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Employee Wage Garnishments: Developing an Effective Compliance Program

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Learn how to issue proper responses, make accurate and timely payments, and avoid potential pitfalls in regards to garnishments.

Learn how to issue proper responses, make accurate and timely payments, and avoid potential pitfalls in regards to garnishments.

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  • 1.   Employee Wage Garnishments: Developing an Effective Compliance Program I.  How Are You I. How Are You Complying with Employee Wage Complying with Employee Wage Garnishments? Garnishments? ...............1  II. Issuing Proper In recent years, employers have been served with record numbers of employee Responses......................2 wage garnishments because of rising living costs, declining personal incomes, III.  aking Accurate and M Timely Payments ............4 and high levels of consumer debt. Without an effective garnishment compliance IV. Avoiding Potential program, employers that receive a high volume of garnishments face significant Pitfalls .............................8 liability exposure to garnishing creditors, child support enforcement agencies,   and levying tax authorities. For instance, failing to answer a garnishment could   cause a default judgment, while remitting payments late under a child support order could result in costly fines and penalties. In addition, failing to comply with a federal tax levy could expose an employer to liability equal to the amount of the tax levy, costs, interest, and a 50% penalty.i In most companies, payroll personnel are responsible for answering barely legible garnishment documents that are full of complicated legal jargon. These payroll personnel, without legal supervision or a legal background, often file written answers to interrogatories under penalty of perjury in jurisdictions throughout the country. Given these circumstances, it is not surprising that employers fail to properly answer garnishments or that default judgments are commonplace – potentially adding hundreds of thousands of dollars of costs to a large, national employer. Developing a garnishment compliance program can be a challenging undertaking due to the variety of garnishment types and lack of uniformity in garnishment law. Each type of garnishment – creditor garnishments, child support orders, federal and state tax levies, wage assignments, bankruptcy orders, and student loans – is governed by federal or state laws that are constantly changing. Garnishment practices can even vary within the same state because of different local court rules that can and do change without Corporation Service Company® 800.927.9800  
  • 2.   Employee Wage Garnishments: Developing an Effective Compliance Program much, if any, prior notice. For instance, an employer can send payments directly to a particular court for years and then suddenly receive a returned check in the mail with a notice that all payments must be sent to the plaintiff— even though other courts in the same state still accept payments. This white paper addresses three essential elements of an effective garnishment compliance program: (1) issuing proper responses, (2) making accurate employee deductions and remitting them in a timely manner, and (3) avoiding commonly made mistakes when processing garnishments. II. Issuing Proper Responses Employers must respond to every garnishment order that they receive. While there are certain common responses, the form and nature of the required responses vary based on the type of garnishment. Creditor garnishments, child support orders, federal and state tax levies, wage assignments, bankruptcy orders, and student loans require different responses. Regardless of the garnishment type, an employer should provide a written notice of the garnishment to the impacted employee. In certain circumstances, including child support orders issued from California or states other than the employee’s work state, the written notice should be accompanied by a copy of the garnishment. Initial Responses Employers should respond to garnishments promptly by the answer date on the garnishment documents, which is usually within 5 and 20 days of service. As a general rule, it is best to use the provided forms when responding to a garnishment, especially if one of the provided forms is an interrogatory or other court pleading. States frequently require responses to be notarized, signed under penalty of perjury, or filed with the court by an attorney licensed in that Corporation Service Company® 800.927.9800  
  • 3.   Employee Wage Garnishments: Developing an Effective Compliance Program state.ii States like Washington and South Dakota require multiple filings for each garnishment, including initial and final disclosures detailing employee wage information during the garnishment period. Frequently, employers receive garnishment documents for a defendant who was either formerly or never employed. When this happens, employers typically answer the garnishment with the response that the defendant was never employed or was formerly employed by the company. In the latter case, companies should include the separation date in their response. Student loans and federal tax levies require specific responses. For instance, student loan documents often include employer certification or order acknowledgement forms that need to be returned by the requested return date to the creditor or agency. Federal tax levies should be answered on the forms provided by the IRS – one form is given to the employee to claim exemptions, while the other is returned to the IRS acknowledging that the company employs the taxpayer described in the levy. Interim Responses Employers should notify creditors and courts of significant events that may occur while the garnishment is in effect, including inactive employee status, employee bankruptcy filing, receipt of a higher-priority garnishment, or a terminated employee. In order to dissuade creditors from seeking default judgments because of a lack of recent payments, employers should notify creditors when employee wages are entirely exempt, especially in Tennessee.iii Employers may also be required to file interim responses disclosing employee wage information every pay period or on a monthly basis. States requiring these interim responses include Arizona, Kansas, Ohio, Utah, and others. For child support orders, employers may have an obligation to report lump-sum payments made to an employee (such as a commission or bonus) to child support enforcement agencies. Corporation Service Company® 800.927.9800  
