Large or small, any business can fall prey to payroll fraud – and even a single incident could cost you tens of thousands of dollars.

To safeguard your enterprise, you should know the warning signs and take proactive measures.

What Is Employee Payroll Fraud?

Time theft is when an employee intentionally misreports the number of hours they’ve worked on their timesheet.

Payroll fraud happens when a dishonest employee manipulates their company’s payroll system to receive money they haven’t earned. This type of fraud poses a risk to businesses of all sizes and industries, but it can be particularly devastating for small businesses with limited resources.

7 Types of Employee Payroll Fraud

Some of the many forms of employee payroll fraud are more challenging to detect than others. Here are seven common schemes to be aware of:

1. Time theft: This is the most basic form of payroll fraud. An employee may intentionally misreport the number of hours they’ve worked on their timesheet.
2. Buddy punching: Two or more employees may collude to commit time theft. One employee will clock in and out on behalf of an absent coworker, who will then get paid for hours they didn’t work.
3. Rate rigging: An employee who has access to the payroll system (legally or not) may inflate their rate of pay. They may then return the pay rate to the original amount after payday to avoid raising suspicion.
4. Bogus bonuses: An unscrupulous employee may exploit vulnerabilities in their company’s bonus or commission policies to claim extra pay they haven’t earned.
5. Workers’ comp cons: An employee may submit a fraudulent claim for workers’ compensation, typically by faking an on-the-job injury. Such claims are paid out by the company’s insurance carrier, but they can increase the premiums that the company has to pay.
6. Ghost employees: Someone with access to HR records may add a fake employee to the system or continue payments to someone who’s left the company. Paychecks are then sent to a disguised bank account or address.
7. Paycheck diversion: Physical paychecks may be stolen and cashed by dishonest coworkers – sometimes without an incriminating paper trail.

Best Practices

As with so many things in business, when it comes to payroll fraud, a penny of prevention is worth a pound of cure. Here are a few actionable strategies you can implement to protect your business:

• Foster a culture of open communication, and encourage your team members to come forward with any concerns.
• Ensure that supervisors review all timesheets and pay particular attention to overtime pay.
• Carefully manage and monitor access to sensitive HR and payroll data.
• If possible, implement a check-and-balance system by tasking one employee with processing payroll and a different employee with making changes to records.
• Conduct thorough reviews of your payroll on a per-pay-period, and quarterly basis and perform surprise audits of all your accounts payable.
• Develop a clear and consistent offboarding process to ensure that terminated employees are properly removed from your payroll and HR systems.
• If you’re still issuing paper paychecks, consider transitioning to direct deposit, which offers greater security and convenience for you and your employees.

Warning Signs

As a small-business operator, you should keep a lookout for these red flags:

• Unexplained changes or omissions in your payroll records. Any discrepancies in your system can enable fraud to occur.
• Duplicate addresses or bank accounts for employees who don’t live together. This could be an indication of an ongoing scam.
• An employee who avoids taking time off or refuses to share their duties. This could mean that they’re afraid of fraudulent activity being discovered.

What to Do If You’ve Been Targeted

As a business owner, you can take action by contacting your state attorney general’s office to report suspected payroll fraud within your company. By addressing the problem swiftly, there’s a better chance that you’ll be able to stop the scam and recoup your losses.

Defend Your Finances

For additional valuable insights on safeguarding your hard-earned funds, consult your financial institution.