Garnished wages

Garnishment is a legal process in which a creditor collects unpaid debts or assets by withholding them directly from an individual’s paycheck or other source of income. The money or assets are usually garnished by a third party and then given to the creditor. It is typically used as a last resort when a debtor has failed to make payments on a credit card or student loan, for example, and the creditor has obtained a court judgment.

Wage garnishment, also called wage attachment, refers explicitly to the process by which a creditor recovers unpaid debts by deducting them from an employee’s wages. A court may authorize an employer or organization to withhold a percentage of an individual’s earnings each month and to transfer the garnished wages to the creditor. Common uses of garnishment include debts such as unpaid taxes, outstanding student loans, or credit card debts.

A court usually issues a garnishment, serving a garnishment notice to the employer. The employer is then legally obliged to continue the garnishment until the notice expires.

There are usually legal limitations on how much can be garnished based on the employee's disposable income and whether or not they have dependents. These limitations vary between countries; in the US, for instance, federal regulations allow courts to garnish 25% of the debtor’s weekly disposable earnings, or the excess of their weekly earnings over 30 times the federal minimum hourly wage.

There are typically three parties involved in wage garnishment.

• The debtor - the individual with unpaid debts 

• The garnishee - a third party that receives legal instructions to withhold a portion of the debtor’s wages, for example, the employer or a bank 

• The garnishor - the creditor and party issuing the garnishment notice

Note that a debtor can appeal a garnishment if they believe it’s unjust. Some valid reasons debtors object to garnishment include if the creditor is taking an excessive amount of money, the debtor has already paid the debt, the creditor did not follow legal protocol, or the debtor has a legitimate exemption from garnishment. Exempt income usually includes payments related to social security, disability, retirement, child support, and alimony. During an appeal, debtors may need to negotiate directly with the garnishor or file an objection with the court and comply with all court procedures and timelines.

Typically, a wage garnishment will only end once a debtor pays off the debt or makes alternative arrangements with the creditor. If a debtor files for bankruptcy, it will also stop most wage garnishments. However, this may put a debtor’s property and physical assets at risk. Wage garnishments may also end if the court judgment expires.

Each type of wage garnishment has unique requirements, such as how much can be garnished and which procedures each entity must follow. To illustrate, here are some common garnishments in the US:

Ordinary garnishments

Ordinary garnishments apply to consumer debt, like credit cards and auto loans. If an employee has unpaid debts, their creditor can obtain a court order to garnish their wages. Creditors typically need to get a money judgment before they can initiate a garnishment.

As mentioned, federal law limits these types of garnishments to 25% of an employee’s wage. However, there are some exceptions. For example, if an employee earns less than 30 times the federal minimum wage ($217.50 every week), their wages cannot be garnished.

Ordinary garnishments also extend to medical bills. If an employee has unpaid medical bills, for instance, a healthcare provider can file a lawsuit and obtain a court order to garnish that employee’s wages.

Child support and alimony

Limits vary for unpaid child support and alimony. Employees can have up to 50% of their wages garnished if they’re supporting another spouse or child, or up to 60% if they’re not. These percentages go up an additional 5% if the employee is more than 12 weeks in arrears.

Student loans

The Department of Education can garnish up to 15% of an employee’s wages without a court order for defaulted student loans. However, private loan lenders must obtain a court order to garnish wages.

Employees who default on their student loans must be notified of the following in writing at least 30 days before their wages are set to be garnished:

• The amount they owe

• Instructions on how to get a copy of their records

• How to enter into a repayment schedule

• How to request a hearing on the proposed garnishment

Tax debts

The Internal Revenue Service (IRS) can garnish wages for unpaid taxes. There are no federal or state limitations on how much can be garnished, but there are strict procedures that must be followed. These include sending the appropriate notices to remind employees of their unpaid balances before they can take action. If an employee fails to pay their balance, the IRS can then garnish their wages.

If you receive an order to garnish an employee's wages, here's what you need to do:

1. Review the order: Make sure a legitimate issuing authority, like a court or government agency, has issued the garnishment order. It should correctly identify the employee and specify the amount and duration of the garnishment.

2. Notify the employee: Notify the employee as soon as you’ve received the order, but treat the situation with sensitivity. Explain how the order will impact the employee’s wages and provide information about the garnishment process. 

3. Calculate how much to withhold: Garnishments apply to disposable earnings — the net income that employees receive after taxes and deductions. Determine the correct amount to withhold and deduct it each pay period for the duration specified in the order. If you outsource payroll, make sure the company has all the necessary details.

4. Remit withheld funds: Remit payment to the appropriate agency or creditor in a timely manner to avoid penalties and follow the preferred payment method (e.g., check, direct deposit, or electronic transfer).

5. Maintain accurate records: Record details about each payment, including the amount, date, and recipient. These records can help ensure accuracy in your payroll processing and serve as proof of compliance.

6. Monitor for status changes: Inform the creditor or appropriate agency immediately if an employee’s employment status changes. You should also keep an eye on any changes or updates made to the garnishment order.

Not complying with a garnishment order can lead to huge penalties. In some cases, your company could even be held liable for the full amount, plus penalties and fees. Consider obtaining legal advice if you're unsure about how to handle the situation.

Garnishment orders for independent contractors

Independent contractors are not employees, so creditors can’t have their wages garnished. However, creditors may try to obtain a money judgment to seize property or other assets.

In such instances, the rules you must follow depend on the contractor's country of residence. In the US, for example, you must withhold child support from payments to non-employees if you receive an Income Withholding Order from the Office of Child Support Enforcement.

State laws can also dictate how you handle garnishments for contractors. For example, Virginia law states that employers must comply with garnishment orders for independent contractors, even for ordinary debt like consumer debt.

If you receive a garnishment order for a contractor, it’s best to seek legal advice.

Garnishment orders for overseas employees

Again, the rules around garnishment for overseas employees depends on where you and your employee are based.

If you're based in the US and you receive a foreign order for child support from a country that has reciprocity agreements with the US, you must comply. For example, if you receive an order from the Federal Circuit and Family Court of Australia, you must withhold a portion of the specified employee’s wages. You can see which countries have reciprocity agreements with the US for child support here.

Keep in mind that these agreements only apply to child support. According to the Social Security Administration (SSA), you should not process foreign orders for withholding other than child support garnishment.

Note that the situation is slightly more complex if you hire abroad through an employer of record (EOR). In such instances, you should consult with your EOR provider.