The good news is that wage garnishment orders generally do not reach self-employment earnings, or income received as an independent contractor. The bad news is that federal and state laws aimed at protecting employees from excessive wage garnishment don’t protect non-wage earnings from garnishment orders.
Technical definitions of wages, earnings, employer, and employee all come into play, as does the distinction between an employee and an independent contractor.
Basics – Wage Garnishment Orders
Issued by a court, wage garnishment orders or directs an employer to withhold an employee’s wages and pay them over to the creditor or a credit agency acting on its behalf. Fundamental to this process is the existence of an employment relationship between the debtor as employee, and the employer served with the wage garnishment order. If there is no employment relationship between them, then the wage garnishment order has no force and effect. It can be totally ignored by the company served and the debtor can relax.
Independent Contractor vs. Employment Relationship
People who are self-employed on the other hand, are independent contractors. Typically, they don’t punch a clock; they set their own hours; they have multiple clients; and they are their own boss. In relationship to the homeowner, the pool guy, the landscaper, and the carpet cleaner (if they work for themselves) are all independent contractors.
An independent contractor is someone who hires himself out to do work for others. Though federal and state laws vary slightly, the more control a person has over his work, in combination with how he treats himself, will determine if he is an independent contractor or not.
Here are the main factors considered:
- Control over when, where and how the work is done
- Responsibility for payment of his own taxes
- Has no taxes or other deductions withheld from his pay
- Does not receive any employment benefits such as health insurance
- Usually does work on a project by project basis
Federal and State Wage Garnishment Protection Laws Don’t Apply
The federal Consumer Credit Protection Act (“CCPA") was passed to protect employees from oppressive effects of wage garnishment orders and processes. The CCPA limits wage garnishments to 25% of the employee’s disposable income, or 30 times minimum wage, whichever provides the greater protection. It also bars employers from firing employees for whom they have received a garnishment order. Some states provide even greater protections.
As an independent contractor, a self-employed individual does not qualify for any of the federal protections against wage garnishment. However, in his capacity as a self-employed independent contractor, he doesn’t need any of the protections. If served with a wage garnishment order, the person hiring him for a job can and should ignore it. The self-employed independent contractor has no wages to garnish.
Non-Earnings Garnishment Orders
The process may not end there, however. The savvy creditor will return to court and ask for a non-earnings garnishment order. This order directs anyone who’s in the process of paying the debtor to withhold those funds and pay the funds directly to the creditor or its agent.
These orders differ in other ways from wage garnishment orders, some good and some bad, depending on the viewpoint taken:
- Non-earnings garnishment orders can be applied to attach anything other than wages (self-employment income, bank account funds, etc.)
- 100% of the debt can be garnished (not just 25% of disposable income or 30 times minimum wage)
- Typically, the order is only good for a single attachment, and is not on-going as is a wage garnishment order, i.e., the order expires instantly after a single garnishment or if there is nothing to garnish
Self-Employment by Self-Owned LLC or Corporation
Many people are employed by their own LLC or corporation or are a member of their own LLC. Generally speaking, those that set themselves up as bona fide employees of their own company can have their wages garnished and must comply with a valid wage garnishment order. However, the CCPA’s wage garnishment protections do apply, so the previously-described limitations come into play.
In sum, wage garnishments of self-employment earnings are not a simple matter. Even if the employee avoids garnishment initially because his income is coming to him as an independent contractor, the wage garnishment order can quickly be re-issued as a non-earnings garnishment order. Businesses and individuals are thus behooved to consult experienced Labor, Debtor-Creditor, and Business counsel immediately upon learning that a garnishment is in the works.
Federal Statute: Title III, Consumer Credit Protection Act (CCPA), 15 USC, §§1671 et seq.
Code of Federal Regulations: 29 CFR Part 870
Explanatory Brochures and Regulatory Materials Online: www.dol.gov/whd
U.S. Wage and Hour Division: Fact Sheet #30 – The Federal Wage Garnishment Law, Consumer Credit Protection Act’s Title III (CCPA)
Field Operations Handbook – 02/09/2001, Rev. 644, Chapter 16, Title III – Consumer Credit Protection Act (Wage Garnishment)