Differing Laws, Stakeholders Complicate Payroll Garnishments

Withholding wages for creditor garnishments can involve several state laws and multiple interested parties with different objectives, which often makes the task for payroll professionals more difficult than it needs to be, an creditor rights attorney said March 17.

Creditor garnishments generally begin when an individual defaults on a contract and owes a creditor money, such as credit card debt, said Nathan Willner, Esq., vice president of government affairs for the National Creditors Bar Association. To collect the overdue payment, the creditor will sue the individual in court, and the court will usually order a writ of garnishment for the individual’s employer to withhold and remit a portion of the employee’s pay.

In this general scenario, the employee, creditor, their attorneys, and the court are all interested parties, he said during PayrollOrg’s Capital Summit, held in Arlington, Virginia. Sometimes, the original creditor sells the debt to a third party, which would become the new interested party and could confuse the employee.

“Right from the beginning, you might get a call from your employee who says they have no idea what this [third party] is, and they sound really convincing” he said. “The problem is, they’ve gotten 25 letters that say their account was sold to [the third party].”

“If you are getting all of your information only from your employee, it is possible that not all of it is accurate,” he warned.

Creditors in certain states, such as North Carolina and Illinois, might be able to have an employee’s wages garnished without a court order, complicating matters further, said Christena Verrill, CPP, payroll manager for L.L. Bean. Garnishments can be legal and valid under state law even though they were not issued by a court.

This is because states have their own garnishment laws, which can pose compliance challenges for multistate employers and employees, Willner said. Employers have to consider where the court judgment was entered, where the company is located and does business, and where the employee is working. The law where an employee’s wages are earned sometimes applies, but that is not always the case.

For example, L.L. Bean, a Maine-based company, once received a creditor garnishment order from Virginia for an employee who was now based in Maine, said Verrill. After looking into the matter, the company’s legal team determined that L.L. Bean had to comply with the order because the company had a business presence in Virginia and the employee was originally from there.

To ensure compliance with a garnishment order and all applicable laws and regulations, payroll professionals should consult with their company’s legal counsel, said Verrill. Employers can be penalized for failing to comply with a garnishment order.

“If your company is served [a garnishment order] and you ignore it, most states have a way that the creditor’s lawyer could then file an action to get a judgment, not against the person who owes the money but the company,” added Willner.

A company’s legal counsel can also inform payroll professionals on when to stop withholding wages under a garnishment order, said Verrill. In most cases, the order will expire or the court will notify an employer to stop, but something like a signed letter from the creditor’s attorney might be enough to stop withholding.

That said, a creditor’s attorney could try to trick an employer by improperly sending them an invalid garnishment order, Willner warned. Payroll professionals should refer these matters to their company’s legal counsel while also trying to understand what they are receiving.

“Just because you get [an order] doesn’t mean you have to starting garnishing,” he said. “If it doesn’t look right, follow your intuition.”