My Employer Filed Bankruptcy. Does That Mean They Can't Enforce My Noncompete?

This question was asked on my post Non-Compete Agreements - Top 5 Ways To Get Out of Yours:

My employer has filed for chapter 11 bankruptcy and is reorganizing. Does this also invalidate their employment contracts?

Wayne

This is a good question, Wayne, especially considering how many bankruptcies have been filed in the past few years. I should first say that, being an employment lawyer, what I don't know about bankruptcy law is a whole lot. However, I'll do my best to explain why there's no easy answer to this question. If there are any bankruptcy lawyers out there who want to chime in, I'd love your help answering this.

Executory contracts: Most employment contracts appear to be considered "executory contracts," which are defined as "a contract under which the obligation of both the bankrupt and the other party to the contract are so unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other." If it's in this category, then the contract becomes part of the bankruptcy estate, which means it no longer belongs to your employer, but instead belongs to the trustee or the debtor in possession.

Bankruptcy estate: Once it is considered part of the bankruptcy estate, the trustee or debtor in possession will decide whether to assume the contract or reject it.

Contract is assumed: If they assume it, then it remains intact and the bankruptcy estate assumes responsibility for it. That means if your noncompete is part of an employment contract requiring payment of wages and other benefits, the estate has to take these responsibilities on.

Contract is rejected: If they reject the contract, then you can treat it as if they breached it on the date the bankruptcy was filed. Even if the contract is rejected, that doesn't necessarily mean you're out of the non-competition part of it though. Some courts have allowed employers to seek injunctive relief against employees for breaching a noncompete even when the contract was rejected.

One analysis of the case law on these issues is here. In short, it sounds like there's no easy out of a noncompete agreement just because your employer is in bankruptcy. I'd suggest talking to a bankruptcy lawyer in your state about your rights.

Potential Employees Beware: Some Employment Laws Hate Job Seekers

An ugly new trend is spreading in the workplace, and the courts say it's okay. If you're trying to get a job, employers can now discriminate against you in ways that current employers can't.

A Potential Employer Can Retaliate Against You For Suing Your Employer

The latest attack on potential employees comes out of the 4th Circuit, covering Maryland, Virginia, West Virginia and North Carolina. In the case of Dellinger v. Science Applications, the court ruled that a job applicant is not protected from retaliation under the Fair Labor Standards Act. The implications are frightening. Say you work for Scumbag Employer, Inc., which suddenly stops paying employees. You sue. You have the right to do so. You win. Scumbag Employer has to pay up. You're a hero, because your coworkers get paid too. If Scumbag Employer fires you for suing them, that's illegal. But once you decide to leave, beware.

In Dellinger, the court found that. . . . read more in the Huffington Post.



Thanks to Gina Misiroglu of Red Room for putting me in touch with the Huffington Post!

Your Employer Can’t Discriminate Because of Your Bankruptcy (But Your Potential Employer Can)

The Bankruptcy Code says: “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 . . . .” Seems pretty clear, huh? Ordinary mortals read the language “or discriminate with respect to employment against” to include discrimination in hiring.

The federal appellate courts, as we know, are not ordinary mortals. In a recent case, the 5^th Circuit Court of Appeals found that this provision did not apply to discrimination in hiring. The employer withdrew a job offer after the background check revealed that she had filed for bankruptcy.

The court said, “Had Congress wished to bar private employers from discriminating against debtors in their hiring decisions, it could have done so by adding the phrase ‘deny employment’ to [the law] when it amended [the law] in 1994 and again in 2005.”

The 5^th Circuit joined the 3^rd Circuit in this reasoning.

Why the tortured logic? Well, it’s at least partly Congress’s fault (isn’t it always?), because they put hiring in a provision about government employers:

“[A] governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to, condition such a grant to, discriminate with respect to such a grant against, deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under this title or a bankrupt or a debtor under the Bankruptcy Act, or another person with whom such bankrupt or debtor has been associated . . . .”

These two courts are assuming that Congress thinks like they do (they don’t) and they are failing to take into account that the two provisions weren’t passed at the same time. So sure, Congress could have included that language. But they’re ordinary mortals who assumed that the phrase “discriminate with respect to employment” meant what it says.

The 11^th Circuit has a similar case in front of it, and these cases are popping up all over now. If another circuit decides differently, then the Supreme Court will have to decide which interpretation wins out.

In my opinion, employers who refuse to hire people just because of bankruptcies are idiots. What on earth does that have to do with their skills? Why exclude an increasingly large number of potential candidates just because the economy tanked?

In the meantime, Congress should immediately act to fix the darned law so their constituents aren’t denied employment just because they filed bankruptcy. Support for the change should have nothing to do with party lines. It’s the right thing to do.