For many industries, running a bankruptcy check before hiring isn’t a legal requirement, but it is common practice amongst many leading Australian and New Zealand-based companies, especially those in banking and finance. When you hire for roles with access to financial controls and sensitive data (upper management and executive positions, for example), you are exposed to high levels of risk.
A bankruptcy check can help you make a more informed decision. It reveals if an individual has ever declared bankruptcy – either for personal or business reasons – and the details surrounding the declaration. This includeswhether the bankruptcy record is current or discharged (meaning the period of bankruptcy has finished – normally three years and one day), the administration process the bankruptcy went through, all associated dates, business names and so on. All bankruptcy filings are stored on the National Personal Insolvency Index (NPII), and held by the Australian Financial Security Authority (AFSA).
Although declaring bankruptcy allows a person to make a fresh financial start, it comes with a far-reaching range of obligations and consequences. They may have to sell assets and make regular repayments. It can also affect their ability to get credit, travel overseas or obtain certain types of employment.
Often, a bankruptcy record is disclosed either during the interview process, or picked up through thorough pre-employment vetting. But what if it appears that your employee has become bankrupt after the relationship has started? Rushing to end their employment may not be necessary, nor the right course of action.
Does the bankruptcy record belong to your employee?
Firstly, you should confirm that the bankruptcy record actually belongs to your employee.
Some older Australian bankruptcy records (CVCheck’s bankruptcy check searches all records dating back to 1928 on the NPII) miss vital information, such as addresses and middle names. This is unfortunate for people with common names.
“If your name is John Smith, for example, a bankruptcy check may return a positive match. This is because a record can be recorded against a person’s full name, date of birth and address, or it can be recorded simply against the name John Smith,” explains Jenny Cutri, lawyer and CVCheck’s Chief Compliance Officer. “In the case of the later, the bankruptcy check will show positive results for any and all John Smiths going back possibly decades.”
In these cases, if your employee is adamant that it is not their bankruptcy record, the accepted practice is to ask your employee for evidence the record doesn’t belong to them. This can be by way of a statutory declaration that the record does not belong to them or by cross checking the record with an independent referee. In some cases, you may be happy to accept their verbal confirmation that it is not them.
When is a bankruptcy record a barrier to employment?
A bankruptcy record can, in some cases, be an employment deal-breaker – it can impact the eligibility of a person to hold a position of trust, or take on certain financial responsibilities. An individual’s record can even jeopardise a company’s licence to trade.
Take the building and construction industry. Bankrupts are not permitted to hold certain licences including builders and property management licences. On the other hand, trades such as plumbers and electricians (among others), may continue to operate with employment or trading restrictions if they carry a bankruptcy record – the rules are set by individual state legislation.
If a person declares bankruptcy or enters into a personal insolvency agreement, they can no longer be a director or officeholder of a company, and it is an offence for them to continue managing a corporation without first seeking permission from the Court.
For those in the finance industry, including (but not limited to) accountants, tax agents, finance brokers and security dealers, the eligibility to work in their chosen profession with a bankruptcy record is set by professional associations, statutory boards and/or government agencies.
“In the finance sector, if you hold an Australian Financial Services licence and declare bankruptcy your licence may be cancelled. This is because it may impact their ability to satisfy the ‘fit and proper person test’. The same goes for persons they may employ as their representatives.
“For this reason, there will often be a clause in the company’s employment contracts requiring an employee to notify the employer if they become bankrupt after their employment commences and detailing the consequences if they don’t (including termination of employment). In this instance, if you become bankrupt (after your employment commences), and if you’re required to notify your employer, and if you don’t, and the record is later disclosed, your employer may be entitled to terminate,” explains Jenny.
What should you do if bankruptcy isn’t a barrier to employment?
Bankruptcy isn’t necessarily an indication an employee can’t be trusted with other decisions – including financial decisions – on behalf of the employer. It simply indicates that at one point in time, the person struggled to manage their finances. Depending on how the record was uncovered, however, may speak to a person’s values, rather than their competency.
“If you’re in operations in a non-financial role (operations analyst, or manager, for example) and you have a bankruptcy issue, it probably won’t affect your ability to do the job. In situations where the record doesn’t affect a person’s ability to meet the inherent requirements of a role, you should not discriminate, and not end the employment relationship for that reason,” says Jenny.
“The only time it becomes an issue and possibly grounds for termination is if you specifically asked them at the time of interview (if they’ve previously been bankrupt) and they lied to you. Or if they’re contractually required to disclose future bankruptcies, and fail to do so. The issue then goes to integrity and honesty, and that’s grounds for either a warning letter, or potentially termination.”
How should employers deal with a recently disclosed bankruptcy?
If bankruptcy isn’t a barrier to employment, consider the following when deciding how to negotiate the undisclosed record:
- Does your company have a relevant policy regarding the employment of bankrupts or requiring an employee to disclose any future bankruptcies?
- Check the employee’s employment contract and disclosure requirements.
- Go back to the employee’s recruitment process and interview, check all records and whether there was anything directly or related to bankruptcy asked of the prospective employee?
If any of these expressly required disclosure of bankruptcy, or future bankruptcies, and the employee does not appear to have disclosed the matter or updated the employer, then this may go to the honesty and integrity of the individual.
Before making any accusations or taking any action, you should always get as much information as you can about the bankruptcy record and confirm that it actually belongs to the individual
An employee may genuinely not be aware that an old record is still available and relevant to the position, or that a business arrangement they entered into was required to be disclosed to the company.
The best way to proceed is often to schedule a meeting with the employee, and have an open and confidential discussion, including:
- If applicable, the company’s policy and/or requirements under their employment contract in relation to bankruptcy matters;
- What was or was not disclosed during the recruitment process;
- The status of the bankruptcy record and the circumstances surrounding it – is it current or discharged, for example?
- If relevant, why the employee did not disclose the bankruptcy during the recruitment process or subsequently?
How to ensure your employees’ bankruptcy records are disclosed?
“For employers hiring people in roles where bankruptcy is an issue, particularly where it’s a requirement of their licence – a finance role, for example – I would recommend conducting a bankruptcy check during the recruitment process, and also asking questions relating to a person’s bankruptcy record, or whether they have ever been involved in a bankruptcy process, and documenting the list of questions and responses during the interview,” says Jenny.
“It should also be expressly noted in their employment contract that they have an obligation to notify the employer in the case of any future bankruptcy, or the entering into of any personal insolvency agreement. The consequences for failure to disclose those details should also be stated in their employment contract. You may also wish to note in the employment agreement that the company will re-run bankruptcy checks on a regular basis and that the employee acknowledges and consents to that process.
“Then I would be recommending that the employer re-run a bankruptcy check on those employees at least yearly.”
If you’re unsure how to best manage an employee’s undisclosed bankruptcy, always seek independent legal advice.