The United States Bankruptcy Code prohibits an employer from taking adverse action against an existing employee because of a bankruptcy filing.
In December, the United States Court of Appeals for the Third Circuit refused to extend that same protection to applicants for employment. In Rea v. Federated Investors, the court ruled that the phrase “discrimination with respect to employment” in section 525(b) of the Bankruptcy Code was not broad enough to encompass discrimination in the denial of employment, and concluded that an employer may refuse to hire a job applicant based on a prior bankruptcy filing. Thus, the court upheld the dismissal of the plaintiff’s case on a motion to dismiss for failure to state a claim.
Despite this ruling, employers should be wary of using prior bankruptcy filings, and more generally credit reports, when making employment decisions, as several U.S. states have laws strictly limiting the use of such information. Also, the EEOC recently filed a nationwide hiring discrimination lawsuit asserting that an employer’s use of job applicants’ credit histories discriminated against applicants on the basis of race under the disparate impact theory of employment discrimination under Title VII. EEOC v. Kaplan Higher Education, Inc., No. 1:10-cv-02882 (N.D. Ohio), filed December 21, 2010. In the past, the EEOC expressed its position that unless a credit history is strongly related to the position at issue (e.g., a position in which the employee is charged with handling cash), use of credit histories may be discriminatory, resulting in liability, even if the discrimination was unintentional.
Thus, employers should review their hiring policies to the extent they use credit checks, and should consult with employment counsel as necessary.