Most employers receive a garnishment from time to time, and some employers receive a lot of them. It is the employer’s legal obligation to administer garnishments exactly, and liability arises for the employer for over-deducting or for the judgment creditor in the case of under-deducting.

There has been an ongoing question for decades about the interpretation of the deduction caps contained in the Consumer Credit Protection Act (CCPA). The big question was whether payments from employers made in a lump sum were protected earnings. Under the CCPA, if the employer payment is “earnings,” then it is protected from over-garnishment. (The amount of protected “earnings” varies depending on the nature of the debt.) Some case law supported the approach that such payments were not earnings and were not protected by the CCPA, and thus they were subject to 100 percent deduction if the state law provided as such. Some states routinely ordered employers to deduct 100 percent of lump-sum payments when the employee had an arrears in child support payments. Other times, creditors attempted to hold employers directly liable for not deducting 100 percent of lump-sum payments.

The new opinion letter, which may have some force of law if courts find it persuasive, brings clarity to garnishment practices. Early in 2017, the Wage and Hour Department (WHD) issued a fact sheet on this topic, but it is less specific and does not have any force of law. The new opinion letter presents a general rule for when an employer payment is “earnings” and when it is not. It also applies this general rule to 18 different types of payments and opines on whether those types of payments are earnings or not—for instance, “severance pay” is earnings.

According to the WHD, “the central inquiry is whether the amounts are paid by the employer in exchange for personal services. If the lump-sum payment is made in exchange for personal services rendered, then like payments received periodically, it will be subject to the CCPA’s garnishment limitations … Conversely, lump-sum payments that are unrelated to personal services rendered are not earnings.” 

Since the opinion letter is remarkably clear on whether the 18 listed types of payments (bonuses, profit sharing, relocation incentive payments, etc.) qualify as earnings, I will not restate all of its conclusions here. One thing employers may want to note is how the WHD treated payments for settlement of employment claims. Specifically, any part of a settlement payment that is to replace lost wages (both back and front pay) is protected by the caps provided in the CCPA. Conversely, payments for compensatory or punitive damages are not earnings and are not protected by the CCPA caps. Thus, in the states that provide that their garnishment orders cover payments beyond just earnings, any part of a settlement payment that is characterized and paid on an Internal Revenue Service Form 1099 may be subject to full garnishment.