HRMN 408 Assignment 1

CHAPTER 6

• Garnishments

• Withholding Orders

• Tax Levies

• Debtors in Bankruptcy

• Department of Education Garnishments

• Wage Assignments

Wage Attachments and Assignments

C o p y r i g h t 2 0 1 7 . S o c i e t y F o r H u m a n R e s o u r c e M a n a g e m e n t .

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Book: The SHRM Essential Guide to Employment Law : A Handbook for HR Professionals, Managers, Businesses, and Organizations. Author: Charles Fleischer Date: 2017

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The SHRM Essential Guide to Employment Law114

The obligations an employer owes its employees under wage and hour laws (discussed in Chapter 5) are trumped by a variety of court-ordered garnishments and wage attachments. When an employee’s wages are garnished or attached, the employer satisfies its wage-payment obligations by paying a portion of the employ- ee’s wages to a third party to whom the employee is indebted.

GARNISHMENTS When an employee’s creditor sues your employee on an unpaid debt and obtains a court judgment, the creditor is authorized to execute on the judgment, meaning the creditor can try to col- lect the judgment out of assets belonging to the employee or income due or to become due the employee. Collecting a judg- ment out of an employee’s wages is known as a garnishment. The cast of characters in that arrangement is the judgment debtor (your employee), the judgment creditor or garnisher, and you, the garnishee.

An employer usually first finds out about a garnishment when served with a court writ. (When the garnishment relates to family support obligations in a domestic relations case, it is called a with- holding order.) The employer must respond by filing an answer in court within the time limit specified in the writ, stating whether the judgment debtor is in fact an employee and, if so, what his or her wages are. If the employer states that the judgment debtor is not an employee, that usually ends the matter, unless the judg- ment creditor requests a hearing to explore the issue further.

While the employer can assert defenses to the garnishment, including defenses the employee may have, it should be up to the employee, not the employer, to litigate the lawfulness of the garnishment. Employers may wish to include in their handbooks a disclaimer like the one in Figure 6.1.

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Wage Attachments and Assignments 115

FIGURE 6.1: GARNISHMENT DISCLAIMER

Garnishments, withholding orders and tax levies, are orders attaching a portion of an employee’s compensation to satisfy a court judgment, support obligation, or tax obligation of the employee. As required by law, the company will honor all garnishments, withholding orders and tax levies that appear to be lawful and proper. The company has no obligation to dispute the lawfulness of any garnishment, withholding order, or tax levy. An employee who wishes to dispute a garnishment, withholding order, or tax levy does so at his or her own expense, without involving the company.

ALERT! Some employers may be tempted to help their employees evade garnishments

and withholding orders by falsifying information about compensation or by paying

employees off the books. Doing so exposes the employer to criminal prosecution as

well as civil liability.

Attachable Wages Assuming the judgment debtor is an employee, the employer is required to withhold the attachable wages of the employee and remit them periodically to the garnisher (the judgment credi- tor) until the judgment is paid or the employment ends. The garnishment applies to any wages that are unpaid at the time of the attachment, as well as wages that become due in the future. The attachable wages are limited by the federal Consumer Credit Protection Act to the lesser of (a) 25 percent of the employee’s disposable earnings (after deducting tax and similar withhold- ings and after deducting the employee’s portion of any medical insurance premiums) or (b) the amount by which the weekly dis- posable earnings exceed 30 times the federal minimum hourly wage. The writ of attachment will say exactly how to compute the amount to be withheld.

Even though an employer is making payments to a garnisher, the employer must treat the payments as part of the employee’s compensation for purposes of computing income tax withhold- ing, FICA, etc. (See Chapter 7 for more details.)

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The SHRM Essential Guide to Employment Law116

Penalties Penalties for ignoring a garnishment can be substantial. In some cir- cumstances, the employer might be held in contempt or might be required to cover the costs and attorneys’ fees incurred by the gar- nisher to enforce the garnishment. The employer might even have to pay double wages—once to the employee and again to the garnisher. In other words, it is a good idea to take garnishments seriously.

If the employee quits or is fired while the garnishment is in effect, the employer’s obligation to remit attachable wages ends. (In some states, rehiring an employee within a short time period automati- cally revives the garnishment.) If several garnishments for the same employee are received, the employer must honor the garnishments in the order they are served, paying off the first one completely before starting payments on the next one.

Federal law prohibits an employer from firing an employee because the employee’s wages are subjected to attachment for any one indebtedness within a calendar year. Many states have similar laws protecting the jobs of garnished employees.

Wages Subject to Garnishment State law defines what constitutes wages for garnishment purposes. The definition generally covers bonuses and commissions, as well as regular compensation. In some states, employee tips may also have to be included.

Contributions to a pension plan that is subject to the Employ- ee Retirement Income Security Act (ERISA) are exempt from gar- nishment, even when state law seems to provide otherwise. ERISA requires plan documents to contain a provision protecting benefits from an employee’s creditors, and ERISA preempts (supersedes) state law relating to pension plans. (ERISA is covered in Chapter 9.)

WITHHOLDING ORDERS A withholding order is a special kind of wage attachment issued in a domestic relations case in connection with spousal or child support.

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Wage Attachments and Assignments 117

Alimony and child support used to be the exclusive concerns of state courts. With enactment of amendments to the Social Security Act in 1975, which established the child support enforcement pro- gram (Title IV-D of the act), the federal government got involved in a big way. Under Title IV-D, each state must develop a formal program, which is subject to approval by the secretary of health and human services, for locating noncustodial parents and obtain- ing child support and support for the spouse (or former spouse) with whom the noncustodial parent’s child is living. Child support must include health care coverage whenever it is available to the noncustodial parent at a reasonable cost, without regard to enroll- ment or open season restrictions.

