Employment Discrimination Against Bankrupt Employee

Kegler Brown Labor + Employee Relations Newsletter

Congress has completed enactment of a substantial overhaul of the Bankruptcy Code to reform the consumer bankruptcy system. The attendant publicity has focused attention on the causes and effects of personal bankruptcy.

An employer may become aware that an employee has experienced severe financial problems or has already filed a personal bankruptcy case. Like other "life events", the bankruptcy of an employee can create problems for an employer. The court process is stressful and may be time-consuming. Severe financial problems may also create or contribute to marital problems and divorce. Job performance may deteriorate. Moreover, an employer devotes time and resources to developing trust, good will and a positive image for a business among its customers and these may be adversely affected by an employee's bankruptcy.

It is not surprising that an employer might consider terminating the bankrupt employee or moving the employee to a less visible public position. Employers need to be aware that it is unlawful to terminate the employment of, or discriminate with respect to employment against, any individual who files for bankruptcy, "solely" because the debtor filed a bankruptcy case or got a discharge of debts.

A recent case illustrates these laws. Bill White had been an employee of Kentuckiana Livestock Market for many years. Among other things, he kept the company's books. He also had two other "side" businesses – a restaurant business with his wife and a welding and fabricating shop. Both of White's side businesses failed, prompting him and his wife to file personal bankruptcy.

Notice of the Whites' bankruptcy proceeding appeared in the local newspaper on April 1, 2001. White was fired from his employment at Kentuckiana three days later, on April 4, 2001. White then sued Kentuckiana, claiming that he had been discharged "solely" because of the bankruptcy proceeding in violation of federal law.

On conflicting evidence of the employer's motivation, the Court concluded that the bankruptcy was "a factor" in the decision to terminate White, but not the "sole factor". The Court accepted testimony from the employer that the decision was motivated partly by its embarrassment over the bankruptcy and concern for the sentiments of its customers, but also by White's "sloppy bookkeeping," and an offer by White to falsify tax records of his employer in exchange for the gift of an automobile. This was an uncomfortably close call for Kentuckiana, and the decision could easily have gone in White's favor.

Significantly, the Court rejected the argument that the clause "solely because" should be interpreted as being the equivalent of "a substantial factor". The Court rejected case law interpreting similar language under Title VII of the Civil Rights Act of 1964, or under the Age Discrimination Employment Act that allows judgment for an employee if the employee proves that their race, sex, or age was a substantial factor in an adverse employment action. Furthermore, the Court rejected White's argument that his employer's stated reason for discharge "was a mere pretext for unlawful bankruptcy discrimination". The idea that a stated reason for discharge may be a mere pretext is also a concept appearing in other types of discrimination cases.

When an employer learns that an employee has filed a bankruptcy case, or has failed to pay discharged debt, the employer must exercise extreme caution when terminating the employee or otherwise discriminating against the employee with respect to his or her employment. If heedless action is taken, the employee may have the basis for a successful suit against the employer for damages. White v. Kentuckiana Livestock Market, Inc., _____ W.L. _______ (Sixth Cir. 2005).