What it means
The FTC's business guide to the Credit Practices Rule explains the history. Previously, if consumers did not pay as agreed, some credit contracts let creditors go directly to the employer to have wages, or part of them, paid to the creditor.
The Rule prohibits contract terms that give the creditor the irrevocable advance assignment of money due to the consumer for personal services, if the consumer does not pay as agreed. The guide says the ban covers salaries, commissions, bonuses, pensions and disability benefits, as well as wages.
The Rule applies to consumer credit transactions other than real estate purchases, and to creditors under FTC jurisdiction, including finance companies, retailers and credit unions. It notes that similar rules were passed for banks and savings institutions by other agencies.
The regulation itself, 16 CFR 444.2, lists exceptions. An assignment of wages is allowed if it is revocable at the will of the debtor.
It is also allowed if it is a payroll deduction plan or preauthorized payment plan starting at the time of the transaction, or if it applies only to wages already earned. The FTC guide adds that creditors may use payroll deduction plans where consumers choose to pay by regular deductions.
They may also require that a revocation of a voluntary assignment be in writing. The Rule's ban does not prohibit garnishment.
If a creditor obtains a court judgment, it can still use wage garnishment to collect, subject to federal and sometimes state consumer protections. An assignment is a contract term signed in advance, and garnishment follows a judgment.
In practice
Real-world examples.
Example
A fictional retailer's instalment contract says that if the buyer defaults, the buyer irrevocably assigns part of her wages to the retailer. Under the Rule, this term is an unfair credit practice for covered consumer credit. The retailer must remove it.
Example
A fictional borrower chooses to repay a loan by regular payroll deductions that start when he signs. The plan is voluntary and set up at the time of the transaction. The Rule's exception for payroll deduction plans covers it.
Example
A fictional creditor wins a court judgment against a debtor and obtains a wage garnishment order. This is not a wage assignment, since it follows a court judgment. Federal and state limits on garnishment still apply.
Formula
Calculation
There is no formula for the ban itself. The FTC guide shows a sample clause, no longer permitted, with a cap: the amount collected may not exceed the lesser of 15% of gross weekly pay or the amount by which weekly disposable earnings exceed 30 times the federal minimum hourly wage.
Worked example of that sample cap with assumed figures: gross weekly pay $800, disposable earnings $700 and an assumed minimum wage of $7.25 an hour.
Step 1: 15% of gross pay = 0.15 x $800 = $120.
Step 2: 30 x $7.25 = $217.50, so disposable earnings minus that figure = $700 - $217.50 = $482.50.
Step 3: the lesser of $120 and $482.50 is $120 a week. Over four weeks the clause would have allowed a creditor to collect up to $480 directly from the employer.
The clause is shown only to illustrate how such terms worked. It is no longer allowed in covered consumer contracts.Case study
Seen in the real world.
This case study is fictional and illustrative. A furniture retailer has used a standard instalment contract for years. It includes a clause assigning a share of the buyer's wages to the retailer if the buyer misses payments. A compliance reviewer reads the FTC's Credit Practices Rule guide and finds that irrevocable advance assignments of wages are prohibited in covered consumer credit contracts.
The clause is irrevocable and takes effect on default, so it is not within the exceptions. The retailer removes it and reissues the contract. The retailer keeps an optional payroll deduction plan that the buyer can cancel in writing. It keeps its right to sue and to seek wage garnishment after a judgment.
The reviewer also checks the retailer's older signed contracts and the template used by each store. She asks the legal adviser to confirm what should be done about customers who signed the earlier version, and she records the review date in the compliance file. Staff are trained to explain the difference between a voluntary payroll deduction and an assignment on default.
Watch out
Common mistakes.
- Confusing a wage assignment with wage garnishment. An assignment is a contract term, and garnishment follows a court judgment.
- Assuming all payroll deduction is banned, when the regulation allows voluntary plans set up at the start of the transaction.
- Applying the rule to real estate purchases, which the FTC guide says are not covered.
Questions
People also ask.
What is a wage assignment?
It is an arrangement in which a worker assigns part of future pay to a creditor, who then collects from the employer.
Are wage assignments illegal?
Irrevocable advance assignments in covered consumer credit contracts are prohibited under the FTC rule. Revocable assignments, payroll deduction plans and assignments of wages already earned are allowed.
Is wage garnishment the same thing?
No. The FTC guide says the ban does not prohibit garnishment after a court judgment, which remains subject to consumer protections.
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