When an employee’s creditors come knocking …

By Declan C. Leonard
Published: September 29, 2008

A business owner is going through the day’s mail, and, in addition to normal invoices and business correspondence, receives a garnishment from an employee’s creditors seeking to garnish the employee’s wages.

The business owner had heard rumblings of the employee’s recent financial difficulties, but now the garnishment would require the owner to have a direct role in a debt collection action against the employee.

The business owner is reluctant to get involved in this sensitive matter, and is unsure what can and cannot legally be done in response to the garnishment.

With the recent downturn in the economy, this scenario is playing out at companies throughout the nation, as more and more employers are confronting issues that arise when an employee’s financial predicaments spill over into the workplace.

Whether it’s a garnishment, an employee filing bankruptcy, or an employee being hounded at work by a creditor, federal laws, and in some cases state laws, govern what actions an employer can and cannot take in response.

Employers should be aware of the law in the four areas discussed below concerning employees and their creditors.

Wage garnishments

In the most common garnishment scenario, an employee fails to pay a debt such as a house or car payment, and, after getting a court judgment against the employee, the creditor seeks to collect by garnishing a portion of the employee’s wages.

Garnishments are almost always done by court order, and unlike voluntary wage assignments, are filed without the employee’s consent. Employers would often like to ignore a garnishment and avoid the paperwork headache it presents. But that’s not a wise move, because most garnishment orders say if the employer fails to follow the garnishment terms it becomes liable just like the employee for the debt.

Wage garnishments are governed by the federal Consumer Credit Protection Act, which has two main provisions designed to protect employees.

First, an employee cannot be fired for a garnishment connected with one debt. A common misunderstanding is that an employee cannot be fired for one garnishment, but can be fired if there are two garnishments.

But the law does not say that. You cannot fire an employee for a garnishment connected with one debt. There can be several garnishments connected with the collection of one debt. In that case, the employee still would be protected from job termination.

Second, the maximum amount that can be garnished is 25 percent of an employee’s “disposable earnings” – which is an employee’s net pay after tax deductions, or the amount by which the employee’s disposable earnings exceed 30 times the minimum wage, whichever is less.

This is the limit no matter how many garnishments are pending against an employee at any one time. An exception is for garnishments dealing with the employee’s nonpayment of child or spousal support. The law allows up to 50 percent, and sometimes as high as 60 percent of the employee’s wages to be garnished to pay the child or spousal support debt.

One other exception is that these restrictions on garnishments do not apply at all if the underlying debt is the employee’s failure to pay federal or state taxes. In tax cases, there is no limit on the wages that can be garnished by the government.

It is important to know whether the garnishment is for a specific time period, or whether the garnishment obligation remains in effect until the debt is paid in full. For instance, in Virginia, a garnishment cannot be in effect for longer than 90 days. The employer would only garnish paychecks falling within that time period, and must stop garnishing by the ending date regardless of whether the underlying judgment is paid, unless the creditor renews the garnishment by filing a second garnishment summons before the end of the 90-day period.

Maryland, by contrast, permits a garnishment to remain in effect indefinitely until the underlying debt is paid.

The bottom line is that despite the temptation to ignore garnishments, employers must closely adhere to the law, and must also have a reliable system in place to handle garnishments and prevent them from falling through the cracks.

Bankruptcies

While an employee filing bankruptcy usually has less of a direct impact on an employer than a garnishment, employers should know the bankruptcy law prohibits them from firing an employee solely because the employee has filed bankruptcy.

Since most states adhere to the “at-will” employment doctrine, in which an employer doesn’t have to give a reason for a termination, employees often have a difficult time proving these cases. Where an employee has successfully proven unlawful termination under this law, the firing has usually taken place in very close proximity of time to the bankruptcy filing (i.e., the next day or within days).

Bankruptcy law also prohibits job discrimination against an employee because of a bankruptcy filing.

For instance, a bank teller one day after he filed for bankruptcy protection was transferred to a position where he would have no contact with the public. A court ruled this violated the anti-discrimination provision of the Bankruptcy Code.

But in another case, where an employee was fired for taking unauthorized time off from work to attend proceedings in her bankruptcy case, the court ruled that bankruptcy law did not entitle the employee to special treatment, such as additional leave, that other employees did not get. The court upheld the employee’s termination.

Calls from debt collectors

This is one of the most common disruptions of the workplace related to employee financial problems, but one an employer can control by implementing a few well-crafted policies.

The federal Fair Debt Collections Act states what a debt collector can and cannot do when chasing down a debt from an employee. Generally, the law prohibits debt collectors from contacting employers regarding an employee’s debt and hounding the employee at work.

Every employer should have a clearly written policy disseminated to all employees that it does not permit employees to conduct personal financial matters at work, including taking calls from debt collectors.

If an employer receives such a call, it should make this policy clear to the debt collector and inform the debt collector to cease making any further contact with the employer or employee at work.

The employer should also carefully document any such calls in the even the debt collector does not heed the warning and more formal action is necessary to secure compliance.

One exception is where the address of a debtor is unknown to a creditor. The debt collection law permits a debt collector to send one letter to the debtor’s last known employer asking the employer for the debtor’s present address. The employer is not obliged to provide the requested address information, and, given the sensitive nature of these matters, employers should refrain from assisting the debt collector in his search for the debtor.

Employee credit reports

What if an employer wants to check an employee’s credit report out of a concern the employee’s mounting financial woes will adversely affect his job performance? Can the employer lawfully access this information?

The short answer is no.

Under the Fair Credit Reporting Act, an employer is prohibited from accessing an employee’s credit report unless the employee provides written consent after receiving a clear and conspicuous written disclosure from the employer.

Declan Leonard is a partner in the Arlington office of Albo & Oblon LLP. His practice focuses on employment law, business law and governments contracts.

Virginia Lawyers Weekly

When an employee’s creditors come knocking …

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