What to Do When You Get a Garnishment Order
Sooner or later, every payroll/HR manager faces the challenge of responding to garnishment order, that is, a legal document from a court or government body (which we’ll refer to collectively as “courts”) telling you to pay part of an employee’s wages to a third party to whom the employee owes money.
A garnishment order is serious business that requires quick action that accounts for the rights of at least 3 different persons: the employee, the person to whom they owe money (the “creditor”) and your own company. And there may be others involved if the employee has multiple creditors. Garnishment mistakes can be costly and rules vary from province to province. Here’s a 3-phase garnishment response game plan based on the advice of lawyers, experienced payroll managers and other experts.
Garnishment Law, 101
Legal disputes don’t necessarily end when one side wins. Once the judgment comes down, the “winner” must collect the money from the “loser.” “Garnishment” is the name for a set of legal procedures that the winning side (aka, the creditor) can use to force the losing side (the debtor) to pay up. Although they come in different shapes and sizes, the most common garnishment is where a provincial family support administrator garnishes wages to get an employee to pay a family support or maintenance order owed to a spouse.
With garnishment you get caught in the middle. The garnishment order is directed not to the debtor but to the source of his funds—in most cases, the employer. It aims to intercept the paycheque before it gets to the employee. It tells the employer to garnish, that is, withhold some or all of the employee’s wages and redirect them to the creditor.
Damned If You Don’t Obey the Garnishment Order
You must obey a garnishment order if the order is valid. If you ignore it and simply pay the employee his normal paycheque, creditors can come after you for the money.
Example: An Ontario woman garnished the wages of her ex-husband to collect a family support order. The employer was unsure how to respond. The ex-husband’s lawyer reassured the employer that the support order was invalid. The employer believed him and ignored the garnishment order. Big mistake. The creditor sued and the employer was found guilty of disobeying the order. Result: The employer had to pay the court the $4,700 the ex-husband owed to his ex-wife [Ontario (Director, Support & Custody Enforcement) v. Duck, 1991 CanLII 12916 (ON CJ).
Damned If You Do Obey a Garnishment Order
Although disobeying a garnishment order is illegal, doing whatever it says can be just as bad. Directing the employee’s money to the sheriff (or government agency like the CRA if it’s a tax order or a family support office if it’s a support order) may violate the rights of other creditors.
Example: You withhold the money from the employee and pay it to the sheriff. The order proves to be invalid. The employee and his union could sue you for failure to pay wages under your province’s Employment Standards Act.
Example: You pay the sheriff. Then you get hit with a garnishment order from another creditor of the same employee. The second creditor sues you. If that second creditor has priority over the first, you must pay him the money you already paid the first creditor.
How to Respond to a Garnishment Order
When you get a garnishment order you must move fast. Garnishment orders typically apply to the next employee payment due after you receive the order, notes an Ontario lawyer. “If there are issues to be resolved, you must work them out immediately before making any payments,” he explains. The worst thing you can do is put the garnishment order in a drawer and “deal with it later.”
Garnishment orders sometimes include instructions. If you have any questions, call the court or a lawyer. Also keep in mind that rules vary depending on what province or territory you’re in and the kind of garnishment is involved.
Types of Garnishment Orders
Family Support and Maintenance Orders used to collect on obligations to family members such as child support and alimony
CRA Garnishments issued by the government to collect unpaid taxes
Court Ordered Garnishments issued by courts to help the winner of a lawsuit collect a judgment
Wage Assignments aren’t court orders but voluntary agreements in which employees transfer their right to receive part of their wages to a creditor to satisfy a debt—assignments are illegal in some provinces
Phase 1: Assess Validity of Garnishment Order
When you get a garnishment order you should first check that all the “i’s” have been dotted and “t’s” crossed. There might be flaws in the garnishment order or circumstances that discharge you from having to honour it. Caveat: What doesn’t get you out of an order are the assurances of employees and their lawyers that it’s a “big mistake” and that you needn’t obey the order. The employer in the Duck case above learned that lesson the hard way. But there are 3 circumstances that might be valid grounds to dispute a garnishment order:
1. The Employee No Longer Works for You
Ensure that the employee named as debtor in the garnishment order is still in your employment. If not, let the court that issued the order know immediately. You may also have to provide the court personal information about the employee including their new address and contact information, even if the employee hasn’t given you consent to disclose these details under personal privacy laws like PIPEDA.
Compliance Pointer: No Retaliation
You’re not allowed to fire an employee to avoid having to pay a garnishment order. In fact, most provinces ban employers from taking any kind of unfavourable action against an employee because their wages have been or might be garnished.
2. Payments to the Employee Have Been Interrupted
You must notify the court if the debtor named in the order is still in your employ but is not currently receiving payments because of a leave of absence, temporary layoff, strike, etc. Notification is also necessary when and if payments resume.
3. `Garnishee’ Name Is Wrong
A garnishment binds only the person who’s listed on the order as the “garnishee.” If the name on the order isn’t the actual name of your company, you’re not bound to obey it. This is important to know because screw-ups in the garnishee name happen all the time. “It’s not unusual for a creditor to guess or misstate the name of the employer company,” explains the Ontario lawyer.
Example: XYZ Forestry Company is made up of a dozen separate and distinct corporations. John Smith is an employee of one of these corporations, Pine Cone Trucking. His ex-wife wants to garnish his wages to collect alimony. The garnishment order lists the garnishee as “XYZ Forestry.” Pine Cone Trucking wouldn’t be bound by the order.
