The term wage assignment refers to the agreement between a creditor and a borrower which says that the creditor can collect the portion of the money collected from the employee’s wages directly from the employer. It acts as collateral and the employee’s future wages serve as the main source of repayment.
The agreement of wage assignment covers aspects like debts, obligations and taxes, which allows the creditors to bypass the procedure of the court and assure repayment. There are various key purposes of Wage assignment like:
Debt recovery: an agreement especially meant to recover the debt from the borrower if the repayment is missed.
Loan collections: Small-scale loan companies use wage assessment to collect overdue payments.
Debt consolidations: makes sure that part of future wages gets the repayment of the debts
It offers a partial option to the creditors for managing debt recovery when there is no physical assessment available.
Types of Wage Assessment
Voluntary wage assessment: Works on an agreement agreed by all the parties and covers a small portion of the wages.
Mandatory wage assessment: It refers to the notice or enforced agreement ordered by a court and includes higher deductions from the salary and wages.
In other words, voluntary wage assessments are as per the employee’s agreement whereas, mandatory wage assessments are enforced by the legal allegations and court orders on the employee.
Working mechanism of wage assignment
Agreement: signing of an agreement which consists of all the details and deduction amount if the loan payment is missed by the employee.
Notice of Intent: the next step is sending a “notice of Intent” to assign wages to both employee and employer at least 20 days before the actual deductions
Demand Letter: when the notice period ends, the creditor then demands a letter to the employer which gives details about how much amounts need to be deducted from the wage of an employee.
Beginning of the deductions: if the assignment is not cancelled by the board or the employee, the loan is still overview and the employer will start making deductions from the wages.
It is mentioned in the legal law that the deductions can be up to 15% and not more than that, which eventually makes it easier for the employee to bear.
If the employee cancels the wage assignment, it does not mean that the debt is eliminated. The creditors are still responsible for taking strict action against the borrower, which can result in higher financial losses and even reputational damage.
