Wage garnishments are skyrocketing – and they’re a minefield for businesses

More than 10 percent of employees between the ages of 35 and 44 had their wages garnished last year, according to a new study by payroll company ADP. That’s a staggering figure, and it creates a serious problem for employers, who are subject to complex state and federal laws about garnishment and can be sued if they do something wrong.

For years, wage garnishment was generally limited to people who fell behind on child support payments or owed money to the IRS. But that’s changed, as more and more private companies are using wage garnishment as a way to collect overdue consumer debts.

In the past few years, these creditors have filed millions of lawsuits. Last year, some 4 million people had their wages garnished for credit card debts, student loans, car payments, medical bills and other consumer obligations. In fact, among employees earning $25,000 to $40,000 a year, more had garnishments for consumer debts than for child support.

There are complex federal and state laws that dictate how employers must respond to garnishment requests. Sometimes they conflict, in which case the employer must generally follow the law that results in the smallest garnishment. Things can get even more complicated if an employer has workers who live in different states with different laws. And some types of debts, such as tax debts, have their own rules.

Employers who make a mistake can face fines, and can even become liable for the employee’s debt in some cases.

Garnishment orders are typically made by a local court, after a worker has fallen seriously behind on a debt and the creditor has filed a lawsuit. Generally, a business must comply with the order and is not required by federal law to obtain a worker’s authorization to withhold money from a paycheck (although state law may vary).

Typically, the court will have sent information about the garnishment order to the employee – although not all employees pay attention to or understand these notices, which can result in a nasty surprise and an unhappy worker who blames the employer for reducing his or her pay.

Under federal law, garnishment is limited to a percentage of a worker’s “disposable earnings.” Figuring out this figure is complicated – it includes wages, salaries, bonuses, commissions, and pension earnings, but doesn’t include tips. This amount must be reduced by federal, state and local income taxes, along with Social Security and unemployment deductions – but not voluntary deductions such as union dues, health insurance payments or retirement plan contributions.

Garnishment amounts for consumer debts are limited to 25% of disposable earnings or the amount by which weekly disposable earnings exceed 30 times the federal hourly minimum wage, whichever is less. (Again, state laws may be different.)

Under federal law, up to 65% of disposable income can be garnished for alimony and child support, but this figure depends on whether the worker is supporting a new spouse or child as well as how far behind he or she is on the payments.

There are special rules that apply to garnishments of tax debts, bankruptcy-related debts, money owed to federal agencies, and student loans owed to the U.S. Department of Education.

The rules are so complex that it’s not unheard of for a local court to issue a garnishment order that’s not consistent with federal or state law. In such a case, the employer will need to go to the court and ask it to fix the problem – a company can’t legally break the rules even if it’s following a court order.

Some businesses have been known to fire employees rather than deal with wage garnishment issues. Curiously, federal law prohibits you from firing someone because of a single wage garnishment, but it theoretically allows you to fire someone who has two separate wage garnishments at the same time, or who voluntarily assigned wages to a creditor rather than waiting for a court garnishment order.

But you should be extremely careful about this. State laws may be different, plus a fired employee could claim discrimination if he or she was fired for multiple garnishments and other employees weren’t.

Employers who violate the federal law on firing over a garnishment can be sued for reinstatement and back pay, and can even be prosecuted criminally in some cases.