Wage Garnishment: What Organizations Need to Know About Compliance
Employers are obligated to comply with wage garnishment notices, but understanding the process — and knowing what you can and can't do in response to a garnishment — can be difficult without extensive knowledge or professional guidance. Here's what to understand about your obligations when you receive a wage garnishment order.
Receiving a wage garnishment can be just as disconcerting for a business owner as it is for the employee. That order requires the employer to withhold a portion of the worker's paycheck and turn it over to a third party, such as a creditor, the state or federal government, or a state or federal court.
Wage garnishment laws vary by state and depend on the type of garnishment. Regulations relate to whether the money needs to be withheld for child support, spousal support, taxes, federal student loans or other reasons, so complying with an order can be a complex undertaking, especially if an employee has multiple garnishments.
With 7% of the U.S. population estimated to have a garnishment, there's a chance that your business will have to deal with them at some point. Here's a look at your obligations when you receive a wage garnishment order, as well as guidance around avoiding fines and penalties for noncompliance.
Navigating federal and state wage garnishment laws
Title III of the Consumer Credit Protection Act (CCPA) limits the garnishment of an employee's earnings. That limit is based on an employee's "disposable earnings," which is the amount left over after withholding federal, state and local taxes, and retirement contributions.
For consumer type garnishments (i.e., not for support, bankruptcy or federal or state tax levies), the weekly amount can't be greater than:
25% of the employee's disposable earnings or
The amount by which their disposable earnings exceed 30 times the federal minimum wage (currently $7.25 per hour)
For child and spousal support garnishment, federal law allows an employer to garnish up to 50% of a worker's disposable earnings if the employee is supporting another spouse or child, or 60% if the employee is not supporting another party, with a 5% increase if there are delinquent support obligations. Some states follow the federal guidelines, but others exempt a larger amount of an employee's wages, and some entirely prohibit garnishment for consumer type debt. The state law prevails when a state's exemption cap provides greater protection to the employee than the federal cap.
Handling wage garnishments is complicated enough when employers have only federal and one state's rules to follow. But that complexity has grown exponentially with the increase in remote work since the emergence of COVID-19.
Many businesses now have employees living and working across state lines, which can make it difficult to determine which state laws apply — the employer's state of domicile, the employee's state of residence, the employee's primary work location or the creditor's home state.
According to Corinne Flores, ADP's Director of Government Affairs, there's no easy answer, but the federal Office of Child Support (OCSE) and the Uniform Interstate Family Support Act (UIFSA) provides guidance for child support questions. "UIFSA makes it clear that employers must comply with the law of the issuing state regarding duration and amount of current support payment," she says. "UIFSA also adds that the state law of the employee's principal place of employment addresses the maximum amount to be withheld from income, including lump sums."
Employees may also be subject to multiple garnishments from different jurisdictions. For example, an employee may have one garnishment for child support and one from a creditor, or multiple orders in different states. Again, how multiple requests are handled can vary depending on the type of garnishment involved.
"For child support, if the employee does not have enough to meet the flat dollar amount, the percentage amount should be used to withhold. All child support orders would receive some amount," notes Flores. "For creditor garnishments, if the employee does not make enough to withhold, the employer would not deduct, as there are insufficient wages to withhold on the creditor garnishment."
For other types of garnishments, Flores recommends seeking legal advice in dealing with multiple states or multiple garnishments.
Handling employee notification
Financial problems can be embarrassing and upsetting for employees, especially when they come to an employer's attention, so handling employee notification correctly is crucial. Some states require employers to notify workers of a wage garnishment, but even if your state doesn't require notification, it's still a good idea.
"It can be a best practice to provide an employee with a notification to ensure that the employee is aware that their upcoming wages will be garnished," Flores explains. "Proactive notification could allow the employee the opportunity to contact the creditor or to possibly prevent calls to the employer on payday."
Some courts and agencies even provide sample notification letters (i.e. Tennessee and Pennsylvania).
Dealing with orders on independent contractors
The rise of the gig economy means organizations may be working with more independent contractors than ever before, so business owners and HR/payroll leaders may receive wage garnishment orders on contractors or workers hired through an agency, which can create challenges.
"If a wage garnishment is received and if there is not an employer/employee relationship, and no payments are being made directly to the recipient, the employer would respond to the order advising that the person listed on the order is not an employee, nor are they paying any money directly to the recipient," Flores says. "However, for child support, if the employer pays an independent contractor directly, those payments are subject to withholding. For other types of garnishments, it is based on the state or agency requirements."
Working with employees or independent contractors who live outside of the U.S. can add complexity as well. According to Flores, it depends on where the employee/independent contractor is located and whether they're being paid from the U.S. or another country. This can be a thorny issue, so it's best to seek legal advice when in doubt.
Wage garnishments can cause additional work for employers but complying with orders and calculating the correct amount to withhold is crucial. The penalties and fines associated with noncompliance can seriously impact a business, so consider working with a professional to ensure your procedures comply with federal and state law.
Learn more about wage garnishment requirements by launching the on-demand webinar, Transforming Wage Garnishment Requirements. Additional information can be found at: ADP Smart Compliance®