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Bankruptcy And Credit History Almost Always Should Play No Role In Employment Decisions

June 9, 2011

By Michael G. McClory


Federal and Oregon laws restrict an employer’s use of credit history and bankruptcy information in the employment process. Specifically, as a federal appeals court recently held, the US Bankruptcy Code makes it unlawful for an employer to terminate employment because the employee is or has been in bankruptcy and makes it unlawful for a public employer to deny employment to an individual on those same grounds (the Bankruptcy Code does not prohibit a private employer from denying employment on those grounds). Further, under Oregon law (amended last week), except in limited circumstances, it is unlawful for an employer to obtain or use an applicant’s/employee’s credit history information for employment purposes. This Alert will discuss the facts and holding of the federal case regarding bankruptcy information and will outline Oregon’s restrictions on obtaining and using credit history in employment.

Federal Law: Decision of the Eleventh Circuit in Myers v. TooJay’s Management Corp.
In February 2008, Eric Myers moved to Florida from North Carolina looking for a fresh start. The month before, he had filed a Chapter 7 bankruptcy petition with a bankruptcy court in North Carolina, and that court ultimately discharged Myers’ debts in May 2008. In Florida, Myers quickly found employment as a shift supervisor at a coffeehouse. While still employed there, he responded to a job posting and applied for a managerial position at a local TooJay’s Gourmet Deli restaurant.

Myers interviewed at TooJay’s in July 2008. The interview went well, and a compensated two-day on-the-job evaluation was scheduled for July 31 and August 1, 2008. (Compensation was less than half of the pay associated with the position.) During the on-the-job evaluation, Myers observed the operation of the deli, did some kitchen work, and signed various personnel forms. Among the forms signed was a “personnel action form” on which the options “new hire” and “rehire” were left blank while the option “other (explain)” was marked with the explanation “OJE” (on-the-job evaluation). Myers also authorized TooJay’s to conduct a background check, including a review of his credit history and reports. At the end of the on-the-job evaluation, TooJay’s scheduled Myers to begin work on August 18, 2008; he was not told that his employment would be conditioned on a clean credit history. Days after Myers quit his job at the coffeehouse, he received a letter from TooJay’s informing him he was not hired because of “a financial matter.” When contacted by Myers, TooJay’s told him that his bankruptcy filing was the only reason he was not hired and that it was company policy not to hire people who had filed for bankruptcy.

In September 2008, Myers filed a lawsuit in federal court asserting, among other things, that TooJay’s had discriminated against him in violation of 11 USC §525(b) by refusing to hire him because of his bankruptcy filing and, alternatively, by terminating his employment because of his bankruptcy filing. The district court granted summary judgment to TooJay’s on the refusal to hire claim on the grounds that Section 525(b) does not prohibit a private employer from refusing to hire someone because of a bankruptcy filing. Although the court allowed the termination claim to proceed to trial, the jury found that TooJay’s had not hired Myers and, therefore, did not terminate him.

Myers appealed both decisions, and the 11th Circuit affirmed the district court decisions. With respect to the refusal to hire claim, the appellate court said that discrimination protection under 11 USC §525 depends on whether the employer is a “governmental unit” (subject to Section 525(a)) or a “private employer” (subject to Section 525(b)). The earlier-enacted Section 525(a) provides that a governmental unit “may not … deny employment to, terminate the employment of, or discriminate” against a person based on that person’s bankruptcy filings. In contrast, the later-enacted Section 525(b) provides that a private employer may not “terminate the employment of, or discriminate” against a person based on that person’s bankruptcy filings; this section says nothing about denying employment because of bankruptcy.

The 11th Circuit found that Myers had no failure to hire claim because TooJay’s was a private employer. It stated: “Had Congress wanted to cover a private employer’s hiring policies and practices in §525(b), it could have done so the same way it covered a governmental unit’s hiring policies and practices in §525(a).” Because the phrase “discriminate with respect to employment” is in both of the subsections, it necessarily “means something other than discrimination in hiring,” which is only in Section 525(a) (applicable to governmental units and not private employers).

With respect to Myers’ termination claim, the appellate court stated that “the factual basis he asserts for the claim—that he was hired and then fired because of his bankruptcy filing—was rejected by the jury.” It held that the district court had properly denied his motions for judgment as a matter of law and for a new trial. (If the jury had determined that TooJay’s hired Myers, the result likely would have been different. In both the private and public sectors, termination of employment because of a bankruptcy filing is unlawful.)

Practical Implications: There are three important lessons in this decision. First, while a private employer may lawfully adopt a rule that it will not hire applicants who have prior bankruptcy filings, a private employer should not apply that rule to an existing employee; the statute expressly bars termination from employment because of a bankruptcy filing. Second, any private employer that adopts such a rule, should uniformly follow that rule; failing to apply the rule uniformly may lead to pretext claims (e.g., an applicant may cite non-uniform application in support of a claim that race or gender, not bankruptcy, was the reason for non-hire). Third, by paying Myers for the OJE, TooJay’s came very close to hiring him; it is important for employers to separate pre-employment activities from post-employment activities.

Oregon Law: Prohibits Credit History Discrimination In Most Circumstances
Oregon law generally prohibits employers from obtaining or using credit history information for employment purposes including hiring, discharge, promotion, and compensation. The statute (best known as Senate Bill 1045) went into effect on March 29, 2010, and was amended last week (June 1, 2011). Claims alleging violations may be filed with the Oregon Bureau of Labor and Industries or in state court.

Pursuant to Senate Bill 1045, there are a number of exceptions to the general credit history prohibitions. These exceptions include:
  • Employers required by state or federal law to use credit history for employment purposes;
  • Employers that are federally insured banks or credit unions;
  • Employers, such as law enforcement agencies, that hire criminal law enforcement officers; and
  • Employers that need to obtain or use credit history information because the information is “substantially job-related” and the “reasons for the use of such information are disclosed to the employee or prospective employee in writing.”
Although “substantially job-related” is not defined in the statute, it is clearly intended to have a narrow scope. BOLI, which has enforcement authority, interpreted this key phrase in a “Fact Sheet” posted on the agency website. According to BOLI, credit history information is “substantially job-related” if: “(1) an essential function of the job requires access to financial information not customarily required in a retail transaction other than a loan or extension of credit (i.e., beyond check information, credit card numbers or debit card numbers);” or “(2) the employer is required to obtain credit history information as a condition of bonding or insuring the employee.”

Bullard Law will continue to track and report on developments relating to credit history and other background information. Please feel free to contact us with any questions about these matters or any other labor, employment and benefits issues.