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Refusing to Hire Bankrupt Applicants is Legal

Companies can refuse to hire someone because of a past bankruptcy filing, according to a recent court case. While the practice is legal, attorneys advise employers to tread carefully.

Friday, February 11, 2011
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Like many Americans, Dean Rea went through a rough financial period. Although his woes occurred in 2002 -- well before the current recession -- things got so bad that he filed for bankruptcy.

Little did he know that its effects would linger into 2009.

After interviewing with Federated Investors, an investment company based in Pittsburgh, Rea appeared to be on his way to landing a job, but he was eventually turned down because of that previous bankruptcy, according to court documents.

Rea sued, but the U.S. 3rd Circuit Court of Appeals ruled in Rea v. Federated Investors that it's legal for a private employer to refuse to hire someone based on a bankruptcy.

"The Circuit Appeals Court established a very clear rule," says Richard C. Pedone, partner at Nixon Peabody in Boston.

Third Circuit rulings apply to employers in Delaware, New Jersey, Pennsylvania and the Virgin Islands.

The rule does not apply to government agencies, which are not allowed to reject an applicant because of bankruptcy. In addition, it's illegal for a public or private employer to fire an employee who files for bankruptcy, say attorneys.

There is a gray area in this matter: What if an employer demotes or denies someone a promotion based on a bankruptcy filing? Pedone says there hasn't been too much case law about it, but he still warns companies against such action.

"I would say the employee would have a very good argument," he says, "that you're improperly discriminating against them."

Bankruptcy filings have risen by more than 50 percent since 2008, according to the administrative office of the U.S. Courts. In 2008, there were slightly more than 1 million bankruptcies filed in the United States. That number increased to 1.4 million in 2009, and was nearly 1.6 million in 2010.

With people in such financial peril, job applicants are not going to be happy about yet another barrier to employment.

The Rea case decision has no bearing on the ability of companies to ask about the credit histories of job applicants. Employers should be cautious in their use of credit checks, based on recent state and federal legislation and litigation, as well as the current E-RACE initiative by the U.S. Equal Employment Opportunity Commission.

While employers have the right to consider credit history and bankruptcies, HR departments may want to consider the public-relations aspect of such actions in a time of such high unemployment.

"Stuff like that could definitely start getting around ... ," says Todd Ewan, an attorney with Fisher and Phillips in Philadelphia, "but from a legal point of view, the case is pretty straightforward."

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Ewan suggests that we haven't seen the last of this matter, and says this case could eventually go all the way to the Supreme Court.

Gary J. Oberstein, also a partner at Nixon Peabody's Boston office, says that pre-hire bankruptcy checks are not the norm, but are widespread -- especially in the financial industry.

"A lot of companies do it, certainly companies hiring employees that will be working with direct access to cash or the ability to deal with significant funds," says Oberstein, noting that there are also a "handful" of companies in other industries that check for bankruptcy filings.

If a company does conduct such a pre-employment screening, Pedone suggests employers read a little deeper into the bankruptcy files. Did the person file because of bad health? Are they back on good financial footing? How did they act during the bankruptcy process?

"You'd hate to lose hiring a good employee because you made a judgment based on something that happened in the past," says Pedone.

Ewan says that a bankruptcy alone shouldn't dissuade you from hiring someone who you think is the best fit for the job -- especially if the job doesn't require financial tasks.

"There may be somebody who filed for bankruptcy in the past and that just may be entirely irrelevant to the work they're going to be doing at the company," says Ewan. "Otherwise the HR person looks at them and says, 'This is a fantastic candidate' -- we're going to bring them aboard."

Oberstein says that, if an employer does check for bankruptcy, it should be well documented, and the employer must make sure to get permission from a job applicant before checking.

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