohibits discrimination based on bankruptcy filing when it comes to firing an employee.

3. Remember the public/private divide. The Bankruptcy Code has different standards for private employers versus government employers.

{ 3 comments… read them below or add one }

James Wyre April 23, 2012 at 9:30 am

I see people hired despite IRS liens and other problems who cannot be hired because they fixed the problem with a bankruptcy. Employers need to realize that after the bankruptcy, the problem is usually solved. Not hiring due to lawsuits active or a long list of serious debt problems makes sense. Not hiring due to bankruptcy makes no sense in a country where each and every citizen is a member of the most bankrupt organization in human history, namely the United States.

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Steve March 13, 2012 at 10:31 pm

That “keepin it clean” attitude before the civil rights movements becomes a dangerous value in our macrostructure again. Of course, nobody is doing anything wrong. We just imagine the one who fell on hard times has something a little wrong, something to keep clear, and the best thing to do is turn one’s head. We can imagine so many terrible characteristics of someone who filed bankruptcy. We ignore the economic events that occurred in our macrostructure, and then move to keep our organization clean. Pick a label and it all seems ethical. Bankruptcy is a good one.

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Leonard September 19, 2011 at 8:54 am

People are the best resources you can have in your business or in your home, so it is extremely important to know your people’s background. Hiring them makes you responsible with their welfare during office hours and doing a criminal background check PA is a very easy process and a first simple step to follow to builds trust and confidence that surely gives you an answer about the personal or shall we say criminal background of the person to be specific. Since a background check is extremely important,

criminal background check PA

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