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Legal Notes Blog > September 2016

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By Attorney Nicholas Smith 

            According to the U.S. Department of Labor Bureau of Labor Statistics, approximately 424,500 people worked in the Leisure, Hospitality, and Services industries in Wisconsin in July, 2016. [1]  Many of these people are paid the $2.33 state minimum wage for tipped employees.[2]  When garnishment proceedings are commenced against a debtor working at the tipped minimum wage rate, the employer typically sends a response indicating that there are not sufficient funds paid to the employee to withhold for the garnishment.  Frequently, the employer’s answer does not take into consideration the tips an employee receives, which allows the employer to pay the $2.33 wage rate.  As such, are tipped employees essentially “exempt” from garnishment in Wisconsin?

            An earnings garnishment is a procedure used to collect a judgment balance from the earnings paid to the debtor from an employer.  Wisconsin Statutes define earnings as “compensation paid or payable by the garnishee for personal services, whether designated as wages, salary, commission, and bonus or otherwise, and includes periodic payments under a pension or retirement program.”[3]  Wages are defined as every form of remuneration payable, directly or indirectly, for a given period, or payable within a given period if this basis is permitted or prescribed by the department, by an employing unit to an individual for personal services and includes tips.[4]

            The United States Department of Labor has also addressed the garnishment of tipped income.  Chapter 16, Section 16a07 of the Department’s Field Operations Handbook states:

a)      Bona fide tips are not subject to the provisions of the [Consumer Credit Protection Act “CCPA”] A garnishment is inherently a procedural device designed to reach and sequester earnings held by the garnishee (usually the employer). Tips paid directly to an employee by a customer are not "earnings" within the meaning of [15 U.S.C.A. §1672] of the CCPA, since they do not pass to the employer. This includes gratuities transferred free and clear to an employee at the direction of credit customers who add tips to the bill.

b)      Service charges added to a customer's bill constitute "earnings" within the meaning of [15 U.S.C.A. §1672] when passed on to the employee. As such, they are subject to the provisions of the CCPA. The following examples demonstrate the point.

1.      A restaurant charges a customer 15% of the check, as a service charge, and in turn pays this amount to the server (debtor). Since this is an automatic charge, there is no gratuity by the customer. The compensation passed from the employer (garnishee) to the server.

2.      The employment agreement is such that the customer's tips belong to the employer and must be credited or turned over to the employer. 

While Wisconsin Courts have yet to address how tips are handled in garnishment proceedings, a number of other courts have.[5]  In each case, the court reviewed the Department of Labor’s interpretation, as well as the manner of charging and distributing tips used by the employer, to determine if the tips needed to be included in the calculation of earnings for garnishment purposes.

            The definition of wages as stated in the Wisconsin Statutes specifically includes tips.  The Department of Labor’s interpretation only considers tips to be earnings in certain specific scenarios.  To some extent, the Wisconsin Statutes and Department of Labor handbook provide conflicting directives.  That being said, neither specifically excludes all forms of tips from earnings or wages.  As such, tipped employees are not “exempt” from garnishment; however, it would appear that at the very least the tips must be charged and distributed by the employer to be considered wages or earnings and taken into consideration in garnishment proceedings.


[1] http://www.bls.gov/eag/eag.wi.htm 

[2]Wis. Stat. §104.035(3)

[3]Wis. Stat. §812.30(7)

[4]Wis. Stat. §108.02(26)(a) and (b)

[5]See, i.e., Capital One Bank (USA) N.A. v. Sullivan, 347 P.3d 307 (Okla. Civ. App., 2015); Big M, Inc. v. Texas Rd.house Holding, LLC, 415 N.J.Super. 130, 1 A.3d 718 (N.J. Super., 2010); Erlanger Med. Ctr. v. Strong, 382 S.W.3d 349 (Tenn. App., 2012).

 
Posted: 9/20/2016 3:22:13 PM by Tom Connor | with 0 comments