Spotting Fake Employees on Payroll

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One of the most common forms of payroll fraud is having fake employees on payroll, otherwise known as ghost employees. This form of malicious wage theft is often facilitated by whoever runs your payroll as a means of using this ghost employee to funnel money to a bank account and ultimately to them.

Payroll fraud and time theft affect over 50 percent of small businesses, and without the proper process of checks and balances, you could find yourself susceptible. While this sounds scary, there are a number of ways you can prevent ghost employees and all forms of payroll fraud if you are up-to-speed on the best practices. With that in mind, read along so you don’t find yourself the victim of a ghost employee scam.

What is a Ghost Employee?

A ghost employee is when someone who is currently or has formerly been involved in your payroll process creates a false profile with a linked bank account to reroute wages. It is typically done at companies that might have multiple sites, remote workers, or are large enough that a routine audit wouldn’t see anything out of the ordinary. In fact, a common tactic is using actual identities with real social security numbers so that even an IRS or social security audit will not reveal anything out of the ordinary.

How do you Identify Ghost Employee

Over 80 percent of small businesses suffer from payroll errors that cause material monetary loss. Nearly 50 percent are affected by payroll fraud, whether intentional or not. Ghost employees are a primary cause of fraud and very costly.

What often surprises most businesses and employers is who commits these crimes primarily. Research has shown that the likelihood of payroll theft goes up as someone’s age goes up. Similarly, 56 percent of embezzlement via ghost employees is perpetrated by women. This is not to stereotype or point fingers at any particular demographic, it is just a warning that even the most innocuous-seeming people may not always be who you think. Luckily, you can avoid having to assume anything about your employers if you have the proper safety protocols in place for your payroll process.

Are Ghost Employees Illegal?

Ghost employees are illegal in almost every situation conceivable, including employer-perpetrated ghosts to embezzle money as well as an employee laundering to an accomplice. There have been cases in which real information has been entered into a payroll system by accident (for example, a new hire that quits immediately) and is paid for a period of time. This is usually not litigated, but is still illegal.

The bottom line is that payroll fraud can result in fines, jail time, and even the loss of a career. If it is done maliciously, you have every reason to go after your employee and an accomplice for damages and pursue the full extent of legal repercussions.

How do you Identify a Ghost Employee?

While many people would like to believe that their employees are of good character (after all, you judged them during the hiring process), that is not going to be enough to ensure that fraud doesn’t occur. In order to both prevent and/or catch ghost employees, we recommend using the following checklist:

  1. Whoever cuts the check can’t sign them: This is an age-old form of multiple-party verification. If your payroll processor and/or accounting team runs the checks, you should have an owner or executive sign them and distribute them. In the digital age of direct deposit, this might mean just having an approval of all checks from two parties.
  2. Run Consistent Third-Party Audits: If you are running payroll in-house, it might be prudent to have an outside company audit your payroll and finances on a regular basis. Inversely, if you are using a third-party payroll processor, you should have someone internally audit the register on a regular basis.
  3. Scrutinize Canceled Checks: Canceled checks are another way of manipulating a payroll register for ghost employee fraud. If the check has been cut and not cashed, and then a second check with a similar name or information is dispersed and used fraudulently, it can often go unnoticed.
  4. Background Check all Social Security Numbers on your Payroll: This is a quick but often unused method of verifying that everyone on your payroll has legitimate information. Reach out to the IRS or a state agency to verify that everyone’s information aligns with what you have in your system. Any discrepancy should be addressed immediately.
  5. Check employees who have few or no deductions: A common ‘error’ that perpetrators of ghost employee fraud make is to exclude deductions on the fake profile in order to steal the most money. While few or no deductions doesn’t always mean there is a ghost employee, it can be a clear red flag if you also don’t know who this mystery employee with no deductions is.

What is a Ghost Employee

No matter the size of your business, the best way to prevent fraud is to treat each person and component of your payroll process as a liability. There should be no fuss from anyone as you try to audit each payroll; your finances and data integrity are dependent on it.

How Much Do Ghost Employees Cost?

This question is going to be dependent on the size of your organization and scope of the business, but the assumption is that the fraud will start in the low thousands and grow as an employee realizes they can get away with it. It is estimated that millions of dollars are embezzled yearly via payroll fraud, with the most impactful cases being in small businesses.

On top of the financial damage incurred by theft, it can also permanently damage the integrity and culture of a small business if fraud goes on for too long. You will have to fire all employees involved, potentially litigate, and go through extensive auditing to see how affected your business was.

In summation, the protocols that you take to prevent and check on payroll fraud will be well worth the time and money spent.

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Keep Your Payroll Safe with PayTech

PayTech has been helping businesses of all sizes integrate optimal practices for running payroll and keeping it secure. We take pride in teaching our clients how to stay ahead of the potential pitfalls that cost other businesses their hard-earned money.

If you want to maintain your secure payroll integrity, reduce your workplace stress, and grow your business as a result, reach out to us today. Together we can protect the product and employees you care about.


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