Check the garnishee name. If the name is wrong, immediately notify the creditor. Explain that unless and until you receive an order listing the correct name, you will take the position that you owe no money under the order. “This is not harassment of the creditor,” explains the lawyer. It’s essential to protect your rights. If one of your companies pays the debts of another, you’re destroying the legal integrity of the structure you created by having separate companies in the first place, he explains.
Upon learning of the error, the creditor must go back to the court and obtain a new order. At worst, this buys you extra time to notify your employee and prepare your next move. And it might even induce the creditor to abandon the garnishment strategy altogether.
Phase 2: Calculate the Garnishment Amount
If you can’t find grounds to avoid obeying the order, you’ll have to calculate how much to withhold from the employee and pay the creditor. Here’s how
Determine Which Moneys Can Be Garnished
Not all monies payable to an employee can be garnished. So, the first step is to determine which funds are garnishable. Although rules vary by province, what’s garnishable is not net but gross pay less a set of specific deductions. Keep these general principles in mind when doing the calculation:
- Salary, hourly earnings, overtime, bonuses, commissions, incentives and other moneys for services are garnishable in all jurisdictions;
- Holiday, vacation and sick pay are garnishable in most jurisdictions;
- Disability benefits are garnishable in BC, MB, NS, PE, QC (except for periodic benefits under an accident or sickness insurance contract) and YK; in other jurisdictions, the rules are less clear;
- Pension benefits and/or money in a pension plan are garnishable, aka, subject to attachment, under certain conditions under BC, FED, MB, NL, NS, NT, NU, PE, QC, SK and YK law; and
- Rules governing garnishability of severance and termination payments vary by province.
Determine Which Monies Are Exempt from Garnishment
Provincial and territorial laws also establish exemptions for certain monies. There are 3 approaches:
Percentage Exemptions: Some provinces make a percentage of monies due to the employee exempt from garnishment, including AB (60%), NS (75%), NT (50%), NU (50%) and ON (50% for support garnishments and 80% for garnishments that aren’t family support orders).
Dollar Amount Exemptions: BC, QC and PE use a formula or schedule to determine a dollar amount exemption based on factors such as how much the employee is paid and how many dependents they have. In PEI, the exemption allocates dollar amounts for specific living expenses.
Other Approaches: MB uses a hybrid approach based on percentages and fixed dollar amounts. NL and SK give judges discretion to set an exemption amount they believe is just.
Caveat: In applying the exemption rules, consider whether the debtor is an “employee” or “independent contractor,” especially if the exemption is based on labour or employment standards laws. Explanation: Garnishment exemptions may cover an “employee” but not an “independent contractor.” For example, under Sec. 7 of the Ontario Wages Act, 80% of an “employee’s” wages are exempt from garnishment (50% if it’s a support order). By contrast, 100% of what you owe to an independent contractor would be garnishable.
Remember that the percentage of wages exempt from garnishment is calculated on a net amount payable to the employee, that is, net of source deductions such as CPP, EI and income tax. Some provinces also allow for deductions of union dues. Deductibility of union dues might vary depending on whether the garnishment is a support order.
Phase 3: Remit Garnishment Payment
Read the garnishment order very carefully and follow the instructions exactly as they’re written, lawyers caution. The order will tell you to whom the garnishment cheque should be made payable, where to send it and how often. You might also have to list a reference number on the cheque and enclose a worksheet or other document containing certain information about the payment. Make sure you provide only the personal information requested. Furnishing more can be a violation of privacy laws. Caveat: Don’t confuse payments that are to be made “semi-monthly” as being required bi-weekly. If you do, you could end up overpaying at least 2 months in each year.
Resolving Conflicting Garnishments
Garnishment is hard enough when you’re dealing with one order at a time. Things get especially tricky when you get multiple orders claiming the same payment. If there aren’t enough funds to cover all the claims, who do you pay first? The issue of prioritizing claims is an enormously complex issue. The answer: It depends on what kind of garnishment order is involved and/or when you get it. Keep these principles in mind:
- CRA orders for unpaid taxes get top priority;
- Family support and maintenance orders are next in line; and
- If you get 2 court orders from courts of different levels (e.g., small claims vs. appeals court), priority goes to the order you got first rather than which court is higher.
Also remember that you must notify the creditor under an order if you decide to suspend payment because another order has priority. Just keep in mind that the information might be considered personal information protected by privacy laws.
Finally, if sorting out the conflict becomes too complicated, you can turn to the court for help by using a legal process known as “interpleader.” This process involves paying the money to the court and letting the court decide who gets what. Even though the legal fees you pay to use the process may not cover your costs, resorting to interpleader might prevent you from making mistakes that would otherwise expose your companies to thousands or even tens of thousands of dollars in liability.
The immediate burden of responding to the garnishment order falls on the payroll manager. Hopefully, the analysis in this article will enable you to manage that burden effectively. But don’t try and be a hero and handle it all yourself. Garnishment law is not easy stuff—even for those who have been down the garnishment block a few times. So, when those orders come in, as they inevitably will, get on the phone and ask a lawyer for help. Coupled with an understanding of the garnishment process, a lawyer’s advice should enable you to navigate your way through the situation.