Wage Assignment

What is Wage Assignment?

A wage assignment is essentially an agreement between a borrower and a creditor that allows the creditor to collect a portion of the borrower’s wages directly from their employer.

It is often used when the borrower lacks assets (like property) to offer as collateral, and so, their future wages serve as the primary means for repayment.

Wage assignments cover debts, taxes, or obligations like child or spousal support — basically allowing creditors to bypass court proceedings and ensure repayment while also helping borrowers meet both their debt obligations and necessary living expenses.

Its key purposes and uses include:

• Loan Collection: It’s used by small loan companies and credit unions to collect overdue payments.
• Debt Recovery: Collection agencies use wage assignments to recover unpaid debts without formal legal proceedings like garnishments.
• Debt Consolidation: Ensures that a portion of future wages goes toward repaying multiple debts in debt consolidation cases.

Wage assignments offer creditors a practical option for debt recovery when no physical assets are available.

What are different types of wage assignments?

There are two types of wage assignments:

Voluntary Wage Assignments and Mandatory Wage Assignments (also called involuntary wage assignments).

1. Voluntary Wage Assignments are when an employee agrees in writing to have part of their wages paid directly to a third party, like a creditor.

Here, the employee consents to this arrangement, and it typically covers only a portion of their wages. The agency handling the assignment needs to process it correctly but isn’t liable for any mistakes.

2. Mandatory Wage Assignments, also known as Involuntary Wage Assignments are required by law or a court order for things like child support, criminal fines, or overpayments of public assistance.

These assignments are enforced by legal authority, and the deducted amount can be higher than the limits usually applied to voluntary assignments. The agency must follow the court’s instructions and continue deductions until the debt is fully settled.

In short, voluntary wage assignments are based on the employee’s agreement, while mandatory wage assignments are enforced by legal requirements.

How Does Wage Assignment Work?

Here’s a simple explanation of how wage assignment works:

1. Agreement:

Firstly, the borrower signs an agreement allowing part of their wages to be deducted to repay a loan if payments are missed.

This allows the creditor to collect directly from the borrower’s paycheck without needing to go through the court system.

Also, note that the creditor can only start the process if the borrower is at least 40 days behind on their loan.

2. Notice of Intent:

Next, the creditor sends a “Notice of Intent to Assign Wages” to both the borrower and their employer at least 20 days before the deductions start.

The notice, sent by certified or registered mail, explains the creditor’s plan, includes the wage assignment form, the amount owed, and provides a revocation form and options for how the borrower can respond.

3. Demand Letter:

Once the notice period ends, the creditor sends a demand letter to the employer, detailing how much to deduct and including the wage assignment form.

4. Deductions Begin:

If the borrower hasn’t canceled the assignment and the loan is still overdue after 40 days, the employer will start making deductions from the paycheck.

The deduction can be up to 15% of the borrower’s total wages, salary, commissions, and bonuses, or the amount by which their weekly take-home pay exceeds $630—whichever is lower.

5. Stopping a Wage Assignment:

The borrower can cancel the wage assignment at any time by notifying both the employer and the creditor in writing.
Note: This doesn’t eliminate the debt; the creditor may still take other actions, such as filing a court case, which could lead to wage garnishment.

6. Duration:

A wage assignment is valid for 3 years from the signing date. If the borrower changes jobs, it remains valid for 2 years. In case if deductions continue after this period, seeking legal advice might be necessary.

Note: Wage garnishments for child support and student loans can happen without the need for a court case.

What are the implications of Wage Assignment for employees & employers?

Here’s a table summarizing the implications of wage assignments for employees and employers, based on state-specific wage assignment laws:

Aspect	Employees’ Implications	Employers’ Implications
Voluntary vs. Involuntary	Voluntary wage assignments allow employees to allocate a portion of their earnings directly.	Employers may need to process wage deductions if the employee consents or the law requires.
Revocation Rights	In most states, employees can revoke wage assignments at any time.	Employers must cease wage deductions immediately upon receiving revocation from employees.
State Variations	Wage assignments are prohibited in some states like Alabama, DC, and Missouri. In others, assignments are valid but restricted to certain debts (e.g., child support in Georgia).	Employers must comply with state-specific regulations. In some states (e.g., Minnesota), employer consent is required.
Employer Consent	In some states, employees cannot assign wages without employer consent (e.g., Indiana, Kentucky).	In states like Wyoming and Iowa, wage assignments are only enforceable if employers agree in writing.
Debt Responsibility	Employees are still responsible for their debts even if they revoke a wage assignment. If unpaid, the creditor may pursue wage garnishment.	Employers must carefully follow state laws when processing wage assignments to avoid legal issues or liabilities.
Child Support Exceptions	Wage assignments for child support are usually enforceable without revocation.	Employers must honor child support-related wage assignments regardless of state-specific revocation laws.
Administrative Burden	No direct impact on employees, but managing multiple wage assignments may complicate personal finances.	Processing multiple wage assignments increases employer workload, especially in states with varying consent requirements.
Penalties for Non-Compliance	Not applicable directly, but failure to manage wage assignments could result in wage garnishment — impacting net pay.	Employers may face penalties or legal action for failure to comply with valid wage assignment orders.

Wage Assignment vs Wage Garnishment

Aspect	Wage Assignment	Wage Garnishment
Definition	A voluntary agreement is one in which an employee agrees to have a portion of their wages paid directly to a third party.	A court-ordered process that lets a creditor collect money directly from an employee’s wages, bank account, or other assets.
Initiation	Initiated by the employee signing an agreement.	Initiated by a court order or legal judgment.
Consent	Requires the employee’s consent and agreement.	Does not need employee consent; it’s enforced by a court or tax authority.
Sources	Can come from courts, government agencies, or private creditors like loan companies.	Typically comes from legal judgments, state or federal tax agencies, or other legal claims.
Legal Requirements	Usually less formal; based on the terms of the agreement.	Strictly regulated by law; employers must follow specific legal requirements and deadlines.
Amount Deducted	Specified in the agreement, often a percentage of the employee’s wages.	Set by the court order; it can be a percentage of wages or a fixed amount.
Employer’s Role	Process deductions according to the signed agreement.	Must comply with the court order and legal requirements.
Duration	Lasts for the period defined in the agreement, until the debt is paid.	Continues as specified in the court order, until the debt is resolved or for a set period.

This comparison should help you understand the key differences and roles associated with each type of wage deduction.

Frequently Asked Questions (FAQs)

1. Who can request a wage assignment?

A. Creditors, like lenders or third-party agencies, can request a wage assignment if the employee has voluntarily agreed to it or if it’s required by law.

2. Can an employee contest a wage assignment?

A. Yes, employees can contest or cancel a wage assignment by notifying their employer and the creditor, though this can vary based on state laws.

3. Does an employer have to honor a wage assignment?

A. Employers only have to follow through with a wage assignment if it aligns with state laws or if they’ve agreed to it in writing, depending on the rules in their area.

4. Are there limits to how much can be deducted in a wage assignment?

A. Yes, there are usually limits—often up to 15% of total wages or based on minimum wage rules, depending on the state.