Under the Federal Wage Garnishment Law, tips aren't considered earnings and they're not subject to garnishment. But states are free to enact their own laws and what holds true on one side of a state line may not be the case on the other. The Tennessee Court of Appeals and the Appellate Division of New Jersey's Superior Court have agreed with the federal position, denying creditors the right to try to garnish this type of income. If you live in Colorado, however, your tips are at risk.
How Garnishment Works
Garnishment is the act of an employer withholding a percentage of an employee's pay and turning it over to a creditor instead, pursuant to court order. This makes garnishing a waiter's tip income logistically difficult, if not impossible. In most cases, these are cash transactions made directly from one person to another. No one other than the waiter and the customer knows exactly how much the waiter received, and the money is never in the possession of the employer. States have ruled that the employer never has a right to that money, so it can't be garnished. The employer isn't giving it to the waiter -- the customer is.
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Credit Cards vs. Cash
Some states have drawn a line between cash tips and tips included in credit card transactions. For a brief time while the transaction is being processed, it can be argued that the employer has possession of the money. It should therefore be subject it to a wage garnishment order. But the Tennessee Court of Appeals disagreed with this, saying the money is still the waiter's property, not that of the employer or the establishment. The New Jersey trial court initially ruled that credit card tips may be garnished, but the Appellate Division overturned the decision.
An Exception to the Usual Rule
An exception exists when tips don't pass directly from the customer to the waiter, even via credit card. If you work in a dining establishment that pools tips, the money may be subject to garnishment because all tips go into one pot. The employer then apportions the money between servers. The money is in the employer's possession for a period of time and is under his control. Some states have ruled that he can garnish a portion of your share of the pool before turning the balance over to you.