Effect of State Law on Creditor Garnishments

The Effect of State Law on Creditor Garnishments

The Consumer Credit Protection Act (CCPA) of 1977 places limits on how much can be deducted from an employee's pay to collect child support or creditor garnishments. What is sometimes overlooked is the fact that each state also regulates the collection of involuntary deductions from employee’s payroll. This article will discuss the effect of both the CCPA and state law on creditor garnishments.

What Limits Are Imposed by the Consumer Credit Protection Act?

According to the CCPA an employer may withhold the lesser of the following amounts from an employee’s payroll:

25% of disposable earnings, or
The amount by which disposable earnings are greater than 30 times the federal minimum hourly wage.

According to the CCPA, disposable earnings are determined by subtracting all deductions required by law from an employee's gross earnings. Deductions required by law include withholding for federal, state, or local income tax, social security or Medicare tax, state unemployment or disability tax, and mandated payments for state employee retirement systems.

What is often misunderstood is that the limit based on the federal minimum hourly wage depends on pay frequency, and the “30 times” figure is based on a single workweek. So that amount has to be increased based on pay frequency. Biweekly pay would be 2 times the weekly amount (or 60 times), semimonthly would be 65 times (30 multiplied by 52 weeks divided by 24 paychecks), and monthly would be 130 times (30 multiplied by 52 weeks divided by 12 paychecks).

As of January 1, 2015, the federal minimum wage is $7.25 per hour. Therefore, the minimum amount that the employee can retain of his disposable earnings would be calculated as follows:

Weekly paycheck = 30 times $7.25 = $217.50
Biweekly paycheck = 60 times $7.25 = $435.00
Semimonthly paycheck = 65 times $7.25 = $471.25
Monthly paycheck = 130 times $7.25 = $942.50

For instance, suppose that the employee is paid biweekly and his disposable earnings are $325.00. In that case, nothing could be deducted from the employee’s paycheck.

On the other hand, suppose that the same employee has $525.00 in disposable earnings. That is $90.00 more than the above limit. However, 25% of the employee’s disposable earnings is $131.25. Since that amount is greater than the excess amount, only $90.00 may be deducted.

In the third instance, the employee’s disposable earnings are $596.00. That is $161.00 in excess of the limit, but 25% of the employee’s disposable earnings is $149.00, so the lower amount of $149.00 is all that can be deducted from the employee’s paycheck.

What Income Is Not Subject to Garnishment?

Disposable earnings are calculated by deducting certain withholdings from an employee’s gross earnings, but it is important to recognize that the definition of gross earnings does not include all taxable wages. There are two primary types of taxable income that are not included in gross earnings: imputed wages and tips.

Imputed wages are usually non-cash additions to income for certain fringe benefits. This may include the imputed fair market value of the following benefits:

Group term life insurance
Personal use of employer-provided vehicle
Employer-provided housing
Employer-provided disability insurance

The above amounts have to be included in an employee’s taxable wages so that tax withholdings may be calculated. However, once the taxes have been calculated using the taxable income, the disposable income is calculated by deducting the taxes from the gross earnings alone.

Employers generally should not include any tips reported to the employer, or any tip allocations reported on Form W-2, as gross earnings. However, tips that are controlled by the employer, such as mandatory service charges for large parties, should be included in disposable earnings.

How Do State Laws Affect Creditor Garnishments?

Although the limits on creditor garnishments are set by the CCPA, it is state law that really dictates how the CCPA is applied. This is due to the fact that state law may affect the answers to the following questions:

What garnishments are allowed under state law?
What additional deductions, if any, may reduce disposable income?
What limits on garnishments may the state impose?
How does the state prioritize involuntary deductions?
Does the state allow the employer to deduct administrative fees?

An overriding factor in answering the above is the fact that garnishments are governed by the state law where the employee works, not where the court order was issued. For instance, New Jersey state law allows for creditor garnishments, but in Pennsylvania all wages are exempt from garnishment except for support, board for four weeks or less, and damages arising out of a residential lease. So if an employee is working in Pennsylvania and a New Jersey court issues a writ of garnishment, the employer would not have to honor the garnishment.

The definition of disposable income may also be affected by state law if the state allows additional deductions to be considered. For instance, in Pennsylvania union dues and health insurance premiums would further reduce disposable earnings.

Although most states use the limits set by the CCPA, some states may reduce the limits for some or all garnishments. Again in Pennsylvania, garnishments for damages arising out of a residential lease are limited to 10% of disposable earnings.

The Real Key to Creditor Garnishments is State Law

Whatever changes in definitions or limits may be dictated by state law, employers must always comply with the regulation that is most favorable to the employee. In many cases, state law is more favorable to the employee, but in some cases federal law may be more favorable. An understanding of the definitions and limits of the CCPA is important, but state law may be an even more important factor is maintaining compliance with garnishment law.