So this isn't work? When a wage isn't protected: Florida bankruptcy court decisions erode earnings exemption for professional practice and business owners.

• Author: Hersch, Craig R.

The Florida Statutes provide creditor protection from garnishment of "earnings." Over the course of the last several years, however, a number of troubling decisions have emerged from the bankruptcy courts in decisions that circumvent the clear intent of the earnings exemption statute. In short, the bankruptcy courts have denied small office professional practice and small business owners the earnings exemption due to the fact that such individuals do not take a "wage," but rather take "discretionary draws" from the business. It is the authors' opinion that the bankruptcy court for the Southern District of Florida has legislated judicial requirements not found in the Florida Statutes or in the leading case law.

The Florida Statute

F.S. [section] 222.11 provides the exemption at issue. Specifically, earnings of a head of family that are less than or equal to $500 a week are absolutely exempt from garnishment. (1) Further, disposable earnings greater than $500 per week are exempt unless the individual agrees otherwise in writing. (2)

These earnings may be invested in other types of exempt assets (including, e.g., homestead, certain annuities, and life insurance) without the transfer being considered fraudulent under the Fraudulent Conveyance Act. (3) Exempt earnings deposited into a bank account are exempt for six months after deposit, as long as the funds are traced and properly identified as earnings. (4)

Thus, if Mr. Jones earns $500 weekly and has creditor issues, theoretically he could use the earnings to support himself and his family, and he could take any excess and pay down his mortgage on his Florida homestead (another exempt asset) without fear that creditors will garnish the extra earnings. Earnings over $500 per week would also be creditor-exempt if Mr. Jones had not otherwise agreed in writing.

Requirements for Exemption

The debtor has the initial burden of proving entitlement to the earnings exemption. (5) The debtor must establish that he or she is a head of family and that the amounts in dispute constitute earnings as defined in the statute.

"Head of family" includes any natural person who is providing more than one half of the support for a child or other dependent. (6) Generally, this issue has not been contested in the court opinions. However, a handful of cases have involved the meanings of "dependent" and "child." "Dependent" is not defined under the statute, and could include a child, aunt, uncle, parent, or former spouse who does not necessarily reside in Florida. Pal unmarried father may qualify as a head of family when he acknowledges a child as his own and voluntarily provides financial support. (7) Further, a former husband may qualify when he provides alimony payments to a former wife. (8)

A moral obligation to support another person may be sufficient to satisfy the head of family requirement. However, the courts often require that nonrelated individuals reside in the same residence. (9) "Child" generally means any son or daughter, regardless of age. (10) Therefore, a debtor supporting an adult child away at college may still qualify as a head of family. (11)

Earnings as Personal Services or Labor

The most common area of dispute and the focus of this article centers on the statutory and case law definition of "earnings." "Earnings" under the statute include compensation paid or payable, in money of a sum certain, for personal services or labor whether denominated as wages, salary, commission, or bonus. (12) "Disposable earnings" means that part of the earnings of any head of family remaining after the deduction from those earnings of any amounts required by law to be withheld. (13)

The Florida Legislature amended the earnings exemption statute in 1993. (14) The significant changes involved deleting the word "wage," which connotes an employer/employee relationship. Instead, the legislature chose to replace the language with "earnings," broadening the definition to include amounts paid in money or sum certain for wages, salary, commission, or bonus, items arguably found not only in employer/employee relationships, but also found in independent contractor settings. The apparent legislative intent to broaden the application of the statute is to be contrasted with the bankruptcy courts' rulings limiting the application of the statute with relation to professional practice and business owners, discussed below.

Independent Contractor Versus Employee

A number of courts have denied the earnings exemption in cases where the debtor was determined to be an independent contractor and not an employee. These courts have relied mainly on a 1931 Florida Supreme Court case, Patten Package Co. v. Houser, 136 So. 353 (Fla. 1931). In Patten, the debtor, Mr. Houser, worked for Gulf Refining Company. Mr. Houser delivered various petroleum products to customers, utilized the services of his son, and often fronted expenses related to the operation of his delivery truck, for which Gulf Refining would later reimburse.

The dispute centered on whether amounts Gulf Refining owed Mr. Houser were creditor-exempt. Mr. Houser argued that the earnings exemption applied to the amounts as earnings for his personal labor and services. The court's issue was whether the money due Mr. Houser from Gulf Refining was due for "personal labor or services rendered by him." (15) (Emphasis added) The court determined an "indeterminable part" of the money due was for the expense account related to the operation of his truck and for the services of the adult son, as well as for his services rendered. Mr. Houser could not account for the exact makeup of the amounts due. Accordingly, the court held that the amounts owed to Mr. Houser were not exempt as earnings within the meaning of the statute.

In reaching its conclusion, the court did note that Mr. Houser acted more like an independent contractor than an employee. (16) It merely stated this fact and moved on to the above analysis. However, this observation was not apparently determinative in arriving at a decision. The court seemed more concerned that Mr. Houser commingled the funds than the source of those funds. Subsequent case law, however, picked up on this innocuous distinction, resulting in rulings that for earnings to be exempt, they must be employment earnings as opposed to earnings of an independent contractor. (17)

Intent of Exemption

The Florida Supreme Court's clear intent in Patten arguably stands for the proposition that an independent contractor may be entitled to the exemption for that portion of his or her earnings related to personal services, even under the old statute. The court expressly stated that the purpose of the earnings exemption is to

prevent the unfortunate citizen from being deprived of the necessaries...