What Is Wage Garnishment And How Does It Work?
You’ve received a wage garnishment order for one of your employees and now must make the necessary adjustments to payroll to account for them. What do you do next?
In this article, we’re going to look closely at wage garnishment, from how it works to what HR’s role in executing them is and why compliance is so important for the business.
What Is Wage Garnishment
Wage garnishment is a legal process where an employer withholds a portion of an employee's wages to pay off their debts.
This is usually mandated by the court and can occur when an employee has defaulted on their loan repayment, failed to pay taxes or child support, or has accumulated substantial debts they can't service.
The garnishments are automatic and continue until the entire debt is paid off or arrangements are made to pay off the debt. A good payroll software platform will be set up to help you execute this with relative ease.
Factors such as the nature of the debt, the employee's disposable income, and federal and state laws determine the amount of money to be garnished. The employer's role is purely administrative—deducting decided amounts and forwarding them to the right authority.
Types Of Wage Garnishment
There are several types of wage garnishments. Let’s take a look at some of the most common ones.
Creditor Garnishment
In this instance, a court order requires an employer to withhold a certain percentage of an employee's income to repay a creditor. This is typically the result of unpaid taxes, defaulted student loans, or unpaid child support.
For unpaid taxes, the Internal Revenue Service (IRS) doesn't need a court order to garnish wages. They can execute it through a levy, or the legal seizure of property or funds to pay a tax debt. The limit they can take varies based on the employee's deduction rate and number of dependents.
In the case of defaulted student loans, the U.S. Department of Education or any entity collecting for this agency can garnish up to 15% of disposable income but not more than 30 times the federal minimum wage.
Lastly, Bankruptcy court orders can also result in wage garnishment in some circumstances, but it typically stops garnishment for unsecured debts.
Child Support and Alimony Garnishment
Governed by the federal Consumer Credit Protection Act (CCPA) and state laws, this form of garnishment can take up to 50-60% of an employee's disposable earnings.
While garnishment of these wages is the job of your payroll function, distribution of funds to the families who need it falls to the Office of Child Support Enforcement.
In 2022, more than $30 billion worth of child support payments were collected, mostly through payroll deductions, and often executed through automated processes of payroll software systems.
How Wage Garnishment Works
The process typically starts with the debtor being served with a notice of garnishment. Should they fail to protest successfully, the employer will be mandated by the court to execute the garnishment.
The garnishment order contains details of the debt and instructions on how the garnishment should be applied. Upon receiving the order, the employer must act immediately to enforce it, or else, face penalties themselves.
There's a cap to the percentage of the employee's wage that can be garnished, ensuring that they have an amount left to meet their living expenses.
Before deductions begin, it’s crucial to note that the employer is required to provide the employee with a copy of the garnishment order and any other associated documents.
How to Start Wage Garnishment
Starting a wage garnishment is a process of complying with legal requirements so the garnishment schedule is closely adhered to. We have broken this process down into seven steps.
Receiving the Garnishment Order
The garnishment process begins when an employer receives an official garnishment order or notice from a court or government agency. This document will detail the amount to be garnished from the employee's wages and provide specific instructions on how to proceed.
Immediate attention to this order is critical, as it often comes with a tight compliance timeframe.
Reviewing the Order
Upon receiving a garnishment order, HR professionals should first verify its authenticity and review the details carefully. This includes confirming the employee's identity, the amount to be garnished, and understanding the duration of the garnishment period.
It's essential to ensure that the order complies with state and federal laws, as these can vary significantly and impact the garnishment process.
Notifying the Employee
Once the garnishment order is verified, HR must then inform the affected employee. This notification should be handled sensitively, as it can be a stressful situation for the employee.
The notice should clearly explain the garnishment order, the amount to be deducted, and the employee's rights, including any potential avenues for dispute or modification of the garnishment order.
Calculating the Garnishment Amount
HR professionals are responsible for calculating the correct amount to be garnished from the employee's wages. This calculation must comply with federal and state laws, which often stipulate maximum garnishment limits and protect a certain portion of the employee's earnings.
The Consumer Credit Protection Act (CCPA) sets federal limits, but some states have additional protections and limits for employees.
Executing the Garnishment
After calculating the garnishment amount, the next step is to implement the deduction from the employee's wages.
This should be done in a manner that complies with the payroll cycle, whether that's bi-weekly, monthly or semimonthly, and ensures timely payment to the creditor or agency that issued the garnishment order. It's vital to maintain accurate records of all withheld amounts and payments made, as these records may be required for future verification or legal purposes.
Ongoing Monitoring and Adjustments
Wage garnishment requires ongoing attention. You’ll want to monitor the situation with your employee to ensure continued compliance with the garnishment order and any changes in legislation that might affect the process.
Should the employee's employment status change, or the garnishment order be lifted or adjusted, you’ll need to respond promptly to make necessary adjustments.
Legal Compliance and Support
Given the complexity of wage garnishment laws and the potential for significant legal consequences, HR professionals should seek legal counsel when initiating the garnishment process.
Legal support can help navigate the intricacies of state and federal regulations, ensure compliance, and mitigate risks associated with garnishment procedures.
How to Stop Wage Garnishment
Let’s say your employee has fully satisfied their obligations to creditors. Now, it’s time for you to end their wage garnishment. Here is how you go about doing that.
Receiving Official Release or Modification Orders
The cessation of a wage garnishment process begins with the receipt of an official release or modification order from a court or issuing agency. This document legally mandates the employer to stop or adjust the garnishment deductions.
It is critical for HR professionals to promptly review this order to understand the new terms and ensure it is authentic.
