Garnishing an Independent Contractor
Earlier this week, the Tennessee Court of Appeals decided an important, and unprecedented, issue affecting the ability of creditors to garnish funds. A garnishment is an order issued to a third party who is holding money that would otherwise be paid to the debtor. The order instead directs that the funds be paid to the creditor. Garnishment is often the only practical way for the creditor to be paid, as once the funds are paid by the third party to the debtor they are quickly gone.
A garnishment normally applies only to funds in the third party’s hands at the time of the garnishment order. But, for employers, the garnishment also requires the employer to hold 25% of funds due to the employee for a six month period after the garnishment order.
The issue in the case was whether this same rule applies to debtors who are not “employees,” but rather “independent contractors.” It is fairly common for people to be independent contractors as opposed to employees, so this is an important question. The trial court decided that the six-month rule applied to a real-estate company that had an agent who was an independent contractor. The Court of Appeals reversed, holding that the withholding of future compensation was limited to “employer garnishee[s]” and that statutory language means what is says.
This decision, if not reversed by the Tennessee Supreme Court, has important implications for debtor/creditor negotiations.
This decision, if not reversed by the Tennessee Supreme Court, has important implications for debtor/creditor negotiations. If it stands, the decision is a big limitation on the ability of creditors to collect outside of bankruptcy. (Inside of bankruptcy, there is no garnishment under this statute, so the case should not have an impact.)
One strategy creditors may use, if the decision stands, is to argue that courts should go beyond the name “independent contractor” and examine whether the debtor is actually an employee. Such recharacterization attempts from independent contractor to employee are common in other areas of law, and may now be an issue here. If the creditor prevailed on such an argument, the third party would be liable for failing to honor the garnishment.
The case is SunTrust Bank v. Burke, decided February 2, 2015.