Firing the Bankrupt Employee

Imagine two people file for bankruptcy.  One is fired by his employer because he filed.  The other applies for a job at the same employer, and is told that the company doesn't hire bankrupts.  Has the company violated the law under either scenario?

The answer is yes and no.  Under Section 525 of the Bankruptcy Code, an employee cannot be fired because he or she filed for bankruptcy.  However, as the Third Circuit ruled recently in Rea v. Federated, that same employer can refuse to hire an employee because he filed.

Dean Rea went bankrupt in 2002, and discharged his debts in 2003.  Six years later, in 2009, he applied for a job at Federated.  Federated initially indicated it was going to hire him, but then later sent him a letter saying it was not going to hire him because of the bankruptcy.  Rea sued under Section 525 of the Bankruptcy Code.

Subsection (a) of the Code says that government entitites cannot discriminate against people who file for bankruptcy, including a refusal to hire.  Subection (b), however, says that no private employer can "discriminate" against an employee who files.  Reading these sections together, the court in Rea concluded that the omission of language banning discrimination in hiring in Subsection (b) meant that Congress intended to ban private employers from discriminating against current employees only.

The court's decision seems correct, as a matter of statutory interpretation.  However, the law does not seem to make any sense.  Why should an employer be barred from firing someone for filing for bankruptcy, but not be barred from refusing to hire?  One reason might be that an employer should not be forced to hire a bankrupt, who in some circles is regarded as less than trustworthy, yet should also not be permitted to fire an employee who is otherwise a good employee.

It is expected that some 1.5 million people will file for bankruptcy this year, up from 1.4 million last year and less than a million in 2008.  In these economic times, that is not surprising.  What is surprising is that an employer would revoke an offer of employment to someone who had filed more than six years prior to the job offer.