Construction executives have many issues to consider when it comes to payroll. With personal and student loan debts on the rise, contractors’ accounting departments need to add the potential liability for wage garnishment to their list of worries.
Under various federal and state laws, employers can be penalized for failing to comply with wage garnishment orders. That means if employers do not withhold garnished amounts from paychecks, they are liable for the money that current and former employees owe.
In addition to that money, employers can be sued for interest and attorneys’ fees if creditors decide to pursue the company for funds that aren’t being properly withheld. Employers even face the risk of being held in contempt of court, which could carry jail time.
To avoid these scenarios, companies need to understand their risks and responsibilities when it comes to wage garnishment.
Risks And Requirements
The federal Debt Collection Improvement Act of 1996 (DCIA) allows federal agencies to garnish the pay of individuals who owe “delinquent nontax debt” to the United States. It also outlines potential penalties for employers that fail to comply with garnishment orders, including liability for debts owed, attorneys’ fees and creditor costs, as well as potential punitive damages.
Wages can be garnished for a variety of reasons. According to the ADP study “Garnishment: The Untold Story,” 7.2 percent of all U.S. employees had their wages garnished in 2013. The three main reasons for wage garnishment are child support (41.5 percent of garnished employees), tax liens (18.3 percent) and other issues, such as student loans and consumer debt (35.4 percent). Student loans are one of the fastest growing areas for wage garnishment. As reported by The Wall Street Journal, approximately $1 billion in student loan payments has been collected annually during the past several years through garnishment—an increase of 40 percent since 2006.
Laws pertaining to garnishment vary dramatically from state to state. Some have minimal penalties, while others threaten multiple-thousand-dollar fines as well as potential imprisonment. Garnishment orders typically are delivered to businesses via service of process to their “registered agent”—a qualifying third party that keeps the business apprised of filing and compliance deadlines, and that receives state and legal documents and promptly relays them to the business.
Whether a business is an LLC, S corporation or C corporation, it must have a registered agent. The agent can help navigate the various requirements of each state in which the company conducts business. A good registered agent also will provide notification when changes are made to state laws that may impact the business.
What To Do When Employees Have Their Wages Garnished
The laws around wage garnishment can be confusing, but companies need to take them seriously. Because more than seven percent of U.S. workers have wages garnished for one reason or another, construction companies need to take several steps to remain prepared and compliant.
Proactively train employees. Registered agents should be prepared to receive wage garnishment notices. However, anyone who opens the company’s mail needs to be trained to identify these types of orders, as well as where to direct them. Sole proprietors (businesses that are not incorporated) need to pay particularly close attention because they are not legally required to have a registered agent and therefore may not have an individual who is trained to receive and handle such notices.
Respond promptly. Wage garnishment is a court order, so companies need to respond quickly and thoroughly. This isn’t something that can fall to the bottom of the to-do list or end up under a stack of paperwork. If the company receives an order for a former employee, don’t ignore it. The firm is still required to respond, if only to check a box or two. Failing to respond could result in liability for debts owed by the former employee. Again, a good registered agent will provide guidance under such a scenario.
Begin withholding. Promptly begin complying with the order by withholding the appropriate amount from the debtor’s wages for each pay period until the company is notified to discontinue wage garnishment.
Work with the employee. It can be alarming to find out an employee needs his or her wages garnished, and it may call into question the employee’s trustworthiness. From a payroll perspective, it can be a headache to implement wage garnishments. However, employers cannot fire employees for having their wages garnished. For example, under the Consumer Credit Protection Act, employers are prohibited from firing an employee whose earnings are subject to garnishment for any one debt, regardless of the number of levies made or proceedings brought to collect that debt. Some states also have very strict laws that protect employees who are subject to wage garnishments.
Confirm that the registered agent can handle wage garnishment orders. Not all registered agents are equal; some businesses run into trouble if their registered agent is a private individual who retires, moves offices, or does not have the resources to service large or multiple businesses. Sole proprietors who are concerned about wage garnishment can consider incorporating (e.g., as an LLC or S corporation). Not only does incorporating carry the benefits of a registered agent, but it also protects the owner’s personal assets from liability in the event of a garnishment hiccup (or other legal issue relating to the business).
Failing to comply with wage garnishments can be costly and can expose a company to significant risk. One Texas florist that failed to withhold enough wages for an employee had to pay a student loan creditor more than $6,500. To avoid a similar fate, companies need to understand what their obligations are and how to comply.