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Impact of Wage Garnishments on Employers

Have you received an increase in wage garnishment orders for your employees? Well you’re not alone. Due to the current economy, many Americans are falling behind on loan, child support and credit card payments. Creditors are turning to wage garnishments as a means to collect payments on delinquent loans. A New York Times article entitled Pay Garnishment Rise as Debtors Fall Behind illustrates the growth in wage garnishments during the recession. According to the article, wage garnishments increased up to 121% in Phoenix, AZ, the highest since 2005, and 55% in Atlanta, GA, the highest since 2004. In Cleveland, OH, garnishments surged 30% between 2008 and 2009. The increase in wage garnishments presents an additional responsibility for employers who receive garnishment orders for employees.

What is a Wage Garnishment?

A wage garnishment is a legal or equitable procedure through which some portion of an employee’s earnings is withheld by an employer for payment of debt. Most garnishments are mandated through court order. Types of garnishment include bankruptcy, child support, federal and state levies, and student loans.

Employer’s Responsibility

Employers are legally mandated to comply with garnishment orders. The burden falls on the employer to forward the payment for each pay period as indicated in the order until receiving a notice of release from the order. Depending on the type of garnishment, the employer may have to send a certification along with the payment as evidence.

Federal Laws 

Title III of the Consumer Credit Protection Act (CCPA) protects employees from termination due to garnishment of one debt. The CCPA prohibits an employer from terminating an employee whose earnings are subject to garnishment for one debt, regardless of the number of levies made or preceding the collection of that debt. According to the CCPA, employers are allowed to discharge an employee if they receive two or more separate garnishments. Employer penalties for violation of termination restrictions include a fine up to $1,000 and/or imprisonment for up to one year.

Additionally, the CCPA provides that the amount of pay subject to garnishments is based on the employee’s disposable earnings. Disposable earnings are defined as the employee’s remaining funds after federal, state, and local taxes, and Unemployment Insurance are deducted. Deductions for garnishment orders must be completed before deductions for voluntary wage assignments, union dues, health and life insurance, contributions to charitable causes, purchase of saving bonds, retirement plan contributions, payments for payroll advances and purchases of work-related merchandise can be taken out of an employee’s paycheck. The CCPA also indicates the maximum amount that can be garnished from an employee’s paycheck. Only 25% of the employee’s disposable income or an amount up to 30 times the federal minimum wage (currently $7.25) can be deducted. Exemptions to this rule include garnishments for unpaid tax debts, bankruptcy court orders, child or spousal support, or voluntary wage assignments. Specifically, up to 50 percent of an employee’s disposable earnings will be garnished for child support if the employee is supporting another spouse or child. If the employee is not supporting a “second” family, their wages can be garnished up to 60%. An additional five% may be garnished for support payments.

However, depending on the state, the maximum garnishment amount may be considerably higher compared to CCPA requirements. If discrepancies exist between state law and CCP requirements, the employer should observe the law resulting in the smallest garnishment. View the wage garnishment by state for information on state requirements.

Protection of CCPA

CCPA protects all employees receiving personal earnings including wages, salaries, commissions, bonuses, or other income from pension or retirement programs. Tips are not considered as earnings under the CCPA thus are not protected by this law.