Operating a business involves managing numerous responsibilities, including the proper handling of employee payroll. Occasionally, you may receive a notice requiring you to deduct a portion of an employee's wages to settle their debts, a process known as wage garnishment. In this article, we’ll provide an overview of wage garnishment, explaining what it is, why it occurs, and the steps you need to take as a business when you receive such a notice.
What is Wage Garnishment?
Wage garnishment occurs when a court or government agency orders an employer to take money out of an employee's paycheck to pay off the employee's debt. The employer sends this money directly to the creditor, the person or company the employee owes money to, until the debt is paid off. Many debts can be garnished through employees’ wages, such as unpaid taxes, child support, and student loans.
How Does Wage Garnishment Work?
Understanding how wage garnishment works is crucial for employers to ensure they handle it correctly and comply with legal requirements. The process often begins once a writ of garnishment is issued. A writ of garnishment is a legal document issued by a court or government agency that orders an employer to withhold a portion of an employee’s wages to pay off a debt.
Employers should give the employee a copy of the wage garnishment notice when it’s received. Although it might feel uncomfortable to discuss with an employee, it's better not to surprise them with this news, and they likely already know about their debt situation. Also, in some states, employees have a certain amount of time to dispute the debt, making timeliness even more important when bringing this up to an employee.
If you get a garnishment order by mistake, such as if the employee no longer works for you, contact the agency that sent the order right away.
Here’s a detailed explanation of the wage garnishment process:
1. Order Received: A court or a government agency sends an official order to the employer. This order states that a portion of the employee's wages needs to be garnished (taken out) to pay off a specific debt.
2. Employer's Role: The employer must follow this order. They calculate how much money needs to be taken from the employee's paycheck based on the instructions in the order.
3. Deductions from Paycheck: What are garnishments in payroll? Each time the employee gets paid, the employer takes out the specified amount of money from their paycheck. This continues each pay period until the debt is fully paid off or the court or agency tells the employer to stop.
4. Payment to Creditor: The money that is taken out of the paycheck doesn't go to the employee. Instead, the employer sends it directly to the creditor. The creditor is the person or company that the employee owes money to.
5. Debt Reduction: Over time, as more money is taken out and sent to the creditor, the employee's debt gets smaller and smaller. Eventually, if everything goes as planned, the debt will be paid off completely.
What Types of Debt Can Result in Garnished Wages?
Garnished wages aren’t limited to just federal debt or state and local tax debt. Debt that can be paid through garnished wages can extend to a wide range of areas. It’s not uncommon to see garnishments come from creditors like banks and credit card companies. Child support enforcement agencies also issue garnishment orders to collect child support payments. Here are some common examples of debts collected through wage garnishment:
1. Child Support: Courts can order wage garnishment to ensure that child support payments are made regularly and in full. This is one of the most common and strict forms of garnishment.
2. Unpaid Taxes: Federal, state, and local tax authorities can garnish wages to recover overdue taxes. The Internal Revenue Service (IRS), state, and local tax agencies have the authority to collect unpaid tax debts through wage garnishment.
3. Student Loans: If federal student loans are in default, the government can garnish wages to recover the overdue amounts. This applies to federal student loans and, in some cases, state and private student loans as well.
4. Credit Card Debt: Credit card companies can seek a court order to garnish wages if a borrower fails to pay their credit card bills. This typically occurs after a creditor has obtained a judgment in court.
5. Medical Bills: Healthcare providers or collection agencies can obtain a court order to garnish wages for unpaid medical expenses.
6. Personal Loans: Unpaid personal loans, including payday loans, can also lead to wage garnishment if the lender wins a judgment in court, or if the employee signs a voluntary agreement to have a portion of their wages assigned to a third party in order to secure a debt.
7. Court Judgments: Any debt that has been confirmed by a court judgment can be collected through wage garnishment. This includes debts resulting from lawsuits for unpaid services, breached contracts, or other financial obligations.
It’s important to note, Federal and state laws limit the amount that can be garnished from an employee’s wages. The Consumer Credit Protection Act (CCPA) generally limits garnishment to 25% of disposable earnings or the amount by which weekly wages exceed 30 times the federal minimum wage, whichever is less. Ensure you’re educated on these limits based on the debt type and its corresponding limit.
What Wages Can Be Garnished?
While certain types of income are protected from garnishment, various employee wages can be subject to garnishment, including:
1. Regular Wages: This includes the employee's standard earnings from their employment.
2. Overtime Pay: Additional compensation earned for hours worked beyond regular working hours may also be garnished.
3. Bonuses and Commissions: Extra income, such as bonuses and commissions, can be subject to garnishment.
4. Tips: If applicable, tips earned by the employee may be garnished.
5. Income from Second Jobs: Wages earned from a second job or additional sources of income can be garnished.
6. Sick Pay and Vacation Pay: Depending on the circumstances, sick pay and vacation pay may also be subject to garnishment.
