Analysis

What Finance Executives Need to Know About Wage Garnishments

What you don’t know about garnishments can hurt your business.

Employers deal with a range of complex issues day in and day out, and perhaps one of the most difficult challenges they face is how to deal with wage garnishments.

Garnishment is a legal order where an employer withholds a portion of an employee’s paycheck in order to repay debts to the employee’s creditors. It’s a process that often puts the employer front and center:  In addition to navigating a sensitive issue with an employee, the employer has to figure out how to comply with a myriad of garnishment requirements. All of this comes in addition to managing the daily operations of the business and making sure the workplace is running smoothly.

As an employer, if garnishment management isn’t on your radar, it should be. Companies that don’t make garnishment-related compliance a priority may open their businesses up to risks of liability, potentially hefty fines, losing valuable employees and even public relations concerns. In some states, for example, creditors may use a single error by an employer to obtain a default judgment against the employer, requiring the employer to pay the full amount of an employee’s judgment, plus attorneys’ fees and court costs. Clearly, businesses can’t afford to make mistakes.

The numbers say it all

To help employers better understand the garnishment landscape, ADP conducted a relevant and timely study called Garnishment: The Untold Story, which reveals trends in wage garnishments across the U.S. If employers are more knowledgeable, perhaps they can provide helpful resources and support for employees who want to resolve their debt and get on track financially, which may also help reduce the number of garnishments in the future.

The study looked at data from 13 million employees and found that 7.2 percent of all U.S. workers had their wages garnished in 2013. Of that 7.2 percent:

  • 4 percent of employees had their wages garnished for child support
  • 9 percent for other reasons, including student loans and court-ordered consumer debt-garnishment
  • 5 percent for tax levies
  • 4 percent for bankruptcy

Interestingly, the study found that garnishment trends vary by industry. Manufacturing, for example, had the highest garnishment rate, with 48 percent of companies having at least one or more employees with a wage garnishment in 2013.

Transportation and utilities companies had the second highest garnishment rate, followed by the information and construction sectors. On the other hand, the professional and business services, financial activities, and education and health services sectors had the lowest garnishment rates, with each at 23 percent. Based on the data, we can infer that garnishment rates may be higher in blue-collar jobs compared to white-collar positions, so employers in those industries should be more vigilant with their compliance obligations and have a standard process in place for handling garnishment orders.

Garnishment rates trend in specific ways when it comes to age and gender. Middle-aged individuals (age 35-54) tend to have a higher garnishment rate than younger or older groups, which could be due to the fact that many of these individuals are at an age where they’re raising children, supporting a family, trying to pay off debt, or going through a significant life event, like divorce. With regards to gender, the data suggests that men are more likely than women to deal with child support garnishments (5.8 percent versus 0.6 percent) and tax levy garnishments (1.7 percent versus 1.2 percent).

The study revealed that where industries are located also could play a role in garnishment rates. In the Midwest, the child support garnishment rate is 4.6 percent, 0.6 percent for bankruptcy, 0.9 percent for tax levy and 4.1 percent for other garnishments. The Northeast region had the lowest garnishment rates across the board, with a child support garnishment rate of 2.4 percent, tax levy at 0.9 percent, bankruptcy at 0.1 percent and other garnishments at 2 percent.

In addition to the factors outlined above, employers need to be aware of how company size and compensation could impact garnishment rates. Larger companies tend to have a higher garnishment rate. Take this into consideration: a company with more than 5,000 employees has a garnishment rate of 9.3 percent whereas a small business (1-19 employees) has a rate of 2.6 percent. Garnishments trend across wage levels, too. Employees making between $25,000 and $40,000, for example, have a garnishment rate of 10 percent. Interestingly, individuals making either less or more than that amount tend to experience a lower garnishment rate.

Being proactive about compliance

So what can employers learn from this data? With more intelligence on where and in what group wage garnishments are more likely to happen, businesses can work with their compliance staff to create a plan for managing garnishments. Knowledge can be one of the first steps in developing a strategic process that can work across the entire enterprise.

As a first step, employers should make sure they understand the regulatory landscape and what action is required of them if a garnishment is ordered. Garnishment laws vary frequently by state (sometimes even at the court level), so employers with a presence in multiple jurisdictions need to understand how requirements may differ. In addition, employers need to understand what their garnishment responsibilities are across wage and hour laws, as well as bankruptcy laws.

As a best practice, finance executives need to play a crucial role in guiding their company through this process. They should be at the helm, coordinating with the HR and legal departments to make sure the regulatory landscape is well understood and that compliance is a top priority across the organization. If not, they could be opening up the entire business to penalties associated with non-compliance and could set their company backward instead of forward.

Julie Farraj is ‎VP, Wage Garnishments at ADP.

To read the full ADP study, click here.