  • 4.   Employee Wage Garnishments: Developing an Effective Compliance Program Final Responses Under most circumstances, an employer should issue a final response before considering a garnishment case closed. For instance, an employer should notify the creditor and court/agency (and provide the separation date) whenever an employee subject to an active garnishment terminates employment. Sending a termination letter helps decrease the chance that an employer will be held liable for failing to remit payments under a garnishment order and can prevent a creditor inquiry regarding why payments have stopped. Employers should request a payoff amount via letter or phone call to creditors, especially in Arizona, California, Maryland, Washington, or similar states. Companies should always obtain a payoff amount, because additional interest or costs may have accrued since the last document was received. In certain jurisdictions, including Minnesota, Missouri, South Dakota, and Washington, the employer must submit a final disclosure for a garnishment. The final disclosure should detail the employee’s wages and deductions made while the garnishment was in effect. III. Making Accurate and Timely Payments In order to avoid potential liability for a garnishment, an employer must remit accurate and timely payments to the proper recipient, whether it is the court, creditor, custodial parent, or alimony payee. Several issues complicate the deduction and remittance of payments, including calculating the employee’s non-exempt wages that are available for deduction, determining when to start and stop deductions, when to remit payments to creditors, and vendor management issues. Corporation Service Company® 800.927.9800  
  • 5.   Employee Wage Garnishments: Developing an Effective Compliance Program Calculating Exempt Wages and Deduction Amounts The federal Consumer Credit Protect Act (“CCPA”) limits the amount of employee wages that can be deducted as a percentage of disposable earnings.iv In most states, disposable earnings are calculated by subtracting certain deductions from gross earnings. These deductions include federal, state, and local withholding taxes; Social Security and Medicare taxes; mandatory deductions for state disability or unemployment insurance; and mandatory contributions to a state pension system for public sector employees. As permitted by the CCPA, states are allowed to define additional deductions from gross earnings (and some do) that include union dues, medical insurance premiums, and life insurance premiums.v For creditor garnishments, the CCPA provides that an employee’s non-exempt wages are equal to the lesser of 25% of the employee’s disposable earnings or the employee’s disposable earnings in excess of 30 times the federal minimum wage. For example, assume an employee has $500 in disposable earnings on a biweekly pay cycle. If that employee had a creditor garnishment, their employer would deduct the lesser of the two calculations. Twenty-five percent of their disposable earnings would be $125, and their disposable earnings in excess of $435 (30 times the federal minimum wage) would be $65. The lesser of the two amounts is $65, so the employer would deduct $65 for the creditor garnishment.vi While the CCPA sets the federal minimum amounts for wage exemptions, states are free to provide greater wage exemptions. For instance, both New Jersey and New York limit wage deductions to 10% of gross earnings. Illinois limits wage deductions to the lesser of the excess of disposable earnings over $720 (on a biweekly pay cycle) or 15% of gross earnings. Texas and South Carolina afford employees the greatest wage exemptions by not permitting wage garnishments in most instances. Corporation Service Company® 800.927.9800  
  • 6.   Employee Wage Garnishments: Developing an Effective Compliance Program For student loans, the Federal Higher Education Act provides that the Department of Education or a private guaranty agency can garnish 15% of an employee’s disposable earnings for each defaulted student loan. For employees with multiple student loans, the employer can deduct 15% for the first student loan and any remaining amount up to the CCPA limits of 25% of disposable earnings for a second student loan or other garnishment.vii The CCPA provides for greater wage deductions for child or spousal support orders than it does for garnishments. For instance, an employer can deduct 50% to 65% of an employee’s disposable wages for support orders, depending upon whether the employee is in arrears of 12 weeks or more and whether the employee supports a second family.viii Although most states follow CCPA limits, some states limit employee wage deductions for support orders to 50% of disposable earnings. The CCPA does not apply to state or federal tax levies. As a result, state law governs the amount of wage deductions permitted for state tax levies and varies significantly among jurisdictions. For instance, some states do not issue tax levies. Other states, such as Illinois, apply their garnishment wage exemptions. A few states, such as Virginia and Idaho, levy upon 100% of disposable wages. For federal tax levies, the IRS has its own wage exemption structure based on the taxpayer’s marital status and number of claimed exemptions. Deducting and Remitting Payments The timing of when an employer should start deducting wages and remitting payments varies greatly across jurisdictions, though there are some common trends. Most frequently, wage deductions start immediately upon receipt of a garnishment summons or order for a continuing lien. In states like Indiana and Vermont, employers must respond to initial interrogatories but do not begin deducting until receipt of a subsequent court order. In certain states, such as Corporation Service Company® 800.927.9800  
