How should an employer process garnishment orders?

Creditors owed money by an individual may collect the debt by starting a court proceeding to obtain a garnishment order. A garnishment order is an order that requires an employer to withhold a certain amount of money from the paycheck of the employee who owes the money, then send that amount to the creditor.

Employers must refer to both federal and state law when processing garnishment orders. The Consumer Credit Protection Act is a federal law that limits the amount of an employee's earnings that may be garnished so that no one, no matter what they owe, will have 100% of their earnings garnished. The law ensures that enough is left for the debtor/employee to live and provide his or her family with the necessities of life and also prohibits employers from discharging employees solely because their wages have been garnished for one indebtedness.

The federal Consumer Credit Protection Act provides that an employer may withhold the lesser of 25% of an employee's disposable earnings, or the amount by which disposable earnings exceed 30 times the federal minimum wage in effect when the earnings are payable ($196.50, eff. July 24, 2008) in order to satisfy a creditor garnishment.

State law. Note that individual states may set a lower limit on the amount that may be withheld in order to satisfy a garnishment, but cannot exceed the limits set by federal law. If the state limit is different from the federal limit, the employer must apply the rule that most benefits the employee.

In addition to setting alternative withholding limits, state law contains all the procedures employers must follow when complying with garnishment orders, including when garnished amounts must be withheld, where they should be sent, any applicable fees, etc.

Disposable earnings. The amount exempt from a garnishment order under the federal rules must be calculated using the employee's disposable earnings. Disposable earnings are generally defined as the employee's earnings, minus deductions from earnings that are required by law.

What are earnings? Earnings are compensation paid for personal services, including wages, salary, commissions or bonuses. The following types of compensation are considered to be earnings for this purpose:

Tips are considered earnings when the tip is included as a set percentage of the bill, or when an employment agreement provides that amounts presented as tips belong to the employer and must be turned over to the employer. But tips paid in cash by a customer to an employee are not considered earnings for this purpose. Sick pay is considered earnings for this purpose.

In contrast, an employee's tax refund is not considered earnings.

Deductions from pay required by law. Once an employee's earnings have been determined, deductions from pay that are required by law must be subtracted from the earnings amount in order to arrive at disposable earnings. Deductions from pay required by law include:

Federal and state income taxes (with respect to federal income taxes, the number of personal withholding exemptions an employee claims for withholding purposes-not the number to which the employee may be entitled-should be taken into account when determining disposable earnings);

• Social security and Medicare taxes; and

• Unemployment and workers' compensation insurance.

Deductions from pay that are not required by law, and thus do not reduce an employee's disposable earnings, include:

• Union dues and initiation fees;

• The employee's share of health insurance premiums;

• Repayment of employer credit union loans; and

• Deductions for the purchase of U.S. savings bonds.

Wage assignments and certain court-ordered payments. Wage assignments are not treated as deductions required by law and thus are included in an employee's disposable earnings. Amounts withheld for child support orders, tax levies, and bankruptcy court orders are also included in an employee's disposable earnings.

Under these definitions, an employee's disposable pay could exceed his take-home pay, as illustrated in this example:

Individual states may define disposable earnings differently than the federal law for purposes of computing their own garnishment limitations. Thus, when determining whether the federal or state garnishment limits are more favorable to an employee in a given situation, employers must use the state's definition of disposable earnings when applying the state's garnishment limits.

Application of garnishment limits. Generally, the workweek for applying the federal garnishment limits is a fixed and regularly recurring period of 168 hours-seven consecutive 24-hour periods. For garnishment purposes, the workweek is the employee's regularly established workweek.

Nonweekly pay periods. For pay periods other than weekly, employers should use a multiple of the federal minimum wage to compute the garnishment restrictions. Under a formula created by the Labor Department, a calendar month is considered to consist of 4 workweeks. As a result, given a federal minimum wage of $6.55 per hour (effective July 24, 2008), the multiple applicable to disposable earnings for biweekly, semimonthly, and monthly pay periods is as follows:

• Biweekly (2 × 30 × $6.55)-$393.00

• Semimonthly (2 × 30 × $6.55)-$425.75

• Monthly (4 × 30 × $6.55)-$851.50

The following table sets forth the federal garnishment restrictions for each pay period.

Note that the Fair Labor Standards Act prohibits certain involuntary deductions from pay if the deductions would reduce an employee's weekly pay below the minimum wage required under federal or state law.

Processing garnishment orders. Employers must apply state law to certain other issues involved in processing a garnishment order.

Most state laws generally limit the application of garnishment orders to wages or debts that are owing at the time of service or due at the time of service. This usually refers to wages that have been earned at the time the order is served, regardless of when the wages are payable.

State laws govern to whom the employer should remit the garnished amount. The employer may be directed to send payment to the court that issued the order or to the officer who serves the garnishment order.

Out-of-state orders. The law of the state in which a garnishment order is issued governs the employer's processing of the order. In addition, some states that maintain garnishment laws that are favorable to employees prohibit in-state creditors from obtaining an out-of-state garnishment order against the employee in an effort to avoid the original state's garnishment restrictions.

Penalties. In some states, employers that fail to comply with garnishments may become liable for the unpaid amount owed by the employee and possibly for related court costs. In addition, employers that discharge or take other disciplinary action against employees as a result of a garnishment may be subject to federal and/or state penalties.