Wage Garnishment: What Employers Need to Know Under the CARES Act

Now more than ever, small businesses must be vigilant when handling wage garnishments. Wage garnishment happens when employers automatically remove money from a worker’s paycheck to pay past-due debts such as student loans, child support, tax levies, and consumer debt.

The COVID-19 pandemic has caused some crucial developments on the state and federal levels.

Education Secretary Betsy Devos sued over wage garnishment

On April 30, 2020, a coalition of student loan borrowers filed a lawsuit against Betsy Devos, Secretary of the U.S. Department of Education (DOE). The lawsuit claims that amidst the COVID-19 pandemic, “countless federal loan student borrowers are suffering needless harm” due to the DOE’s refusal to comply with the CARES Act, which temporarily halts the collection of certain federal student loans.

On May 11, 2020, the DOE filed a status report with the court, revealing that a whopping 54,000 federal student loan borrowers are still subject to wage garnishment — despite the CARES Act’s mandate. Although the DOE did not commit to suspending wage garnishment for the 54,000 borrowers, the agency said both parties are in discussions and that the DOE will deliver periodic status reports to the court.

While the case plays out, small employers should know the impact of the CARES Act on wage garnishments plus other garnishment requirements stemming from the pandemic. 

The DOE reportedly said that the agency has informed employers to temporarily stop garnishing employees’ wages for certain federal student loans, but not all employers have complied.

While the case plays out, small employers should know the impact of the CARES Act on wage garnishments plus other garnishment requirements stemming from the pandemic.

Wage garnishment suspension under the CARES Act

Prior to the CARES Act’s passage, the DOE said it would temporarily halt wage garnishments on certain federal student loans for 60 days, as a way of helping borrowers impacted by COVID-19. The 60-day relief period would start March 13, 2020.

Section 3513 of the CARES Act, enacted March 27, 2020, legally authorizes and directs the DOE to stop certain federal student loan garnishments from March 13, 2020 through September 30, 2020. Interest on these loans will cease, as well, throughout that period.

Because payroll departments administer various types of wage garnishments — including for federally- and commercially-held student loans — there’s been some confusion as to which loans are covered by the CARES Act.

To clarify, suspension of student loan garnishments under the CARES Act applies only to loans owned by the Department of Education. These include Direct Loans and Federal Family Education Loans (FFEL), which are owned by the DOE. Commercially-held FFEL and Perkins Loans held by an educational institution do not qualify for wage-garnishment suspension. Also, private student loans, such as those owned by banks, credit unions, and other private entities, are not eligible for suspension.

Suspension comes down to whether it’s an HEA or DCIA garnishment.

Under the Higher Education Act (HEA) and the Debt Collection Improvement Act (DCIA), the federal government can garnish up to 15% of a borrower’s paycheck for a defaulted federal student loan. The CARES Act permits suspension for HEA wage garnishments — but not for DCIA garnishments.

Employee and employer notification

The CARES Act mandates the DOE to notify borrowers whose wage garnishment for a federal student loan has been temporarily suspended. The notice — which must be sent within 15 days of the CARES Act’s enactment — also tells borrowers that they can choose to keep making payments toward their principal during the suspension period.

Per Bloomberg Tax, the notice is also sent to employers and “offers the written guidance that employers need.”

Tips for handling wage garnishments covered by the CARES Act

• If you garnished an employee’s wages for a federal student loan covered by the CARES Act, you do not need to issue a refund, as the DOE has said that it will refund the employee.
• The DOE stated that it will monitor employers for compliance, so make sure you administer garnishments for federal student loans as accurately as possible.
• Contact the student loan servicer listed on the original wage garnishment, or the entity shown on the suspension notice, if you have questions regarding a student loan garnishment.
• If an employee has a HEA wage garnishment, but you have not received notification to suspend the garnishment, contact the student loan servicer for verification.
• Let the employee know beforehand that you will be stopping their wage garnishment.
• The CARES Act says that starting Aug. 1, 2020, the DOE must let borrowers know — at least 6 times, by mail, phone, or electronically — when their regular student loan payments will resume. To enhance communications, notify the employee on your end before restarting their withholding.

Child support

The U.S. Office of Child Support Enforcement has confirmed that wage garnishments for child support are still in effect and states are continuing to process payments.

Some states have issued coronavirus-related guidance for employers administering child support orders. For example, California’s child support website has a designated page providing COVID-19 updates for employers.

Oregon’s COVID-19 FAQ webpage answers questions to common employer concerns. Notably, Oregon employers whose business temporarily closed because of COVID-19 will not be penalized for not responding to child support withholding orders, though they should respond as soon as possible.

Tax levies

On March 25, 2020, the IRS unveiled its People First Initiative, which gives relief to taxpayers unable to meet their existing Installment Agreement obligations because of COVID-19. These taxpayers may suspend payment from April 1, 2020 to July 15, 2020.

The IRS says it will not automatically release levies and wage garnishments. Instead, the agency will “consider taxpayers’ requests to release levies on a case by case basis if the levy is causing an economic hardship.”

This means you should continue withholding IRS tax levies, unless the agency directly orders you to stop the garnishment.

State garnishments

Some states have paused garnishment on certain debts during the pandemic. For instance, under Directive 017, Nevada has temporarily suspended court-ordered wage garnishments. Pursuant to Executive Order 20-50, Minnesota has temporarily halted wage garnishments for consumer debts. Under Executive Order N-57-20, California exempts any federal, state, or local financial assistance received in response to COVID-19 from levy and garnishment.

It’s critical that you stay abreast of wage garnishment updates on both federal and state fronts.