  • 7.   Employee Wage Garnishments: Developing an Effective Compliance Program California and Connecticut, deductions are made after a brief objection period during which an employee can contest the garnishment. Remitting payments on time significantly reduces the possibility of default judgments or late penalties.ix Garnishment payments are generally remitted within a week (or less) of deduction. In a minority of jurisdictions, payments are held until a brief objection period elapses or a subsequent court order is received.x For child support orders, payments must be remitted within a few days of deduction, after which time child support agencies can potentially assess penalties or late fees. In at least 10 states, employers must remit child support payments to the state via an approved electronic funds transfer method.xi Vendor Management Issues In order to minimize the number of returned checks, an employer should carefully read the garnishment documents to determine whether the check should be sent to the creditor, sent to the court, or made payable to the creditor but mailed to the court, as is the case in Virginia. Checks are often returned by courts or creditors because the account has been paid in full or the vendor address has recently changed. Sometimes, courts and creditors will hold checks for months before processing them, causing the checks to become stale. For these reasons and others, employers need to have a process in place for handling returned payments and reissuing them to creditors or refunding them to employees. Besides returned payments from creditors, employees will occasionally be entitled to refunds. In this case, the employer may receive orders releasing garnishments after deductions have been made but before the funds were sent to creditors. Corporation Service Company® 800.927.9800  
  • 8.   Employee Wage Garnishments: Developing an Effective Compliance Program IV. Avoiding Potential Pitfalls There are several potential pitfalls to avoid when processing garnishments, including garnishing the wrong employee, incorrectly handling multiple garnishment situations, using out-of-date payroll software to calculate garnishment deduction amounts, or having an insufficient garnishment intake and tracking process. In addition, in order to avoid wrongful discharge liability under federal and state law, employers should be careful when taking adverse employment actions against employees currently being garnished. Matching Garnishment Documents to Employees In order to avoid garnishing the wrong employee, special precautions should be taken. These include verifying that garnishment documents match the employee’s first and last name and full social security number. If there are discrepancies with the first two matching criteria, an employer should conduct additional verifications, including comparing the employee’s address in employment records against the address on the garnishment documents. A red flag exists where the garnishment document lists a city and state that differs from those on the employment records. Whenever there is doubt, an employer should contact the creditor before complying with the garnishment. Employees with Multiple Garnishments An employer should also exercise extra care whenever an employee is subject to multiple garnishments. Creditors look for any reason (including late or invalid responses) to seek a default judgment against the employer, especially where there is little hope of collecting from the employee. A creditor’s priority position depends on the type of garnishment and service date. Priority is generally determined as follows: child support order (if served before a federal tax levy), Corporation Service Company® 800.927.9800  
  • 9.   Employee Wage Garnishments: Developing an Effective Compliance Program federal tax levy, student loans, federal administrative wage garnishment, bankruptcy order, state tax levy, and creditor garnishment or wage assignment (based on their respective service dates). An employer should notify creditors where a garnishment has been subordinated by a higher priority order to ensure that creditors not receiving payments do not seek a default judgment. Garnishment Intake Process and Tracking Many companies employ an insufficient process for receiving, tracking, and monitoring garnishments and, as a result, incur fines and default judgments. Because garnishments are often served on retail stores or office locations, it is important to provide clear instructions to employees and managers to forward garnishment documents to corporate headquarters or the company’s registered agent. While a paper process may be sufficient for employers who receive only a handful of garnishments, an electronic garnishment platform is preferable. An electronic platform can help the employer scan and store garnishment documents, responses, and correspondence; track response deadlines; monitor payments; and manage vendor information. Additionally, an electronic platform can often be integrated with payroll and/or accounts payable software, providing the General Counsel’s office the ability to audit and ensure compliance with state and federal laws. If an employer uses a payroll software program to calculate the amounts for each garnishment wage deduction, the employer should review the software and deduction calculations periodically to ensure the software is working correctly and accurately reflects state and federal wage exemption and deduction calculation rules. Wrongful Termination and Other Employment Liability Because federal law prohibits employers from discharging employees having only one garnishment, employers should carefully consider and document any adverse employment actions taken against garnished employees.xii Some Corporation Service Company® 800.927.9800  
