Garnishment of wages is something finance leaders in the manufacturing industry should pay attention to. In fact, half (49%) of manufacturing companies have at least one employee with a garnishment and an average garnishment rate of almost 10 percent, according to the 2017 ADP Research Institute® report, The U.S. Wage Garnishment Landscape: Through the Lens of the Employer. As a finance leader in manufacturing, you should have a plan for effectively handling this issue such as by offering counsel, education and preventative financial wellness training to employees.
The Issue of Wage Garnishment
According to ADP, wage garnishment is highest for employees between the ages of 35 and 44, with a garnishment rate of 10.5 percent. This is the age group most likely dealing with debt. Additionally, garnishment increases by the size of the organization across all industries. Organizations with more than 5,000 employees have the highest garnishment rates due to tax levies, bankruptcies and miscellaneous reasons. And organizations with less than 5,000 employees have the highest child support garnishment rates.
The Employer Responsibility
Often, the most challenging type of wage garnishment for employers to handle are those issued by a court for repayment of consumer debt. With these, after the creditor has won a judgment against an individual for an unpaid debt, the creditor can apply for a post-judgment collection order directed to the individual's employer. This court order, often called a writ of garnishment, requires the employer to withhold a portion of the employee's wages for the benefit of the creditor. The writ will generally include a response form that must be returned to the court, and a garnishment calculation worksheet. The calculation worksheet provides guidance to your payroll department to help it determine the amount that needs to be withheld from the employee's wages for the creditor's payment.
Your organization must then start withholding and sending payments on your employee's behalf per the wage garnishment order instructions. Your HR department should let the employee know about the order and that your organization has no way to change the amount being taken out of their pay. The employee may be able to claim exemptions available in some jurisdictions that may reduce the amount of the deductions or work with the garnishing agency to obtain an amended order or a termination order.
Compliance With Wage Garnishments
Compliance with garnishment orders is mandatory, otherwise employers may face severe consequences such as being in contempt of court or liability for the judgment debt. Even if the judgment debtor does not work for you or does not earn sufficient wages to withhold the deduction amount, an employer must respond to the court, agency and/or judgment creditor or else it could be exposed to liability. If your payroll department hasn't yet handled a wage garnishment, consider holding a training class to help avoid compliance issues.
The Bureau of the Fiscal Service offers a garnishment calculator, but keep in mind that your state may have its own additional rules for garnishing wages. Further, it's important to understand when and which state rules are to be applied rather than the federal, as well as when the rules of the state where the order was issued apply versus those of the state where the employee resides. Moreover, an employer needs to understand that the applicable laws can vary depending on the type of garnishment; as an example, the applicable rules for child support are not the same for writs of garnishment.
Go over a sample calculation with your payroll team, taking note of how the percentage that comes out is based on the employee's disposable income. The maximum amount that can come out depends on the type of garnishment. For example, no more than 25 percent can be taken out for consumer debts, but the IRS can take up to 100 percent depending on the circumstances, notes ADP.
When it comes to paying multiple garnishments for one employee, they're typically processed in the order received. If the first debt pushes the employee to the garnishment maximum, other creditors must wait; however, some debts like unpaid taxes and child support take priority and should be paid first.
If you work with a payroll provider, ask what support they provide for wage garnishments. Does their system automatically respond to garnishment requests and help you maintain compliance with state and local laws? This would simplify the process and could be another solid reason for outsourcing payroll if you're worried about upcoming garnishments.
Managing Employees Who Have Wage Garnishments
To help your employees with wage garnishments, consider holding financial education classes throughout the year to teach employees budgeting strategies and ways to avoid falling behind on payments, such as debt consolidation. If you offer an Employee Assistance Program, it might be wise to include debt counseling as well. Just make sure to work with your HR department to ensure your employees are aware of the resources available at your organization.
Hopefully, your employees can avoid running into financial trouble, but finance leaders still need to be prepared, especially in high-risk industries like manufacturing.
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