CPA INSIDER

Wage garnishment — what employers should know

Employers can be held liable for employee debt for failing to comply.
By Maria L. Murphy

An estimated 7% of American workers have their wages garnished every year, according to a recent study by ADP Research Institute. Wage garnishment can result from several types of debt, including unpaid state and federal taxes, overpaid Social Security and unemployment benefits, alimony, child support, student loans, credit card debt, medical bills, and personal bankruptcy. Anyone working in the United States or a U.S. territory has the potential of having earnings garnished for some type of obligation authorized by federal and/or state laws.

A garnishment order may come to an employer from any number of sources. Most are time sensitive and impose a significant compliance burden on employers. Without adequate procedures, employers risk failing to comply with garnishment orders.

"Employers need to understand the type of debt and who is collecting it, along with what the order is asking them to do," said Corrinne Flores, ADP director of government affairs. "The risks to employers vary, based on the type of garnishment, but there are potential financial and employee relationship risks for all," Flores said, adding, "Not knowing is not a defense."

"Employers have a number of questions because it's not always clear from the forms they get what they're supposed to do," said Randy Groendyk, J.D., a creditors' rights attorney at Varnum Law. "'How do I calculate this?' 'When do I start withholding?' 'How do I respond to this order?' they frequently ask," he said.

There is no single answer to what an employer needs to do when an employee faces garnishment. The requirements vary by type of debt and jurisdiction. Businesses operating in multiple states must determine what is required of them by various state laws; a large number of employees and locations can increase the potential for processing errors and noncompliance.

However, it's vitally important to understand an employer's responsibilities when an employee has his or her wages garnished, and it is often a complicated, multistep process. The employer is responsible for calculating the garnishment amount, withholding it through its payroll process, and forwarding payments to the correct agency or creditor. The garnishment must continue until the employer receives a release.

Failure to properly comply with garnishment orders can result in costly penalties. In some jurisdictions, an employer can be held liable for the full amount of the employee's judgment. Interest, court fees, and legal costs may be added. In certain states, failure to garnish wages for child support may result in the employer's having to make up the missing payments.

As with any legal issue, a good starting point is to consult legal counsel as you develop a process for handling wage garnishments. And after implementing your process, when questions arise, consult legal counsel as often as necessary. We asked experts for tips for employers when dealing with wage garnishment:

  • If you receive a garnishment notice, follow its requirements.
  • "Any notice must be acted upon. Don't put it aside," said Amorette Nelson Bryant, author of Complete Guide to Federal and State Garnishment, 2018 Edition. Almost every garnishment has an interrogatory, where you must answer questions and respond to the creditor and/or the court. Failure to respond will result in liability and potentially a judgment against the employer under state and federal laws.

    Once the order is received, the employer may be required to notify the employee in writing about the specifics of the order and the garnishment amount and time period. There may be a form provided, or the employer may draft a letter. Flores suggested that best practice is for the employer to notify the employee using a cover letter with a copy of the order attached, to ensure that the employee is fully notified and to provide the employee with the opportunity to contact the agency directly.

    "Don't try to resolve an order just by talking with the employee involved," Groendyk said. "The employee may advise the employer that he/she already has taken care of it, but the employer can get into trouble by not following the instructions in the order and responding to it," he said.

  • Develop procedures for garnishment processing.
  • While third-party payroll processing services and payroll software packages often include federal and state garnishment calculations and payment processing features, it is still incumbent on employers to have effective procedures in place.

    "Garnishment processing is more than a clerical function," Groendyk said. "Have competent, trained people that review the orders and know how to handle them when they come in. Make sure they take this seriously, ask their supervisors if they have any questions about what to do with them, and understand the legal consequences to their employer for mishandling these," he advised.

    That can be difficult when every employee situation and garnishment is different. There are rules for how to calculate the garnishment, including the base amount of wages subject to the calculation, and priority if an employee has more than one garnishment at a time. There may be a requirement to complete and submit a calculation worksheet or to provide other documentation. Independent contractors may or may not be subject to garnishment, and employees moving from state to state or working remotely add complexity.

    "For employers with multiple locations, it is important that everyone knows what a garnishment order is for and is aware that it should be sent to a standard payroll processing location," Flores said.

  • Be aware of and mitigate potential risks.
  • Employers must be aware of the applicable laws, rules, and regulations and actively monitor legislation and changes to garnishment laws. Businesses operating in multiple states must comply with the requirements of each. That requires employers to actively stay current with laws across multiple jurisdictions.

    "The scope of garnishment has broadened with additional agencies using it for collection and additional types of payees being added," said Bryant. "It's not something that is going away." Employers may contact state departments of labor for assistance. The IRS website includes information for employers about levies on wages, along with IRS Publication 1494, which explains how employers compute amounts exempt from an IRS levy. The federal Office of Child Support Enforcement (acf.hhs.gov/css) offers guidance and compliance instructions.

    Employers can get more information by attending conferences, leveraging state and federal agency contacts, participating on committees and in state and federal agency pilot projects, and joining distribution lists.

Maria L. Murphy is a CPA and freelance writer and editor based in Wilmington, N.C. To comment on this article or to suggest an idea for another article, contact Chris Baysden, associate director – content development, at Chris.Baysden@aicpa-cima.com.

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