Wage garnishment is a regular part of payroll processes all over the world, and has major impacts on employees and employers alike. They’re perhaps most common in the United States, but are known by a range of different names elsewhere, such as ‘attachment of earnings’ in the United Kingdom, ‘wage deduction orders’ in Australia and ‘earnings assignment orders’ in some parts of Canada.

These garnishments are deductions applied to individual employees’ wages in order to meet legal obligations, such as court orders or debt repayments. They can be complicated for payroll teams to deal with, as they require processing at an individual level and adherence to stringent regulations that can vary from one territory to another. They also represent a sensitive and stressful issue for employees, who generally want to deal with the matter discreetly and without unnecessarily impacting their wider finances.

In this guide, we’ll explore how wage garnishment works, the main employer responsibilities in this area, and how to avoid pitfalls and complications along the way.

What types of wage garnishment are common?

The limits and legal protections around different wage garnishments vary widely, but they all serve the same purpose: using deductions from an employee’s paycheck to cover financial obligations directly. The range of different types of debt applicable to wage garnishments is huge, and includes payments to cover:

• Unpaid taxes
• Unpaid government debts and fines
• Child support payments and/or alimony payments
• Student loans (particularly in the UK)
• Legal and court judgment payments
• Bankruptcy
• Medical bills
• Unsettled consumer debt (such as credit card debt)
  
  

Wage garnishments are usually the result of court orders, which put the legal mechanism in place around the amount or percentage of an employee’s disposable income to be paid over a defined period.

Which payments can and cannot be garnished?

Using the United States as an example, Title III of the Consumer Credit Protection Act sets out how wage garnishment should work. Specifically, it states that garnishment calculations should be based on an employee’s disposable earnings, i.e. after regular federal and state taxes and deductions are made.

Therefore, in the United States, wages that can be garnished include hourly wages, salary payments, bonuses, commission, retirement and pension earnings and service charges. Any money earned as tips is generally kept outside the calculations. As laws vary from country to country, and state laws vary from state to state, it’s important to research and understand which payments can and cannot be garnished where your employee works.

What are employers’ wage garnishment responsibilities?

Garnishment processes start when employers receive information about the court order, after which they will be asked to send proof of employment and amount of earnings for the employee involved, and possibly more detailed information if requested. After this, employers are expected to:

• Comply with the order in full: respond to all instructions given in a timely manner, taking action as soon as the wage garnishment order is received
  
  
• Calculate the withholding correctly: ensure that the right levels of garnishment are applied, taking into account the areas of earnings that should and shouldn’t be included (as mentioned above)
  
  
• Direct the payment as appropriate: send the correct garnishment amount to the right agency or creditor at the right times
  
  
• Keep full records: ensure that the amount of wages withheld and remitted, and when those actions took place, are properly documented and stored
  
  

Garnishment processes normally continue until one of three conditions is met: the employee’s debt has been repaid, the specific garnishment period in the court order has ended, or the order itself is revoked.

It’s worth noting that employees can appeal against garnishment orders, but the processes should continue during this time, unless and until the court or agency officially confirms it should stop.

Potential pitfalls around wage garnishment

Wage garnishment is a complex and sensitive process, especially when HR, payroll and finance teams have to take care of different orders and regulations for employees around the world. It can be very easy for organizations to face serious repercussions for non-compliance due to oversights during the wage garnishment process such as:

• Not reviewing orders fully: if any important details within the order are missed or misunderstood, then compliance and calculation errors can quickly creep in
  
  
• Not notifying employees quickly: employees should be informed of the details of the garnishment arrangements as soon as possible – a lack of clear information can lead to confusion, stress and low morale
  
  
• Deducting incorrectly: without expert knowledge and close attention, calculations and deductions can easily end up being over- or under-applied
  
  
• Not applying exemptions: some people facing financial hardship or those on low incomes may be eligible for certain exemptions on their garnishment. Failing to apply these can put considerable and unnecessary financial pressure on employees
  
  
• Missing deadlines: if the total amount of funds isn’t sent to the appropriate places within the required pay period, there can be penalties and sanctions applied
  
  

The errors listed above can lead to legal and financial sanctions from the courts, civil lawsuits from the employees involved, and reputational damage to the organization so, if necessary, legal advice should be sought to avoid any mistakes.

Wage garnishment best practice

With the right approach, employers can avoid falling into non-compliance and ensure they always meet all their requirements. From our experience working with payroll teams all over the world, we recommend the following:

Clear wage garnishment policies and procedures

A comprehensive set of policies and procedures can ensure compliance with all relevant state and federal laws and protect the organization’s financial integrity. This should include garnishment order reviews; employee notification processes; consistent calculation methods; timely remittance; thorough record-keeping; and standardized processes at all stages for maximized consistency and minimized errors.

HR, payroll and finance training

The staff involved in handling wage garnishments must be fully trained on all process intricacies, garnishment rules and legal requirements. They should know exactly how to calculate deductions accurately, process remittances at the right time, and be able to keep up to speed with evolving regulations. Just as importantly, they’ll need to understand how to effectively and sensitively communicate the process to employees, to manage any potential impact on employee morale and satisfaction.

Leveraging expert support

Working with a third-party partner such as CloudPay can be ideal for filling in the gaps in expertise and processing that you may have around wage garnishments.

CloudPay can also provide a fully managed wage garnishment service that takes care of everything, including full compliance, calculations, remittance, multi-country payroll management, secure data collection and storage, and more.

In the US: CloudPay can withhold and submit payment for various types of garnishments. CloudPay recognizes that every state in the US has its own garnishment laws. Receiving a notice for garnishment typically involves a formal legal process. The specific procedures can vary depending on the type of garnishment. Our US CloudPay Team is available to help fulfil the employer responsibility. Feel free to reach out to your assigned payroll professional or get in touch to discuss CloudPay’s services.

In Europe: In some regions (such as the UK and Germany), CloudPay can deduct garnishment funds and process the payment to the relevant third party. In Austria, CloudPay can even deduct funds through Payroll Metrics and have the payment appear in the Nets file for processing to the third party. This removes the requirement for a separate process to facilitate the payment. Get in touch to discuss your global pay requirements in detail.

CloudPay offers a fully managed service with all garnishments completed. For all regions globally, take a closer look at our managed global payroll services in more detail here, or check our Country Payroll Guides for help with payroll regulations by country.