Can I fire a bankrupt employee?

September 5 , 2008

Excerpted from New Mexico Employment Law Letter written by attorneys at the law firm of Tinnin Law Firm, A Professional Corporation

by Robert P. Tinnin, Jr.

Q I'm the owner of a business that sells big-ticket home furnishings. While reading the paper today, I discovered that my credit manager has filed for bankruptcy. Obviously, when the word gets around, it will really make me look like a fool! I want to fire him immediately, but a friend of mine says I can't. I know I can't fire someone because he's in a "protected class," such as race, sex, age, or disability, but I didn't know that being a deadbeat is protected. Is it?

A Not exactly, but your friend is right. Of course, everyone who files for bankruptcy isn't a deadbeat. Many people have very legitimate reasons for seeking bankruptcy protection, and you can't fire your credit manager for filing for bankruptcy. A primary purpose of the bankruptcy law is to allow debtors to obtain a fresh start, and Congress has determined that a fresh start would be impeded if an employer can adversely affect, end, or modify a debtor's employment on account of bankruptcy.

The U.S. Bankruptcy Code contains a nondiscrimination provision that bars employers from firing or discriminating against an employee who is or has been a debtor or bankrupt "solely because" he (1) is or has been a debtor, (2) has been insolvent before the commencement of the bankruptcy proceedings, or (3) hasn't paid a debt that can be erased in bankruptcy.

Discrimination prohibition construed narrowly
The bankruptcy discrimination statute applies to all private employers. It protects all individuals who are or have been in bankruptcy. Because many people are filing for bankruptcy these days, one would expect to see a flood of bankruptcy discrimination cases, but that hasn't happened. There are several reasons.

Scope of statutory protection very limited. Courts have interpreted the statute to require proof that the employee was discriminated against "solely" because of the bankruptcy or insolvency. An employer can prevail if it can offer a legitimate nondiscriminatory reason for the adverse employment action, even if bankruptcy also was a consideration.

Statutory protection may not extend to all aspects of the employee-employment relationship. For example, some courts have found that the provision doesn't cover discrimination in hiring since applicants for employment aren't "employees."

Statutory protection isn't available if adverse employment decision occurs before bankruptcy filing. If an employer fires an employee before he files for bankruptcy, even if it's because of his poor financial status, he can't later file for bankruptcy and then sue the employer for discrimination.

The fact that the statute has been interpreted rather restrictively isn't a reason for you to ignore it. You should remain on guard for situations that would lead to a lawsuit under the bankruptcy discrimination law. Bear in mind that while some courts have ruled to the contrary, other courts have ruled that it's illegal to refuse to hire an otherwise qualified applicant because of a bankruptcy.

Employer risks
The law doesn't specify what remedies are available for a violation. For the most part, in formulating remedies, the bankruptcy courts have relied on remedies applied in other employment discrimination contexts, e.g., an award of reinstatement and back pay for illegally terminated employees. A current or former employee who is in bankruptcy already has an attorney and is before the bankruptcy court and in difficult financial straits. Launching a lawsuit against an employer is relatively easy under those circumstances, so an employer's risk is heightened because a bankrupt employee might be more likely to sue than other disgruntled employees.

Bottom line
Exercise common sense, and you should be able to avoid bankruptcy discrimination liability. The key is to remember that the law prohibits discrimination "solely" because of bankruptcy or insolvency. So long as you can identify some other reasonable factor that played a role in your decision, you should be able to successfully defend against that type of claim. Proper documentation of your reasons will bolster your defense.

"Question Corner" is a regular monthly feature of New Mexico Employment Law Letter. Submit any questions you wish for the editors to address to rtinnin@tinninlawfirm.com.

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Copyright 2008 M. Lee Smith Publishers LLC. NEW MEXICO EMPLOYMENT LAW LETTER . NEW MEXICO EMPLOYMENT LAW LETTER is published to provide information of general interest and not to provide legal advice regarding any specific situation. Questions and inquiries directed to specific applications of the information contained in the newsletter should be addressed to an attorney.

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