Can you terminate an employee who has filed for bankruptcy?

Q. I recently discovered that an employee who handles my company's accounts receivable has filed for bankruptcy. Can I discharge this employee?

A. Under the Federal Bankruptcy Act, bankruptcy is not a legal reason for rejecting an applicant or firing an employee.

The statute provides: "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, a debtor or bankrupt under the Bankruptcy Act, or an individual associated with such debtor or bankrupt.

The limited number of court rulings that have addressed this provision in the Bankruptcy Act have been willing to apply a retrospective "but for analysis to determine whether the bankruptcy information was the reason for an adverse employment decision (i.e., but for the bankruptcy, the worker would not have been terminated).

Thus, an employer that obtains information indicating that an applicant or current employee has filed for bankruptcy should base any adverse employment decision only on facts independent of the bankruptcy filing—and should ensure that clear documentation exists establishing this explanation.