7. Retirement Benefits: In some cases, retirement benefits, such as pensions or 401(k) distributions, can be garnished to satisfy certain debts.
Additionally, certain types of income are protected from garnishment, such as Social Security benefits, Supplemental Security Income (SSI), and certain types of pension payments.
Is the Process Different if the Employee Has Multiple Garnishment Orders?
If an employee has multiple garnishments, the employer must prioritize them according to federal and state guidelines, with child support and federal debts usually taking precedence, followed by state or local tax debts, then earliest credit card or other debt garnishment, with all other debts being addressed after the former are taken care of.
When Can the Employer Stop Garnishing Wages?
An employer can stop garnishing wages to pay an employee's debt when they receive an official notice to terminate the garnishment. This notice usually comes from the court or government agency that issued the original garnishment order. There are several situations where this might occur:
1. Debt Paid in Full: When the total debt, including any interest and fees, has been fully paid off, the creditor or issuing agency will send a notice to stop the garnishment.
2. Bankruptcy Filing: If the employee files for bankruptcy, an automatic stay is typically put in place, which temporarily halts most wage garnishments. The employer will receive a notice from the bankruptcy court to stop the garnishment.
3. Court Order: If the court issues an order to stop the garnishment, possibly due to a successful appeal or dispute resolution by the employee, the employer will receive a directive to cease the garnishment.
4. Termination of Employment: If the employee no longer works for the company, the employer should notify the issuing agency, which may then instruct the employer to stop garnishing wages.
5. Settlement Agreement: If the employee reaches a settlement agreement with the creditor that resolves the debt outside of the garnishment process, the creditor will send a notice to terminate the garnishment.
Employers should always wait for official documentation before stopping any wage garnishment to ensure they remain compliant with legal requirements. If there is any uncertainty, it is advisable to consult with legal counsel or the issuing agency for guidance.
Handling wage garnishments is an important responsibility for any business owner. Understanding how to garnish wages properly helps ensure compliance with legal requirements and helps manage employee payroll smoothly. By knowing the steps involved in processing a garnishment order and recognizing the types of debts that can lead to garnishment, you can navigate this process more effectively.
To help you better understand your responsibilities as an employer and how to manage wage garnishments effectively, we’ve compiled a list of frequently asked questions. These FAQs cover essential topics such as checking garnishment balances, appealing garnishments, informing employees, and understanding pay stub deductions and tax implications.
FAQs About Wage Garnishment
How do you check a wage garnishment balance?
Answer: To check a wage garnishment balance, employers can consult the documentation provided by the issuing agency or creditor. This typically includes the original garnishment order, which outlines the amount to be withheld from each paycheck. Employers should maintain accurate records of garnishment payments made to ensure compliance with the garnishment order.
What are the steps that you can take to appeal a wage garnishment?
Answer: If an employer or employee believes that a wage garnishment is incorrect or unjust, they can take steps to appeal the garnishment. This usually involves filing a petition or motion with the court that issued the garnishment order. The appeal process varies depending on the jurisdiction and the specific circumstances of the case. Consulting with a legal professional experienced in wage garnishment matters is advisable to navigate the appeals process effectively.
How should you inform an employee that you have received a writ of garnishment?
Answer: When informing an employee about a received writ of garnishment, it’s important to handle the situation with sensitivity and professionalism. Employers should schedule a private meeting with the employee to discuss the garnishment in a respectful manner. Provide the employee with a copy of the garnishment notice and explain the details, including the amount to be withheld from their paycheck and the reasons for the garnishment. Encourage the employee to ask questions and offer support or resources if needed.
Can an employer refuse to garnish wages?
Answer: No, an employer generally cannot refuse to garnish wages if they receive a valid court or government agency order. Employers are legally required to comply with garnishment orders and must deduct the specified amount from the employee's paycheck. Refusing to do so can result in legal penalties and the employer may be held liable for the employee's debt. However, if there are errors in the garnishment order or the employee no longer works for the company, the employer should contact the issuing agency for clarification.
Can employers terminate an employee due to garnished wages?
Answer: No, employers cannot terminate an employee solely because their wages are being garnished. Under the Consumer Credit Protection Act (CCPA), it is illegal to fire an employee if their wages are being garnished for a single debt. This protection ensures that employees are not unfairly penalized for having their wages garnished.
However, this protection has limits. The CCPA does not prevent an employer from terminating an employee if they have multiple garnishment orders for different debts. If an employee has more than one garnishment, the employer is not prohibited by federal law from taking adverse employment actions, though some states may have additional protections.
Employers should be aware of both federal and state laws regarding wage garnishment to ensure compliance and avoid potential legal issues. If in doubt, consulting with legal counsel or a human resources professional, like our FrankAdvice HR consultant team, can provide further guidance.
