Eighth Circuit Rules Employer paid Disability Payments Constitute Earnings for Purposes of Wage Garnishment

An employee was injured on the job and as a result could no longer work for her employer and began receiving payments under a disability insurance program paid for by the employer. Sometime after the employee began receiving disability payments, the employee was incarcerated and upon her release, was forced to pay restitution. The Internal Revenue Service sought to garnish these disability payments pursuant to her restitution sentence. The employee challenged this garnishment claiming that the disability payments constituted earnings under the Consumer Credit Protection Act (“Act”) and thus were subject to the limitations that the Act places on the amount of earnings subject to garnishment.

The district court held that the disability payments did not constitute earnings and thus could be fully garnished by the IRS. In a case of first impression by the federal appellate courts, the Eight Circuit Court of Appeals reversed the holding of the district court by focusing on the character of the payments and determining whether the disability payments constituted “compensation paid or payable for personal services.“ In its analysis, the Eighth Circuit held the disability payments were earnings, as the payments served as wage substitutes payable from the employee’s former employer because of  past services she provided to such employer.

Based on the holding of the Eighth Circuit, employers should ensure garnishments governed under the Act include disability payments in the calculation of earnings to ensure the employer does not garnish an impermissible amount of the employee’s “earnings.” Employers should watch for further guidance regarding garnishments of disability payments as this is a case of first impression.

If you would like more information about United States v. Ashcraft, No. 12–2449 (8th Cir., October 09, 2013).