March 17, 2011

In this article Partner Carla J. Rozycki and Of Counsel Emma J. Sullivan discuss the recent decision in Rea v. Federated Investors, in which the 3rd U.S. Circuit Court of Appeals held that the Bankruptcy Code’s anti-discrimination provisions applicable to private employers do not apply to hiring decisions. This decision indicates that while private employers may avoid liability under the Bankruptcy Code when making hiring decisions on the basis of an applicant’s bankruptcy filing, such employers will face liability under the Bankruptcy Code’s anti-discrimination provision if they terminate an employee or otherwise discriminate against an employee on the basis of his bankruptcy filing. The authors go on to suggest that employers may run afoul of various state and federal statutes, and or state anti-discrimination laws when making employment decisions based on employees’ and applicants’ credit histories. In addition, employers may also run afoul of the federal Fair Credit Reporting Act if they use a third-party consumer reporting agency to conduct background checks, which typically include credit history information, and an adverse employment decision is made based on such information, unless the employer complies with the FCRA’s strict notice, authorization and disclosure requirements prior to taking adverse employment action based on such information. The authors conclude that employers should carefully examine any practices which entail obtaining or using credit related information in making employment decisions. Only those practices which comply with applicable federal and state laws should be continued, and such information should only be used for decisions where the employer can articulate a job-related rationale consistent with business necessity for consulting credit information, such as the position provides access to finances or to sensitive financial information about the company, its customers, or its employees.