Wage garnishment is a legal procedure in which an individual's employer is required by a court order or similar procedure to withhold earnings for the payment of a debt. The debt could be for a variety of reasons, such as child support, a credit card judgment or unpaid state or federal taxes. Wage garnishment can be a painful and embarrassing process for the employee. The employee can feel that their personal life or personal financial management issues are made know to their employment in general and to other employer's who work in the employer's finance and account departments and administer their wage garnishment, in particular.To help reduce the occurrence of garnishment and thus minimize its destructive impact, finance leaders may offer financial wellness programs, budget training and financial counseling.
Most people do not forego paying their debts for philosophical reasons. Most do so because they are experiencing temporary or ongoing financial difficulties that impact their ability to pay. Hence, when wages are garnished, the employees are usually placed under additional financial strain. According to the Department of Labor, the federal Consumer Credit Protection Act (CCPA) limits the amount of wages that can be garnished to the lesser of 25 percent of the disposable income or "the amount by which disposable earnings are greater than 30 times the federal minimum hourly wage."
This limitation does not apply to taxes or child support. For these, the limits are significantly higher. In addition, the CCPA protects employees from being released by employers for the garnishment of one debt; however, it does not protect employees against successive or subsequent instances. Thus, although there are legal limits, the financial strain may still be overwhelming.
According to the ADP Research Institute®, Garnishment: The Untold Story, employers also face financial risk exposure in wage garnishment cases. In most states, if a business is noncompliant with the laws involving earnings garnishment, it could be liable to the employee's creditor for the full judgment amount. In addition, employees often experience feelings of loss of control over their futures and believe that they are working for whomever they owe money to, not for themselves. These feelings and beliefs often lead to lower productivity and low motivation, which results in additional indirect costs for firms. Therefore, to help reduce their organization's potential exposure and liability, it behooves financial leaders to understand the concerns and to explore options to help prevent such occurrences.
Inside the Numbers
According to previously cited ADP report, approximately 7.2 percent of employees are subjected to wage garnishment. The two main reasons for this are child support and tax liens. The third reason, "other," includes consumer debt and student loans. For those between 35 and 44 years of age, the percentage increases to 10.5. The Midwest had noticeably higher rates of garnishment for child support, at 4.6 percent (compared to 3.9 percent for the South, which had the 2nd highest rate) and "other" at 4.1 percent (compared to 3.2 percent for the West, in second place). In general, the group with the highest garnishment rate was lower middle income earners making $25,000 to $39,999 annually.
Prevention Through Education
Offering tax education may help decrease the number of IRS or state tax garnishments. Providing financial counselors who are knowledgeable about interacting with the IRS and entering into installment agreements or offers in compromise is another option. Offering counseling on managing funds to support child support payments can help employees avoid the failure to pay that results in garnishment. Furthermore, making private debt counseling services available and publicizing them can help employees learn the actions to take to avoid judgments. In addition, general financial wellness training offered periodically to all employees is a strong prevention tool and can help augment all employees' overall financial health, not just those at high risk.
Finance leaders must balance the offering of empathetic and consistent services to employees with wage garnishments, with the compliance requirements and the associated costs. They need to ensure that staff understand the issues for both the organization and the employees and to assist high-risk employees in developing sound financial management skills. Doing so can help employees manage their debt and may aid in minimizing the adverse impact of wage garnishment on employees and thus reduce the inherent risk for financial leaders and their organizations.
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