Wage Garnishments! How exciting! Not buying the enthusiasm? Me either. Garnishments just might be the most boring wage & hour topic ever. Nonetheless, most employers will have to deal with employee wage garnishments at one point or another. It might be for child support, alimony, taxes or an employee with bad debt. Regardless of reason, it is important to make sure wage garnishments are done properly. Please bear with me and don’t fall asleep until you’ve at least read the first paragraph or two. I’ll do my best to keep you awake and you might even learn something along the way.
Q: Do we really have to do it? / Can’t we just fire the employee instead of garnishing his/her wages?
A: It depends. (You didn’t really expect a straight answer, did you?) The Consumer Credit Protection Act (“CCPA”) prohibits an employer from firing an employee whose earnings are subject to garnishment for any one debt. However, if the employee has two or more debts, the CCPA does not prohibit discharge. Before discharging an employee for excessive garnishments, employers are wise to run the scenario past employment counsel to make sure there are no other factors which might lean against termination.
Q: How much are we required to garnish?
A: It depends. (Are you noticing a pattern here?) The amount of an employee’s wage that is subject to garnishment is determined by the employee’s “disposable earnings.” Disposable earnings are essentially the net amount of an employee’s pay after legally required deductions are made – i.e., Uncle Sam gets his cut first. The DOL has a fancy formula for determining the amount. I’m fairly certain that the formula was designed by NASA engineers on a mission to design something more complicated than the IRS tax code. There are different limits depending upon whether the garnishment is for child support, alimony, bankruptcy, taxes or other debt. Clear as mud, right?
As a general rule, the first $217.50 of the employee’s disposable weekly income is not subject to garnishment. After that, employers need to apply the DOL’s formulas for determining the amount, which can vary from 10% of disposable earnings all the way up to 60%, depending upon the reason for the garnishment. Here is a link to DOL guidance on calculating garnishment amounts. It is definitely worth contacting employment counsel (or a rocket scientist) when determining the proper amount to garnish.
Q: What’s the DOL’s new garnishment guidance?
A: It depends. (Just making sure you’re still awake!) Last week the DOL issued Opinion Letter CCPA2018-1NA which addressed whether lump-sum payments are considered earnings subject to garnishment under the CCPA. With a few exceptions, the quick answer is that the vast majority of lump sum payments are subject to garnishments. The DOL’s standard is “whether the employer paid the amount in question for the employee’s services.” If the payment is for the employee’s services in almost any way, the payment will be subject to garnishment.
The DOL determined that these lump-sum payments are earnings subject to garnishment:
- Bonuses (discretionary, non-discretionary, performance, productivity, referral, sign-on)
- Profit sharing
- Relocation incentive payments
- Attendance awards
- Safety awards
- Cash service awards
- Retroactive merit increases
- Holiday pay
- Severance pay
- Termination pay
- Workers’ compensation payments for wage replacement
- Insurance settlements for back/front pay.
These lump-sum payments are not earnings subject to garnishment:
- Workers’ compensation payments for medical reimbursements
- Wrongful termination insurance for compensatory or punitive damages
- Buybacks of company shares
As with the other DOL opinion letters Graydon has covered this week, this opinion letter does not represent a significant directional change for the DOL. It is consistent with what we’ve advised clients for years. What is significant is that these opinion letters provide assurances that employers are on the right track. It is also significant that the DOL is once again taking a proactive approach to helping employers figure things out before they step into a pot of boiling water.
Thanks for staying awake! Buehler? Buehler?