When a debt goes unpaid, creditors will sometimes turn to wage garnishment as a way to collect payment directly from the debtor’s employer. When wages are garnished, an employer must withhold a portion of a person’s earnings to send directly to the creditor. Most garnishments are made under a local court order that creditors file a few months after debtors fall behind on payments.
By the time you, as an employer, receive the garnishment order, the court should have notified the employee about the action. No written authorization by the employee is required by federal law before garnishing his or her wages.
You’ll probably see garnishment as a burden, especially if you have to navigate different laws when state and federal garnishment laws differ, but you can’t just ignore it. Indeed, if you don’t garnish wages, you may become liable for the employee’s debt, depending on the particular situation.
Know the Rules
The federal Consumer Credit Protection Act (CCPA) limits the employee’s earnings that may be garnished. They must be “disposable earnings,” the amount that’s left after legally required deductions are made — state, federal, and local income taxes; Social Security tax; and state unemployment insurance.
And what’s meant by earnings? Wages, salaries, commissions, bonuses, and pension or retirement plans are included. Tips are generally not considered earnings by CCPA definitions. But deductions not required by law — union dues, health and life insurance premiums, and retirement plan contributions not required by law — may not be subtracted from gross earnings when calculating disposable earnings.
Also, the maximum amount in garnishment withheld in a weekly period for consumer debt is limited to either 25% of the employee’s disposable earnings or the amount by which the employee’s weekly wages exceed 30 times the minimum wage, whichever is lower. Does your pay period cover more than a week? You must use multiples of the weekly restrictions for depending on how many weeks your pay period covers to calculate the maximum amounts that may be garnished.
Knowing these rules is important; more than one in 10 working Americans between the ages of 35 and 44 had their wages garnished in 2013. And probably “deadbeat dads” who owe spousal and child support come to mind when you think about garnishment. But many debtors were delinquent on taxes, credit cards, medical bills, and student loans, not just support payments. In fact, garnishments in the consumer-debt category are treated differently from alimony and child-support payments.
When it comes to alimony and child support, the CCPA allows up to 50 percent of a worker’s disposable earnings to be garnished if the worker is supporting another spouse or child who is not the subject of the support order, and up to 60 percent otherwise. An additional 5 percent may be subtracted for support payments more than 12 weeks in arrears.
Know Your Responsibilities
As an employer, you must honor an income-withholding order for child support. You must withhold child support before all other garnishments, except an IRS tax levy entered before the date the underlying child-support order was established.
The law prohibits you from discharging an employee because wages have been garnished for any one debt, although this protection doesn’t extend to multiple garnishments. There are also limits on the amount of an employee’s earnings that may be garnished in any one week.
States have exemption laws to prevent creditors from pushing debtors into poverty. These vary from state to state, but are generally designed to preserve subsistence wages and essential property from seizure by creditors and deter predatory lending practices and fraudulent claims.
Obviously, it’s a good idea to let the court know if your company cannot legally comply with the order because of the above limits or any other reasons. Wage garnishment errors can be a costly mistake for employers. If you are facing any of these issues, please give us a call before you do anything, to avoid major problems later.