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Disclaimer: Educational purposes only. Not legal advice. Consult a qualified NZ legal practitioner for your specific circumstances.

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employment

Can an employer fire you for going bankrupt?

Key Takeaway

In New Zealand, an employer generally cannot dismiss an employee solely for becoming bankrupt. Dismissal must be justified, meaning there's a genuine reason related to the employee's ability to do the job, their conduct, or the employer's business, and a fair process must be followed. Bankruptcy might only be relevant in specific roles involving financial trust or where it genuinely impacts business operations.

Can an Employer Dismiss an Employee for Going Bankrupt in New Zealand?

In New Zealand, an employer's ability to dismiss an employee for becoming bankrupt is limited. Generally, an employee's personal financial situation, including bankruptcy, is not considered a direct ground for dismissal unless it genuinely impacts their ability to perform their job, their suitability for the role, or the employer's business. Any dismissal must meet the legal test of justification under New Zealand employment law.

What is Bankruptcy?

Bankruptcy is a legal process for individuals who cannot pay their debts. It involves a person's assets being managed by an Official Assignee (an officer of the Insolvency and Trustee Service) to repay creditors, and it imposes certain restrictions on the individual [Source: Insolvency Act 2006, s 19].

General Principles of Justified Dismissal

Under New Zealand law, for a dismissal to be justified (lawful), an employer must show that their actions, and how they acted, were what a fair and reasonable employer could have done in all the circumstances at the time the dismissal occurred [Source: Employment Relations Act 2000, s 103A]. This requires both a substantive reason for dismissal and a fair process.

Bankruptcy itself is typically a personal financial matter and usually does not, on its own, constitute a justifiable reason for dismissal. The Employment Relations Act 2000 emphasises the importance of good faith in employment relationships, meaning parties must be open, honest, and not mislead each other [Source: Employment Relations Act 2000, s 4]. This principle extends to how employers manage issues related to an employee's personal circumstances.

When Bankruptcy Might Be Relevant to Employment

While bankruptcy alone is not a direct ground for dismissal, there are specific circumstances where an employee's bankruptcy may become relevant to their employment and could potentially lead to justified dismissal, provided a fair process is followed:

  • Roles requiring financial trust or integrity: If an employee's role involves handling significant amounts of money, managing financial accounts, or a high degree of financial trust (e.g., a financial controller, accountant, or bank teller), bankruptcy could be considered a legitimate concern regarding their fitness for the role. The employer would need to demonstrate how the bankruptcy genuinely impairs the employee's ability to perform the essential duties of their specific job or poses an unacceptable risk to the business.
  • Impact on the employer's business or reputation: In certain situations, an employee's bankruptcy might genuinely and significantly damage the employer's reputation, particularly if the employer operates in a sensitive industry (e.g., financial services) or if the employee holds a very public-facing role. The employer would need to demonstrate a clear and tangible link between the bankruptcy and the harm to the business or reputation.
  • Legal disqualification for specific roles: The Insolvency Act 2006 and the Companies Act 1993 impose disqualifications for bankrupt individuals from holding certain positions. For example, a bankrupt person is generally disqualified from acting as a director of a company without court leave [Source: Companies Act 1993, s 151; Insolvency Act 2006, s 304]. If an employee's role requires them to be a company director, bankruptcy would render them legally ineligible for that position, potentially leading to a justified termination if no alternative role is suitable.
  • Breach of specific employment agreement clauses: While rare and subject to scrutiny, if an employment agreement contains a clause stating that insolvency or bankruptcy is a ground for dismissal, such a clause would still need to be assessed against the general test of justification and fairness. It's unlikely that such a clause would permit automatic dismissal without demonstrating a genuine impact on the employment relationship or business.

Procedural Fairness is Essential

Even if an employer believes there are substantive grounds for dismissal related to an employee's bankruptcy, they must follow a fair process. This includes:

  • Informing the employee of the concerns related to their bankruptcy.
  • Providing the employee with an opportunity to explain their situation and respond to any allegations or concerns.
  • Considering the employee's explanation and any mitigating factors.
  • Exploring alternatives to dismissal, such as a different role, if appropriate.
  • Conducting a thorough and impartial investigation where necessary.

Failure to follow a fair process, even if there might have been a substantive reason, can render a dismissal unjustified [Source: Employment Relations Act 2000, s 103A].

Unjustified Dismissal

If an employee is dismissed solely due to bankruptcy without a genuine impact on their job performance or the employer's business, or if a fair process was not followed, they may have grounds to raise a personal grievance for unjustified dismissal. Remedies for unjustified dismissal can include reinstatement, reimbursement of lost wages, and compensation for humiliation, loss of dignity, and injury to feelings [Source: Employment Relations Act 2000, s 123].

When to Seek Independent Legal Advice

Individuals facing employment issues related to bankruptcy, or employers considering actions against an employee due to bankruptcy, should seek independent legal advice. Information about employment rights and obligations can be obtained from Employment New Zealand, and free initial legal assistance may be available from Community Law Centres.

Key Resources