Employers often pay little attention to the bankruptcy filings of their employee. This failure is a blunder that could have serious consequences. As an employer you need to be aware of several issues may arise from the filing of bankruptcy by an employee. Under the Bankruptcy Code, an employer may owe certain duties to the bankrupt employee and other parties interested in the bankruptcy, such as the employee’s creditors and the bankruptcy trustee. An employer therefore, needs to have an understanding of these duties and put in place policies to spot these issues when they arise.
No Discrimination Against Bankruptcy
All employers should always be aware that employers are prohibited from discriminating against employees or potential employees who have filed for bankruptcy. Section 525 of the Bankruptcy Code expressly prohibits employers from terminating the employment or discriminating with respect employment of individuals who are or have been a debtor in bankruptcy or on the basis of an employee or potential employee’s association with a bankrupt.
Employer’s are also forbidden from considering the pre-bankruptcy insolvency of in making employment decisions. See 11 U.S.C. § 525.
Employers must therefore, institute policies to protect employees who file for bankruptcy from discrimination at the work place. Without a clear policy, there may be confusion with respect to how bankrupt employees are treated by supervisors and managers. There may also be consequences with respect to potential employees. If the issue of bankruptcy is NOT handled properly during the hiring process the employer may be exposed serious legal consequences.
Wage Order Obligations
In a Chapter 13 reorganization case filed by an employee, the employer may be subject to a wage order that requires the employer to remit a portion of the employee’s wages to the Chapter 13 trustee. The employer should therefore, show active interest in the bankruptcy cases of its employees, looking out for orders and issues that impact the employer/employee relationship.
There may also be instances where an current employee who files for bankruptcy is subject to a garnishment of his his or her wages. The employer needs to take special care in such circumstances of conflict between the order that garnishes the employee’s wages and the automatic stay that comes into existence in a bankruptcy. While continuing to garnish an employee’s wages may violate an the automatic stay this may NOT always be the case and before disobeying the garnishment order the employer needs to clarify and be certain as what its obligations are.
Employer’s should have procedures in place to addresses these issues quickly so that it does NOT find itself faced with contempt for violating a valid court order. If the employer is unsure as to its obligation it could seek an comfort order from the bankruptcy as to whether the automatic stay is in force as to the garnishment order. A comfort order if usually sought when there is uncertainty as to as to whether a bankruptcy injunction applies to to the collection or enforcement of certain debts.
Contract Employee Present Special Circumstances
Employers should be aware that pre-bankruptcy contractual obligations by a debtor may be avoided. The employer should therefore, pay careful attention to bankruptcy of employees who have unexpired contracts. This is particularly so if the employee has received an advance on the contract for work that has NOT been provided at the time of the bankruptcy filing.