The Fifth Circuit recently held that private employers may discriminate in hiring based on a bankruptcy filing. In re Burnett, 635 F.3d 169 (5th Cir.2011). The court distinguished between public employers which may not discriminate in hiring and private employers which may. Neither public nor private employers may discriminate with respect to persons who are already employed based solely on a bankruptcy filing. (The employer in Brunett was Stewart Title Inc. – another reason to not be fond of title companies.) The Fifth Circuit is in line with Rea v. Federated Investors, 627 F.3d 937 (3d Cir.2010).
The bankruptcy code contains provisions dealing with employment discrimination by public and private employers in Section 525 as follows:
(a) Except as provided in the Perishable Agricultural Commodities Act, 1930 . . . a governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to, condition such grant to, discriminate with respect to such a grant against, deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under this title or a bankrupt or a debtor under the Bankruptcy Act, or another person with whom such bankrupt or debtor has been associated, solely because such bankrupt or debtor is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been insolvent before the commencement of the case under this title, or during the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act.
(b) 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, a debtor or bankrupt under the Bankruptcy Act, or an individual associated with such debtor or bankrupt, solely because such debtor or bankrupt—
(1) is or has been a debtor under this title or a debtor or bankrupt under the Bankruptcy Act;
(2) has been insolvent before the commencement of a case under this title or during the case but before the grant or denial of a discharge; or
(3) has not paid a debt that is dischargeable in a case under this title or that was discharged under the Bankruptcy Act.
Subsection (a) dealing with discrimination by governmental units was contained in the 1978 Bankruptcy Code. Subsection (b) dealing with discrimination by private employers was added in 1984. Both prohibit termination of employment or discrimination of employment based solely on a bankruptcy filing, but there is a small but apparently significant variation in the language of these two provisions. (a) prohibits denying employment based on a bankruptcy filing, but (b) does not. The courts have relied on this difference in holding that a private employer may deny employment based on a bankruptcy filing while a governmental unit may not.
An issue common to both sections is that they prohibit discrimination based “solely” on a bankruptcy filing. Employers will rarely identify a bankruptcy filing as the reason for terminating employment when a general assertion of insubordination or not being a team player will suffice (and is much more difficult to disprove.) Even if an employer does identify a bankruptcy filing as an issue in employment discrimination, as long as it is not the only issue, 525 is presumably not violated.