Wage Garnishment? Not Quite as Easy as It Appears

You’ve got no choice but to honor a garnishment order, but the issues of how much of disposable income to pay and which order to honor first are trickier than they appear on the surface.

What Is a Garnishment?

A wage garnishment is an order from a judicial or governmental agency requiring an employer to withhold a certain sum from the wages of an employee for payment of a debt. Such an order may come from the Internal Revenue Service (IRS), a federal or state agency or court, or from an individual creditor.

An employer’s response to a garnishment demand will depend on its nature and in what order the employer receives it.

Two Garnishment Caveats

• Wage garnishments are not the same as voluntary wage assignments (situations in which employees voluntarily agree that their employers may turn over a specified amount of their earnings to a creditor or creditors).
• Employers should take care not to be misled by official-looking documents mailed by collection agencies requesting deductions from an employee’s paycheck.

Wage Garnishment Is Very Complex

Federal law is not straightforward, and state laws also interact with garnishment obligations. An employer that receives a wage garnishment order may want to consult a legal advisor before deciding how much to withhold and, in the case of multiple garnishments, where priorities lie.

Never Ignore a Garnishment Order

Failure to answer and comply may result in a contempt of court judgment and, in some cases, the employer may wind up with liability for the amount owed. In the case of a consumer order, if an employer is unable to honor it because of its priority or the exemption amount, the employer must communicate with the court or agency and explain the circumstances.

Processing Fee

Employers may withhold a processing fee, which is generally set by the orders themselves or by state law, from the employee’s wages.

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You may receive any of the following types of garnishment:

Family Support

Child and spousal support is governed by Title IV-D of the federal Social Security Act.

Administrative Wage Garnishment

These garnishments are covered by the Debt Collection Improvement Act of 1996 (DCIA) (31 USC 3720D).

Defaulted Student Loans

The Higher Education Act (HEA) authorizes the Department of Education’s guaranty agencies to garnish up to 10 percent of disposable earnings to repay defaulted federal student loans.

Consumer Debt

Title III of the federal Consumer Credit Protection Act governs most garnishments, other than child support or alimony and tax levies. It limits the amount of an employee’s earnings that may be garnished and protects an employee from being fired if pay is garnished for only one debt.

Garnishment restrictions do not apply to bankruptcy court orders and debts due for federal or state taxes. For orders other than for federal taxes, family support, and Chapter 13 bankruptcy, the maximum amount of wages available for garnishment is the lesser of:

• 25 percent of disposable weekly earnings.
• The amount by which disposable weekly earnings exceed 30 times the federal minimum hourly wage in effect at the time the earnings are payable. Some states use 40 percent of the federal minimum wage—which would supersede the federal figure—so check your state law.

When the garnishment is for child or spousal support, a Chapter 13 bankruptcy, or state or federal taxes, the 25 percent limitation does not apply.

Family Support Orders

The maximum amount of wages available for family support garnishment is:

• 50 percent of disposable earnings, when an individual is already supporting another spouse or dependent child
• 60 percent of disposable earnings, when an individual is not already supporting another spouse or dependent child

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Tax Liens

The order itself should state the amount owed by the employee, the kind of tax, and instructions for calculating the amounts to be withheld. Certain moneys are exempt from levying, including unemployment benefits, workers’ compensation, money that the worker must contribute to support for minor children, and certain disability benefits.

Federal Agency Nontax Debt

Any federal agency that is owed any nontax debt may now administratively garnish employee wages to recover the debt. State laws that prohibit or otherwise govern garnishment are preempted. Employers will receive an administrative order, and the regulations suggest that the amount be sent within 10 days of payday.
The most that may be withheld is the lesser of:

• The amount shown on the garnishment order up to 15 percent of the employee’s pay; or
• The amount by which disposable pay exceeds 30 times the federal minimum wage.

However, if an administrative order is not first in time or if a child or family support order is served at any time, the maximum amount changes to the following:

• The amount that could be withheld if there were no prior order, and
• The amount equaling 25 percent of disposable pay, less the amount withheld under the prior order.

Example. Assume a state child support withholding order and a consumer debt garnishment. The child support order must be honored first. If it takes 50 percent of the debtor’s disposable earnings, the consumer garnishment may not be honored because it is subject to a 25 percent limit, which has already been passed. If, however, the child support takes only 15 percent of disposable earnings, there will be 10 percent available for the consumer debt (up to 25 percent). If the second order is a state or federal tax levy, the order itself will state the amount that must be withheld.

Note: The statute that is more generous to the employee always prevails.
The law protects everyone receiving personal earnings, such as wages, salaries, commissions, bonuses, or other income—including earnings from a pension or retirement program. Tips are generally not considered earnings for the purposes of the wage garnishment law.

In tomorrow’s Advisor, guidance for the tricky issue of what order to pay garnishments in, plus news of a timely webinar on wage attachments.