Each state has a Directory of New Hires (discussed in Chap- ter 2) along with support guidelines and collection procedures, in accordance with the program.

When a current employee who is obligated to make support payments becomes more than 30 days delinquent, the delinquen- cy usually results in issuance of a withholding order directing the employer to withhold the support payments from the employee’s wages. Within 20 days after an employer hires a new employee, the employer must submit the employee’s name, Social Security number, and other identifying information for inclusion in the state’s Directory of New Hires. If that information matches with an outstanding withholding order, then the state sends a notice directing the employer to withhold the required amount from the employee’s wages.

As with garnishments, the federal Consumer Credit Protection Act also sets limits on the amount of wages that may be withheld pursuant to a withholding order. However, the limit may be as high as 65 percent of disposable earnings if the employee is in arrears in support payments and has no new spouse or dependent children to support.

Pursuant to the a state’s Title IV-D program, withholding orders will direct the employer to remit withheld payments not to

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The SHRM Essential Guide to Employment Law118

the employee’s child or to the parent who has custody of the child, but instead to the state agency or court that monitors enforcement of such orders.

Employers are prohibited from retaliating in any way, such as by firing or disciplining an employee who is the subject of a withhold- ing order. States may, however, permit employers to charge a fee for processing withholding orders.

(See also Qualified Medical Child Support Orders in Chapter 10.)

TAX LEVIES When your employee fails to pay his or her federal income taxes, the Internal Revenue Service (IRS) can collect the unpaid taxes from you, the employer, by serving you with a levy. Levies, like garnishments, require the employer to pay to a third party (in this case, the U.S. Department of Treasury) some portion of the wages otherwise due the employee to extinguish the employee’s debt to that party. Corporate officials who are responsible for payroll mat- ters can have personal liability for disregarding a tax levy.

State law also provides means for collecting delinquent taxes through garnishment of salary or wages. The procedures and exemptions differ from state to state.

If your employee disputes the validity of the levy and sues you for unpaid wages, you are discharged from any obligation or lia- bility to the employee because you made payments in accordance with an IRS levy.

ALERT! Under a 2015 amendment to the Internal Revenue Code, a taxpayer who has a seri-

ously delinquent tax debt can have his or her passport revoked or limited. A serious-

ly delinquent tax debt is a debt greater than $50,000 and as to which the IRS has

filed a lien or issued a levy. The impact on employees who travel internationally for

a living could obviously be substantial.

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Wage Attachments and Assignments 119

DEBTORS IN BANKRUPTCY Chapter 13 of the federal Bankruptcy Code is titled “Adjustment of Debts of an Individual with Regular Income.” Under Chapter 13, a debtor with a regular income may ask a bankruptcy court to prohibit creditors from suing him or her or otherwise attempting to collect debts. In exchange, the debtor must propose a plan to pay down the debts out of ongoing disposable income (generally defined as income not reasonably necessary for the support of the debtor). The plan can last no more than three years, and it must be designed so that the creditors receive at least as much under the plan as they would have received had the debtor simply brought all assets into court in a Chapter 7 liquidation.

ALERT! Federal law prohibits discrimination against persons who have filed for bankruptcy.

If the bankruptcy court confirms (approves) the plan, then the court will issue an order directing the debtor’s employer to pay specified amounts to a Chapter 13 trustee. The trustee, in turn, makes periodic payments to the creditors. Bankruptcy orders are exempt from the limitations imposed by the Consumer Credit Protection Act.

DEPARTMENT OF EDUCATION GARNISHMENTS Under the federal Higher Education Act, the U.S. Department of Education (DOE) may garnish the disposable pay of individu- als who are delinquent in repaying student loans made, insured, or guaranteed by the federal government. Under the garnishment pro- cedure, the department issues a withholding order to the employer. If the employer fails to withhold in accordance with the order, the employer can be sued both for the amount that was not withheld and for attorneys’ fees and punitive damages. The term disposable pay is defined as compensation remaining after deduction of any amounts required by law to be withheld.

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The SHRM Essential Guide to Employment Law120

Employers may not retaliate by discharging or disciplining an employee whose pay is subject to a DOE withholding order. Employ- ers are also prohibited from refusing to hire a prospective employee because he or she is the subject of a DOE withholding order.

WAGE ASSIGNMENTS An assignment of wages is different from a garnishment. Garnish- ments are government orders with which the employer must comply. Assignments, on the other hand, are private agreements between an employee and a third person—usually a creditor to whom the employee owes money—that may or may not be valid, depending on whether they comply with state law.

State law often restricts the ability of an employee to make a volun- tary assignment of wages. It may also impose specific requirements and procedures to make a valid assignment. The safest practice is for an employer to adopt a uniform policy and distribute it to all employees, such as through the employee handbook, stating that the employer will not honor any wage assignments and—except as otherwise required by law—will pay all wages directly to the employ- ee without regard to any assignment. See Figure 6.2 for a suggested handbook provision.

FIGURE 6.2: ASSIGNMENT OF WAGES PROVISION

Except for garnishments and similar government orders, all net wages earned by an employee are payable to the employee only. Employees are prohibited from making any assignments of their wages. The company considers any attempted assignment of wages to be void and will not honor any attempted assignment.

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