Managing the changing legislative environment surrounding wage garnishment involves several steps.
Wage garnishment can be an intensive process — one that, when not handled properly, can cost organizations thousands of dollars. The complexity of the process is due to the various types of garnishments that exist, including IRS and state tax levies, court ordered wage garnishment for consumer debts and child support. For enterprises operating in multiple states, this complexity increases even further thanks to the variation in wage garnishment laws across states.
According to "The U.S. Wage Garnishment Landscape Through the Lens of the Employer," a report by the ADP Research Institute®, 7 percent of employees are subject to wage garnishment, and roughly one in eight have more than one type. Of the individuals impacted, Gen Xers have the highest garnishment rate, at 10.2 percent.
More recently, changes in wage garnishment laws and regulations dictate how states should handle them, thereby altering how firms should be processing them. It's important to be aware of the changing legislative environment in order to effectively manage and adjust the internal handling of garnishments.
Wage garnishment involves the withholding of wages from an employee's paycheck for a debt or obligation the employee owes a third party. It is often subject to mulitlevel - federal and state - oversight.
Among the many reasons behind the regulation of wage garnishments is that an employee's paycheck is often their primary or only income source; allowing too much of worker wages to be withheld at one time could result in that individual being unable to afford basic living expenses. So wage garnishments are often both financially and emotionally stressful for employees. Since that stress can impact workers' morale and productivity, it can impact their employers in turn.
Also significant to employers is that the wage garnishments often require either acknowledging the order or providing other written responses that include individual employee information and that have to be filed with courts and provided to other parties. Additionally, wage garnishments require determining, calculating, withholding then delivering the appropriate amount to the appropriate party. All of this must be done in compliance with the garnishment order and applicable state and federal laws and regulations. This can mean significant additional stress and work for the employer.
Unemployment, Child Support and Bankruptcy Changes
Increasingly, states are turning to wage garnishment as a tool to recoup overpayments of unemployment benefits. If not careful, these recovery efforts can be mistaken for a state tax levy which generally is not correct. That's why it's critical for the relevant individuals in the finance department to carefully read the order when it's received from the state and to follow that order's instructions precisely.
Whereas in years past, states used wage garnishment as a last resort to collect child-support payments, more states now employ wage withholding as the primary means of collecting child support payments. This has had positive results for the children who rely on this financial support: 75 percent of the $33 billion in child support collected in 2016 was done directly through employers.
Regarding bankruptcies, the last consumer bankruptcy law overhaul was in 2005. Although this was designed to make it more difficult for consumers to file Chapter 7 bankruptcies and instead file Chapter 13 bankruptcies, the overall percentage of bankruptcies has decreased since then. This has positively impacted employers because with this reduction, the need to withhold wages to comply with wage garnishment orders issued pursuant to Chapter 13 repayment plans has also decreased.
How Wage Garnishment Laws Have Changed
The Department of Labor (DOL) and the Federal Consumer Credit Protection Act (CCPA) have established limits on the amount of an employee's wages that can be garnished in any one workweek. However, a number of states have been lowering those limits even further in an effort to protect workers, particularly those receiving minimum wages. These changes often accompany changes to minimum wage laws, as more legislators and jurisdictions focus on providing equitable wages, especially in high cost areas. For example, California amended its laws to require the consideration of state and local minimum wage laws, and Nevada decreased the disposable income threshold for lower wage workers so that less of an employee's disposable income in a pay period may be garnished. Meanwhile, New York established lower gross income percentage limits for low wage workers.
While bonus and lump sum payments can be garnished to pay delinquent child support payments, one question that arises is what constitutes a lump sum that must be reported and how much of that lump sum can be garnished to pay back child support. States have different reporting requirements regarding such payments, which include profit-sharing or performance bonuses and commissions, and some states will take as much as 100 percent of the payment. The DOL has issued clarification stating that that a bonus or lump sum payment may still be subject to maximum income percentage caps, but the inclusion of the word "may" continues to allow room for interpretation by states.
Additionally, some states have begun to use electronic payments, and more are considering their use. Because of its complexity and impact on employers — especially large, multistate organizations — there is a call for standardized wage garnishment legislation, and efforts are underway to achieve this. The nonpartisan Uniform Law Commission has approved and published a Uniform Wage Garnishment Act (UWGA), though each state must introduce it and adopt it as legislation.
How to Manage
Managing the changing legislative environment involves several steps. Develop tools, strong working relationships and relevant agency contacts to be notified of changes as they occur. Participating in pilot programs and initiatives will allow feedback from the employer perspective and to access information and methodologies that can help streamline internal processes and reduce related costs. Managing additionally includes maintaining the tools and resources for handling liens and communicating with agencies and courts regarding wage garnishment cases and requests. Attending and participating in conferences can also help finance and compensation professionals to understand the scope and be introduced to new ways of addressing this ongoing issue.
Wage garnishment laws have changed in response to the concerns that have been voiced about prior laws and in response to other changes. By remaining aware of the changes and making the applicable adjustments to internal processes, finance and compensation professionals can help ensure that they are fully compliant with the new or modified laws and help ensure that they minimize their associated compliance and handling costs.
Want to learn more? Listen to ADP's on-demand webinar, "Workplace Compliance Spotlight: Strategies for Wage Garnishment Compliance."