DOL issues guidance on lump-sum garnishment payments

The U.S. Department of Labor’s Wage-Hour Division (WHD) has issued an opinion letter on whether lump-sum payments from employers to employees are earnings for garnishment purposes under Title III of the Consumer Credit Protection Act (CCPA).

Central inquiry

According to the WHD, to assess whether certain lump-sum payments are earnings and subject to garnishment limitations under the CCPA, the central inquiry is whether the amounts are paid by the employer in exchange for personal services. If the lump-sum payment is made in exchange for personal services rendered, then, similar to payments received periodically, it will be subject to the CCPA’s garnishment limitations as described in the WHD Fact Sheet #30 issued in 2016. Conversely, lump-sum payments that are unrelated to personal services rendered are not earnings under the CCPA.

Specific payments

In response to the facts of the specific inquiry, the WHD opined that the following lump-sum payments provided from an employer to an employee are earnings under the CCPA: commissions, discretionary and nondiscretionary bonuses, productivity or performance bonuses, profit sharing, referral or sign-on bonuses, moving or relocation incentive payments, attendance awards, safety awards, cash service awards, retroactive merit increases, payment for working during a holiday, termination pay, and severance pay because, as mentioned above, the reason for the underlying payment was to compensate the employee for personal services rendered.

Commissions and bonuses

WHD also noted that the CCPA specifically lists commissions and bonuses as examples of payments that are earnings (15 U.S.C. §1672(a)). In addition, the WHD pointed out that definition’s list of examples is non-exhaustive, and a profit sharing payment is compensation for the employee’s service and is similar in nature to a bonus. Likewise, a signing bonus, referral bonus, or moving or relocation incentive payment is a type of bonus provided for the employee’s service to the employer. Similarly, a one-time lump-sum payment awarded for the employee’s attendance, safety, or service record is in essence a bonus, which is compensation for the employee’s personal services to the employer.

Severance pay

As far as termination severance pay tied to the employee’s length of service, WHD will treat such a payment as earnings under the CCPA. These payments are compensation for the employee’s service and similar in nature to a cash service award. (See Shah v. City of Farmington Hills, 748 N.W.2d 592, 597 (Mich. Ct. App. 2008).

Workers compensation

For workers’ compensation and insurance settlements, certain portions of the payment may qualify as earnings, while other portions may not, according to the WHD. At least a portion of workers’ compensation payments, whether paid periodically or in a lump-sum, constitute earnings under the CCPA because certain payments are designed to replace wages that would have been earned by the employee, but for the work-related injury. Unlike wage substitute payments, reimbursement for medical expenses is not payment for services provided by the employer to the employee. Therefore, any portion of the workers’ compensation payment that is attributable to reimbursement for medical expenses is not earnings under the CCPA.

Wrongful termination

Similarly, certain portions of lump-sum payments resulting from wrongful termination insurance settlements, may qualify as earnings under the CCPA. The parts of an insurance settlement attributable to back and front pay are earnings under the CCPA. The wage portion constitutes compensation for the employee’s services. However, portions of a wrongful termination insurance settlement payment that result from compensatory or punitive damages are not earnings under the CCPA. (See United States v. Cooper, No. 02-40069, 2006 WL 3512936, *5-6 (D. Kan., Nov. 1, 2006).

Buybacks of company stock

Payments to employees resulting from buybacks of company shares do not appear to be compensation for the employee’s personal services. As described, buybacks are a “flexible way of returning money to shareholders relative to dividends.” Accordingly, there is no nexus between personal services rendered and the company’s decision to repurchase the stock. The company’s intent is to “reduce the number of its shares on the open market,” not to compensate the employee for personal services rendered. Therefore, lump-sum payments received by an employee pursuant to a company buyback are not earnings subject to the CCPA garnishment limitations. (U.S. Department of Labor, Wage-Hour Division, CCPA2018-1NA, April 12, 2018; U.S. Department of Labor, Wage-Hour Division, Fact Sheet #30: The Federal Wage Garnishment Law, Consumer Credit Protection Act’s Title III (CCPA), (Revised November 2016).)

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