Key Rules for Garnishing Lump-Sum Payments
In 2018, the Department of Labor issued an opinion letter in response to a query regarding whether certain lump-sum payments are considered earnings under Title III of the Consumer Credit Protection Act, which limits the amount an employer can deduct from an employee's wages for child and alimony support plus other garnishments.
The CCPA states that in any workweek or pay period, an employer can withhold no more than 25 percent of an employee's disposable earnings or the amount by which the employee's disposable earnings exceed 30 times the federal minimum hourly wage, whichever is less. (This limit applies to ordinary wage garnishments, such as those issued by creditors for credit card and medical bills.)
Withholding orders for child support and alimony have a different CCPA limit: up to 50 percent of the employee's disposable earnings if he or she is supporting a child or spouse outside the withholding order, and up to 60 percent if he or she is not. Employers can also withhold an additional 5 percent for support payments that are over 12 weeks late.
While some states mirror those federal CCPA limits for both ordinary wage garnishments and child support, others set different parameters. According to the DOL opinion letter, some states require garnishment withholding of up to 100 percent from lump-sum payments.
The organization making the query asked the DOL to explain whether certain lump-sum payments are considered earnings under the CCPA and are therefore subject to the act's limits. (The agency has long held that when both federal and state wage garnishment limits apply, the employer must use the smaller amount.)
Per the DOL opinion letter, the following lump-sum payments are earnings under the CCPA:
- Discretionary bonuses.
- Nondiscretionary bonuses.
- Performance bonuses.
- Profit sharing.
- Referral bonuses.
- Sign-on bonuses.
- Moving or relocation incentive payments.
- Attendance awards.
- Safety awards.
- Cash service awards.
- Retroactive pay increases.
- Payment for working during a holiday.
- Workers' compensation payments for wage replacement.
- Termination pay.
- Severance pay.
- Back and front payments from insurance settlements.
No more than the CCPA limits discussed earlier can be withheld from the above lump-sum payments — unless the state has a smaller limit.
The following three lump-sum payments are NOT earnings under the CCPA:
- Workers' compensation payments for medical expense reimbursements.
- Insurance settlements for wrongful termination.
- Buybacks of company shares.
Because these three payments are not protected by the CCPA, they may be subject to the mandated state limit.
The basis for the DOL's opinion is that if the lump-sum payment is made to compensate the employee for services rendered, then it is regarded as earnings under the CCPA. However, payments unrelated to employee services rendered are not earnings under the act.
Other types of lump-sum payments may or may not qualify as earnings under the CCPA and these rules can get very complicated, so be sure to get professional advice before making a decision about your situation.