Reviewing the Order for Compliance
Upon receiving a release or modification order, HR should carefully examine the document to verify its legitimacy and to understand the specifics of stopping or adjusting the garnishment. This involves confirming the order's alignment with state and federal laws and ensuring that the instruction is clear and actionable.
Notifying the Employee
After validating the order, HR must inform the affected employee about the cessation or modification of the garnishment.
This communication should include details about the change in the garnishment status and its impact on the employee's future paychecks. Transparency and sensitivity are crucial in this step to maintain trust and support the employee through the transition.
Adjusting Payroll
The next critical step is to adjust the payroll system to reflect the cessation or modification of the garnishment. This adjustment must be accurate and timely to prevent any incorrect deductions from the employee's wages.
HR should work closely with the payroll service to ensure that changes are implemented correctly and in accordance with the pay cycle.
Finalizing Payments
If the garnishment order is fully satisfied or if a settlement has been reached, HR may need to make a final payment to the creditor or agency. Ensuring this payment is processed correctly and on time is vital for fulfilling the employer's legal obligations and for officially closing out the garnishment process.
Record Keeping and Documentation
Maintaining comprehensive records of all communications, transactions, and adjustments related to the garnishment is essential.
These documents should include the original garnishment order, the release or modification order, notifications to the employee, and records of all payments made. Proper documentation supports compliance and can be crucial in the event of disputes or audits.
The Rules Of Wage Garnishment
Wage garnishment limits and regulations play a crucial role in enforcing obligations for debt repayment while simultaneously shielding the employee from unduly punitive deductions.
Under the Title III of CCPA, the maximum amount that can be garnished from an employee's disposable earnings is determined by federal law. However, individual state laws may vary, potentially setting the limit lower than that of federal standards.
Employers have the responsibility to understand these complex regulations. Failure to correctly process garnishments can lead to penalties and fines for the company, making it vital to accurately interpret these boundaries using reliable HR software.
Employee Rights
Employees facing wage garnishment have rights designed to protect their interests and ensure fair treatment throughout the process. The aforementioned CCPA handles limits on what the garnishments can be.
Other rights include the formal notice of wage garnishment and instructions on how to contest it. The notification period provides employees with a crucial opportunity to verify the debt's validity, negotiate a payment plan, or seek legal counsel to challenge the garnishment if necessary.
Lastly, it's important for employees to know that federal law prohibits employers from terminating or disciplining an employee solely because of a wage garnishment for any single debt. However, this protection does not extend to employees with multiple garnishments from different debts.
Violations of these rights, such as terminating an employee solely because their wages have been garnished for a single debt, can lead to additional legal actions against the company, including lawsuits for wrongful termination.
Penalties and Sanctions
Non-compliance with wage garnishment orders can lead to significant penalties and sanctions for companies, underscoring the importance of adhering strictly to legal mandates in these situations.
Companies that fail to withhold the designated amounts from an employee's wages as required by a garnishment order may find themselves directly liable for the amounts that should have been garnished. This means that a company could be compelled to pay out of its own funds the debt the employee owes, which can be a substantial financial burden depending on the size and nature of the garnishment.
In addition to financial liabilities, companies can also face legal consequences for non-compliance, including fines and penalties imposed by the court or issuing agency.
These penalties can vary widely but are intended to enforce compliance and ensure that creditors' rights are protected.
Repeated or egregious violations of garnishment laws may attract regulatory scrutiny, leading to audits, investigations, and potential damage to the company's reputation.
Such outcomes can have long-term implications for a business, affecting its operational standing and relationships with employees, partners, and the broader community.
State Laws
While federal laws set the baseline for garnishment practices, including the maximum percentage of an individual's earnings that can be garnished, state laws can further refine or impose additional restrictions on these processes.
For instance, some states enact lower limits on the amount that can be garnished, offering greater protection to employees' earnings than federal law requires. This means that in states with such provisions, employers must adhere to the more restrictive state laws when processing garnishments.
A good example of this is Florida where the following rules apply:
- Only one wage garnishment permitted per individual
- If disposable income is less than 30 times the federal minimum wage, your wages cannot be garnished.
- Florida Head of Family Exemption: If the employee is the head of a household and is making less than $750 per week, wages cannot be garnished.
State laws can also dictate the types of debts that are subject to garnishment and may prioritize certain debts over others.
For example, some states give precedence to child support or alimony garnishments over consumer debt orders. This prioritization can affect the order in which multiple garnishments are processed and the total amount that can be legally garnished from an employee's wages.
Understanding these nuances is crucial for employers to ensure compliance and for employees to know their rights and the protections afforded to them under their state's legal framework.
The procedures for contesting a garnishment, the rights of the employee, and the responsibilities of the employer can vary significantly from one state to another. These variations emphasize the importance of consulting with legal professionals familiar with the specific garnishment laws in the state where the company operates and where the employee resides.
Impact Of Wage Garnishment On Credit And Financial Health
Wage garnishment can have substantial influences on an individual's credit score and overall financial health.
A successful wage garnishment indicates a default judgment, which is a public record that can significantly lower a credit score.
The judgment stays on the credit report for seven years, negatively affecting the debtor's ability to procure future loans and credit as potential lenders may consider them a high-risk debtor.
Additionally, a reduced paycheck due to wage garnishment can strain a person's monthly budget. If an individual is living paycheck to paycheck, a decrease in income may result in their incapability to meet other financial obligations.
Over time, this financial stress can lead to more defaulted loans and missed payments, resulting in further derogatory marks on their credit report.
The cycle of financial instability can continue unless proactive steps for damage control and financial planning are taken. Be sure to consider financial literacy programs for these employees to help them make the most of their pay check.
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