Court Decision Clarifies that a Bankruptcy can be Used as Part of Pre-Employment Background Check for Private Employers

A new decision by the United States Court of Appeals for the Third Circuit has clarified the issue of whether a private employer can legally consider a job applicant’s bankruptcy under U.S bankruptcy law in making an employment decision. The Court ruled that when it comes to private employers, Congress intentionally only protected current employees from discrimination under bankruptcy law, and that job applicants were not protected. However, employers should still approach the use of bankruptcy records with great caution.

In the case, the plaintiff applied for employment at a retail store and it appeared that he would be hired. However, after a bankruptcy was discovered, the retail store refused to hire him due to the bankruptcy.

The job applicant filed a lawsuit on the basis that under federal bankruptcy law, a consumer filing bankruptcy was entitled to a fresh start, and that an employer could not discriminate against him based upon a bankruptcy.

The Court noted that there were two sections of federal law concerning bankruptcy and employment. Under 11 U.S.C. Section 525(a), Congress specifically stated that a governmental unit could not deny employment based upon a bankruptcy. (Note: U.S.C. stands for United States Codes, where federal laws are found. They are divided into titles, with Title 11 covering bankruptcy).

Congress later added a section 525(b) covering private employers that read:

(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…” 

The section concerning private employers did not specify that a private employer could not deny employment due to bankruptcy. 

The job applicant argued that the term “discriminate with respect to employment” was board enough to protect job applicants as well as current employees. In addition, even though section 525(b) does not refer specifically to job seekers, such an interpretation is consistent with the reasoning of the section which intends to give someone a fresh start and not let the bankruptcy prevent employment. The applicant further argued the omission of the verbiage concerning denial of employment when it came to private employers was just an error in drafting.  

The Court disagreed and noted that Congress clearly wrote the law to so that the government may not “deny employment,” but specifically declined to add the same language to the section concerning private employers. The Court reasoned that if Congress wanted to extend the same protections to consumers seeking jobs with private employers, then Congress could have used the same language used it used in section 525(a) in regards to government employment.

The Court noted that the United States Supreme Court has established a rule of statutory interpretation that “where Congress included particular language in one section of a statute but omits it in another section of the same Act,  it is generally presumed that Congress acts intentionally and purposely in the disparate inclusive or exclusion.”

In other words, Congress is presumed to know what was in 525(a), and could have used the same language in 525(b) in regards to private employers but chose not to. 

One district court in New York ruled in a previous case that bankruptcy could not be used.  The Court of Appeals disagreed, indicating there was overwhelming authority based upon cases that ruled bankruptcy laws did not protect job applicants that applied to private employers, and that a court could not simply assume that there was an error in language.  The Court ruled that where the language is clear, a Court’s duty is to enforce a statute according to its language

This is an important case on this issue since a decision by a Court of Appeal carries much greater importance then district court decisions.  The decision is binding on the states in the jurisdiction of the Third Circuit, which includes Delaware, New Jersey, and Pennsylvania. (Other federal Appeals Courts have the power to rule otherwise, and if that happened, the United States Supreme Court can step in and announce a national rule.) 

However, this case should not be seen as opening the floodgates for widespread use of bankruptcy information. The case was litigated on just the basis that the actions were discriminatory under bankruptcy law.  A job applicant could potentially file a claim of discrimination under Title VII if it can be shown that the use of bankruptcy creates a disparate impact on the basis of race, creed, color, nationality, sex, or some other prohibited criteria.

As with all pre-employment screening tools and assessments, bankruptcy should only be used if there is a business justification, meaning essentially that the tool is a valid predictor of job performance, and does not have a discriminatory impact. Employers should still approach the use of bankruptcy with caution. A number of states have or are in the process of limiting the use of credit reports for employment due to concerns that it is being used unfairly.  Such concerns can also arise if bankruptcies are used unfairly in a way not related to employment or that has the impact of treating members of protected groups unfairly. Employers may want to consider whether a bankruptcy is related to a bona fide occupational qualification.

The case can be found at http://caselaw.findlaw.com/us-3rd-circuit/1548259.html.

Founded in 1996 in the San Francisco Bay area, Employment Screening Resources (ESR) is the company that wrote the book on background checks with ‘The Safe Hiring Manual’ by ESR founder and President Lester Rosen. Employment Screening Resources is accredited by The National Association of Professional Background Screeners (NAPBS®) Background Screening Credentialing Council (BSCC) for proving compliance with the Background Screening Agency Accreditation Program (BSAAP). ESR was the third U.S. background check firm to be ‘Safe Harbor’ Certified for data privacy protection. To learn more about ESR’s Leadership, Resources, and Solutions, visit http://www.ESRcheck.com or contact Jared Callahan, ESR Director of Client Relations, at 415.898.0044 or jcallahan@ESRcheck.com.

Source: http://caselaw.findlaw.com/us-3rd-circuit/1548259.html