  • 10.   Employee Wage Garnishments: Developing an Effective Compliance Program states prohibit the discharge of employees regardless of the number of garnishments, while other states prohibit discrimination, discipline, or a refusal to hire employees that are subject to garnishments.xiii One jurisdiction creates a rebuttable preemption that a violation of law has occurred if any adverse employment action is taken against an employee within 90 days of receiving a garnishment and imposes a fine of up to $10,000 for violations.xiv Disclaimer The information contained in this document is merely intended to alert customers to potential issues surrounding garnishment compliance. Material contained herein is intended only for informational purposes and does not constitute legal advice or counsel. The reader assumes all risk and liability resulting from the use of this information. About the Author Travis N. Turner is the Director of Garnishment Services and Associate General Counsel for Corporation Service Company. While practicing collections and bankruptcy law at Young Conaway Stargatt & Taylor, LLP, Mr. Turner represented clients that included Federal-Mogul, American Home Mortgage, and Old Country Buffet. Mr. Turner has published articles that include Pre- packaged Asbestos Bankruptcies: Down but not Out and Insurance Assignment and Preemption Stipulation Allows Federal-Mogul to Emerge from Bankruptcy. Mr Turner has also presented on garnishment law at a legal education seminar sponsored by the Association of Corporate Counsel. Corporation Service Company® 800.927.9800  
  • 11.   Employee Wage Garnishments: Developing an Effective Compliance Program About CSC Corporation Service Company (CSC), a privately held company with headquarters in Wilmington, Delaware, is a leading provider of legal and financial services for many of the world’s largest companies, law firms, and financial institutions. CSC offers a variety of garnishment services, including garnishment document receipt, scanning, and delivery into an electronic garnishment management platform; garnishment preparation services; garnishment compliance advisory services; and full-service garnishment outsourcing solutions. To learn more about CSC® Garnishment Services, please call the author at (800) 927-9800 or visit www.cscglobal.com.                                                              i 26 U.S.C. § 6332(d)(2) (2010); United States v. Moskowitz, Passman & Edelman, 2007 U.S. Dist. LEXIS 75407, *7 (S.D.N.Y. Oct. 9, 2007) (imposing 50% penalty for defendant’s failure to comply with a federal tax levy). ii Eckles v. Atlanta Tech. Group, 485 S.E.2d 22, 27 (Ga. 1997) (holding that a corporation must be represented by a Georgia attorney in any court proceeding); N. Ga. Med. Ctr. v. Food Lion, 517 S.E.2d 799, 800 (Ga. Ct. App. 1999) (allowing the amendment of a garnishment pleading to substitute an out-of-state attorney with a Georgia-licensed attorney). iii TENN. CODE ANN. § 26-2-215 (2010). Creditors may move for a conditional default judgment on the grounds that no payments have received in the last thirty days. iv 15 U.S.C. § 1672(b) (2009) (CCPA defines disposable earnings as “that part of the earnings of any individual remaining after the deduction from those earnings of any amounts required by law to be withheld.”). v Some states allow deductions for union dues (CT, NM), life insurance premiums (CT, LA), health insurance premiums (CT, LA, MD), or child support wages (WY). vi The exempt amount is $435 for an employee on a biweekly pay cycle (2 weeks multiplied by 30 multiplied by the federal minimum wage of $7.25 per hour). vii 20 U.S.C. § 1095a(1) (2010); Halperin v. Regional Adjustment Bureau, Inc., 206 F.3d 1063, 1069 (11th Cir. Fla. 2000) (holding that the limit in Section Corporation Service Company® 800.927.9800  
  • 12.   Employee Wage Garnishments: Developing an Effective Compliance Program                                                                                                                                                                                                   1095(a)(1) applies only to a single student loan and that the CCPA limit of 25% of disposable earnings governs multiple student loans). viii 15 U.S.C. § 1673(b)(2) (2010). ix 750 ILCS 28/35 (2010) (assessing a $100 a day penalty for child support payments sent after the seven day grace period); Grams v. Autozone, Inc., 745 N.E.2d 687, 689 (Ill. App. Ct. 2001) (affirming the lower court’s imposition of a $20,700 fine representing $100 per day penalty for each day that the employer failed to remit payments under a child support withholding order). x In Alabama, Michigan, and Utah, an employer must wait a short period of time before remitting payments to the creditor or court. In Arizona, Florida, Illinois, Minnesota, and Vermont, a court order is required before the withheld funds can be remitted to a creditor or court. xi California, Florida, Illinois, Indiana, Massachusetts, Nebraska, Oregon, Pennsylvania, Virginia, and Rhode Island require electronic funds payments for child support orders. xii 15 U.S.C. § 1674 (2010) (imposing penalties up to $1,000, one year imprisonment, or both for discharging an employee subject to only one garnishment); Martin v. Hawkeye Int'l Trucks, Inc., 782 F. Supp. 1320, 1324 (S.D. Iowa 1991) (finding that an employer must reinstate an employee wrongfully discharged and must pay the employee $13,463.28 in back pay). xiii 750 ILL. COMP. STAT. 28/35 (2010); IDAHO CODE § 28-45-105 (2010). xiv D.C. CODE ANN. § 46-219 (2010). Corporation Service Company® 800.927.9800