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Are You Prepared to Handle An Employee's Wage Garnishments?

Payroll
Article
02/22/2016

Updated March 2, 2016

Handling an employee's wage garnishments can become a challenge for employers. When notified of the need to garnish wages by a federal/state agency or court, business owners aren't always clear on their responsibilities and obligations. The forms for each type of garnishment are different and the rules for how to calculate the garnishment and its priority over other garnishments (if an employee has more than one) are complex.

What qualifies as a wage garnishment?

A wage garnishment is any legal or equitable procedure where some portion of a person's earnings is withheld by an employer for the payment of a debt. Situations that incur wage garnishment typically include alimony, child support, the default of a student loan, unpaid taxes, and other consumer debts.

When notified of an order to garnish wages, an employer is legally obligated to make the appropriate deductions from an employee's salary and direct payments to a designated agency or creditor. Wage garnishments are time-sensitive and failure to process the garnishment within the allotted time frame may lead to penalties.

What wages are garnished and for how much money?

For most garnishments including child support, creditor garnishments, and student loans, Title III of the federal Consumer Credit Protection Act (CCPA) requires that the amount of pay garnished should be based on an employee's "disposable earnings" (that is, the amount remaining after legally mandated deductions). Broadly speaking, this includes salaries, bonuses, and sales commissions, as well as earnings derived from retirement plans and pensions. (Tips aren't usually regarded as earnings for garnishment but service charges are considered earnings.) The maximum amount of wages garnished varies depending on the garnishment but they range from 15 percent of disposable earnings for student loans to as much as 65 percent of disposable earnings for child support (if the employee is at least 12 weeks in arrears).

However, some states deduct based on the gross rather than disposable earnings. For example, in Illinois the amounts subject to withholding for creditor garnishments are the “Lesser of (1) 15 percent of the gross amount paid for the week, or (2) the amount by which disposable earnings exceed 45 times the federal minimum wage (see ¶2857) or for wage deduction orders issued after January 1, 2006, 45 times the state minimum wage (whichever is greater) is subject to garnishment.”

In states that have enacted laws differing from federal wage garnishment requirements, employers must comply with state laws demanding a lesser garnishment. And because state laws differ (North Carolina, South Carolina, Pennsylvania, and Texas generally prohibit wage garnishment for consumer debts altogether), employers should ascertain what's required of them by state law before proceeding with garnishment.

Can employers fire a worker due to garnished wages?

Under CCPA provisions, an employer can't terminate an employee whose wages are being garnished for a solitary debt. No such CCPA provision exists for an employee saddled with multiple wage garnishments, but CCPA provisions do not preempt state laws that provide greater protection for employees by increasing the number of garnishments that can serve as the basis for termination or by prohibiting all terminations because of garnishments.

Most employers don't regard wage garnishment as cause for firing an employee, but others prefer to cut their losses with regard to employees who have repeated garnishments. For some types of garnishments, such as child support, the employer can actually deduct an administrative fee to offset the costs of processing the garnishment and this may be a good alternative to terminating an employee with multiple garnishments. The limits on the maximum amount of the administrative fee that can be deducted vary by state.

Steps employers must take

Upon being notified of a wage garnishment court order, an employer should immediately alert the employee to the situation in writing. Depending on the garnishment, there may be a form provided for this (ex. form 668 for a federal levy) or an employer can draft a letter detailing the specifics of the wage garnishment order, the amount to be taken from each payment, and the length of time the wages will be garnished.

Concurrently, an employer should notify their HR and/or payroll departments so they can start the wage garnishment process and ensure that payments are sent to the appropriate agency or creditor (whether the employee wishes to comply or not). Taking these actions protects the business from any legal repercussions for failing to respond to the order.

After the employee's debt has been paid, the procedure for stopping the garnishment will vary depending on the type of garnishment. For Federal levies, employers will receive a 668-D form, for child support the employer will receive a notice or letter from the state and for creditor garnishments, creditors will send employers a "Notice of Termination/Release of Wage Garnishment Order."

Using a garnishment payment service helps businesses process garnishments within the law, and helps protect them against undue liability and lawsuits. These services often include wage garnishment interpretations, accurate calculation of deductions, and the assurance that the proper agency will be paid either by paper check or electronic funds transfer.

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This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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