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Bankruptcy Code Does Not Include Failure to Hire Cause of Action

    Client Alerts
  • December 31, 2010

As more employers conduct financial background checks of applicants, legal question over the use of these screening tools continue to arise. Earlier this month, the Third Circuit Court of Appeals rejected an attempt by a rejected applicant to use the Bankruptcy Code to challenge the employer's hiring decision.

In Rea v. Federated Investors, the plaintiff filed for bankruptcy in 2002. In 2009, he was rejected for employment by Federated due to the prior filing. He filed suit under Section 525(b) of the Bankruptcy Code, claiming that this statute prohibits employers from refusing to hire persons whose debts have been discharged through the bankruptcy process.

The Third Circuit affirmed a grant of summary judgment for Federated. The court noted that by its plain language, § 525(b) prohibits employers from discharging a current employee due to a bankruptcy filing. Rea contended that legislative intent also applies this prohibition to the initial hiring decision. The Third Circuit disagreed, concluding that had Congress meant to extend this prohibition to the hiring process, it could have done so.

While the Bankruptcy Code may not provide an avenue of relief for applicants rejected due to financial issues, some applicants may seek relief under Title VII, alleging that financial exclusions have a disparate impact against minority applicants. Employers that decide to use financial status as a hiring criteria should make certain that they can demonstrate the link between the applicant's financial issues, and real concerns over placing that employee in a job that involves some sort of responsibility over company or client funds.