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Posted On: 06/24/2024 / Payroll Services
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Home » Resources » Blog » 5 Payroll Fraud Schemes to Safeguard Against

An accurate and secure payroll is one of the foundations of a thriving company. Your data integrity, financial well-being, and employee happiness are all boosted by timely payroll without costly errors on a consistent basis.

One of the leading causes of payroll degradation is fraud. There can be small repeated payroll fraud schemes that go undetected and wreak significant havoc for months or outright assaults from workers who are no longer at the company. The common denominator is that these moves are typically preventable if you know what signs to check for consistently; so we’ve compiled a list of the most frequent payroll fraud and how to combat them.

The 5 Most Common Payroll Fraud Acts

There are many ways to defraud a payroll system, especially with remote work and more nuanced software that allow multiple administrators and job sites. However, the most prevalent fraud schemes remain largely the same in almost any digital payroll system. See if these apply to your payroll processing and how to stop them:

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  1. Falsified Wages:
    This can be as simple as someone with access to the back end of your payroll changing their rate. At the same time, it can be as complicated as manipulating bonus systems or stipends for jobs that provide them, or logging hours that prompt weekly overtime payments as opposed to regular hours.
    How to Prevent it:
    This is often an accessibility or technology issue. This means either too many people (or someone who is untrustworthy) have access to reports or payroll approval. Similarly, it might be an issue of single-verification; you should always have a manager or supervisor doing the payroll and submitting it to a third party or vice versa. The last bastion is having executive approval of all paychecks, and we strongly recommend this if you are a small business with payroll fraud concerns.
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  3. Workers Compensation Fraud:
    This is a plague to all sorts of industries, not just blue collar work as it is often perceived. Workers with desk jobs will claim neck and back pain, or even accidents in break rooms. These, coupled with exaggerated injuries from on-site incidents at physically demanding jobs or home injuries that are falsely filed as work damages, can cost companies millions.
    How to Prevent it:
    Visual verification is going to be the number one way to prevent on-site fraud. If people claim that an accident happens, you should at least have video footage to corroborate or deny it.
    Similarly, when claims are filed, there should be two sets of medical opinions – one from the employee and one from you. In the most extreme cases, you can even hire private investigators to see if an employee is living an active lifestyle while claiming a debilitating injury. This may seem cliché, yet often can help combat fraudulent work comp claims.

  4. Ghost Employees:
    Otherwise known as dummy employment, this is when there are workers on payroll who were never or are no longer employed by your business. This can happen via social security fraud (a fake employee is added and the funds are syphoned by a real person) or just someone who used to work there but was intentionally left on the payroll.
    How to Prevent it:
    There are multiple audits you can conduct to prevent ghost employee fraud. One is having employees sign a physical piece of paper at a regularly scheduled meeting and making sure each is unique. Similarly, you can cross-reference your payroll with other identification systems to check social security numbers and other sensitive information. Finally, with digital meetings becoming more prevalent, no matter what the size or geographical spread of your company, you should be able to request a face-to-face or video meeting if there is ever an employee in question.

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  6. Commission Fraud:
    This is most commonly perpetrated by sales employees or those who manage them. It is even possible for someone at your company to collude with a vendor to make sure a contract or product is sold and then the commission is split. In any case, it is difficult to detect because the commissions that are being stolen are usually ones that exist within a system, but are being inappropriately rerouted.
    How to Prevent it:
    Check to make sure your top performers on paper align with your vendor and executive appraisals. Additionally, make sure to carefully reconcile your commission policy with the actual jobs that are assigned to be eligible for it; often, payroll administrators only match the numbers paid out. Finally, see if rising commissions correlate with rising sales – in almost every commission-based organization, this should be the case.

  7. Worker Misclassification:
    This is often committed by employers or payroll administrators without the misclassified worker knowing about it. For example, a company might list someone as a 1099 worker to avoid payroll tax, insurance contributions, or other benefits. Similarly, there might be classifications that are insured differently, and an employer could misclassify them there.
    How to Prevent it:To begin with, you should make sure that you or your payroll administrator are not doing this by accident or thinking it is acceptable. Past that, make sure that you are not employing someone who is working to try and cut corners for either your business or the employee listed as a contractor. This should be as simple as knowing the proper classifications of your employees and cross-checking it with your tax reporting.
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There are many unique forms of payroll fraud that can occur at any business. The more payroll sites and variables you have, the more security methods you will need to have in place. The bottom line is that payroll fraud deducts from your overall profit. Eliminating payroll fraud can be the difference between growth and failure, so we advise you to pay attention.

Stay Safe Against Payroll Fraud With PayTech

At PayTech, we have helped businesses grow for over three decades. Part of our client’s success is an education in how to safeguard against making payroll complex and risky.

If you would like to simplify payroll systems, please reach out for a business appraisal so we can help you take the next step towards efficiency and security – it might just be what takes your company to the next level.