39: Garnishment Administration

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You can be held liable for 100% of your employee’s debt if you don’t administer your garnishments properly.

One of the least enjoyable parts of being an employer is when you have to get involved in your employee’s personal financial affairs. How? By having to withhold money from their paycheck and send it to a creditor . In other words, a garnishment.

Garnishment administration is difficult and it requires attention to detail. We’ll learn the basics, I’m talking the very basics – of garnishments, on this episode of SmallBiz Brainiac.

What is a garnishment?

A garnishment is a wage withholding for the payment of a debt or other financial obligation. A garnishment order is a legal document requiring you, the employer, to withhold and remit money from your employees earnings for the payment of the debt or obligation.

A garnishment order is the result of several different types of events and is initiated by different types of creditors, plaintiffs or government entities. Most garnishments are made by court order but the government can also initiate a collection for child support, taxes and student loan debts owed to them without a court order.

You are legally obligated to execute the garnishment and remit the funds, and if you don’t, you can be liable for 100% of the outstanding debt. As crazy as that sounds, it’s true. I’ve seen it happen. Don’t take garnishment orders lightly. You need to give them priority attention and create a process to ensure they are responded to timely.

Garnishment orders get served on you and at first glance they look like you are being sued or that you’re the one who owes the debt. You’re actually considered the Garnishee, which sounds like your the one with the problem, and the order is to you requiring you to withhold and remit funds from the debtor, your employee.

These orders require a response from you. If you fail to respond on time, you can be held liable for whatever portion of the debt would have been paid had you respond timely. If you don’t respond at all, you could be held liable for 100% of the debt. You want to be especially cautious if you’re operating as a sole proprietorship. You don’t want to end up owing the debt personally.

It’s super important that you throughly read and follow the instructions that come with the garnishment. One thing to keep in mind is that you must continue the wage garnishment until either the total amount has been withheld or you receive notice from the creditor. If your employee tries to tell you it’s all settled, let them know that you’re legally obligated to continue the withholding until

How many employees have garnishments?

The ADP Research Institute conducted a study which says that 7.2% of all employees had their wages garnished in 2013.

  • 3.4% were for child support
  • 2.9% for other forms of debt – mostly student loans and other consumer debt
  • 1.5% for tax levies, and;
  • 0.4% for bankruptcy.

However, the rate is 10.5% for employees between the ages of 35 and 44.

Garnishment rates were higher among employees of manufacturing companies when compared to service companies, implying a variation between blue- and white-collar environments.

The study goes on to say that “The economic downturn has produced a significant increase in the number of debtors – and creditors seem to be suing at higher levels. Garnishments are up 121% in Phoenix since 2005 and 55% in Atlanta since 2004.”

With a divorce rate in this country of 50%, it shouldn’t be surprise that child support is the leading cause of garnishment orders.

What are your obligations as an employer?

Federal law:

Garnishments are regulated at both the federal and state levels. The federal law is Title III of the Consumer Credit Protection Act, or “CCPA”. This law basically does two things. It caps the amount that can be withheld and it protects the employee from termination… sort of. The job protection only applies for one garnishment, not two. So if your employee has two or more garnishments, you may terminate them for this reason.

Questions about the priority given to certain garnishments are not covered by CCPA. You should reference state law and talk to the court or agency initiating the garnishment action.

Under the CCPA, the wages that are subject to garnishment are called “disposable earnings”, which is what’s left over after you deduct all legally required amounts. What does that mean? Well, payroll taxes and retirement systems contributions that are required by law such as the Teacher’s Retirement System.

The law sets the max amount that may be garnished in any workweek or pay period, regardless of the number of active garnishment orders you might have for them.  This max applies to ordinary garnishments, which DO NOT include child or spousal support, bankruptcy, or any state or federal tax).

The weekly amount may not exceed the lesser of : 25 percent of the employee’s disposable earnings, or the amount by which an employee’s disposable earnings are greater than 30 times the federal minimum wage.  So for example, the federal minimum wage is $7.25 X 30 = $217.50.

But that’s a bit confusing so let me say it another way: You can only garnish disposable earnings above $217.50 up to the point where the garnishment is 25% of the disposable earnings.

So, for example, let’s say gross earnings are $263.00 and disposable earnings are $233.00. Only $15.50 may be garnished, since only the amount over $217.50 can be taken. $233 – $217.50 = $15.50

The easiest way to look at this is that on disposable earnings up to $289 you subtract $217.50 and garnish the rest. At $290 or more in disposable earnings you just garnish 25% of the disposable earnings. I should have just said it this way to being with…

State law:

Each state has their own wage garnishment laws and some states provide better protections for the debtor than the federal CCPA.

The National Consumer Law Center has published a state map showing the different debtor protections. As for wages, there are 5 categories:

There are four Category 1 States that ban wage garnishment for most debts. They are NC, SC, PA and TX.

There are five Category 2 States that preserve 90 percent of a debtor’s wages. They are IA, MO, NJ, NY and Virgin Islands

There are three Category 3 States that protect enough wages so the paycheck does not drop below the poverty level. They are AK, FL and WI

There are twenty Category 4 States that otherwise preserve more of a worker’s wages than the minimum required by federal law, and finally:

There are twenty-one Category 5 States that don’t offer any more protection than the federal CCPA minimum.

Now if you’re dong the math, that’s 53 states… and since there are only 50 states this list includes the District of Columbia, the U.S. Virgin Islands and Puerto Rico.

I’ve put a link to the NCLC state maps in the show notes.

Here are some how to administer garnishments highlights:

What if one of your employees ends up with multiple garnishments? Fire them! I’m just kidding…. you can fire them for this if you want to. If not, then there is a priority or hierarchy used to determine the deduction order.

  • Bankruptcy Orders
  • Child Support
  • Federal Tax Levy
  • Federal Student Loan
  • State Tax Levy
  • State Student Loan
  • Local Tax Levy
  • Creditor Garnishments

If you have employees or you conduct business in a state where you don’t have an office address or where you have an address but no-one is around to check the mail everyday, then make sure you use a registered agent in that state so you don’t miss the response date on a garnishment order.

You have to respond to a garnishment order even if the employee no longer works for you – even if they never worked for you.

Keep a log of the orders you receive and include your response date.

Summary:

  • You can become liable for an employees debt if you don’t comply with your obligations as the garnishee under the law.
  • An average of roughly 7% of employees have garnishments every year.
  • The Consumer Credit Protection Act regulates garnishment deductions at the Federal level.
  • 31 states and one territory have higher limits on how much of your employee’s earnings can be garnished.
  • Above all, respond timely to EVERY order.

About the author, Thomas

I have 20 of years insurance industry experience in C-level management, focusing on all aspects of workers compensation, risk management, loss control, employee benefits, HR, payroll and professional employer organization (“PEO”) operations. Currently, I am the owner and CEO of Humanly HR, and founder and host of SmallBiz Brainiac; a podcast providing employer intelligence to small business owners.

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