Payroll Fraud: How To Spot It and Prevent It

At first glance, something like payroll fraud may seem insignificant and limited in scope. When it comes to employee theft, most small business owners think about little things like stealing from the supply room to get a few extra pens and post-it pads. The reality, however, is that payroll fraud is major threat to businesses across the United States.

In fact, the FBI’s Internet Crime Complaint Center (IC3) reported that between January 2018 and June 2019, the average dollar loss per complaint was $7,904. Keep in mind, that number only reflects the reported losses. Taking into account losses that have not been reported or have not been discovered yet, the picture of payroll diversion schemes in payroll fraud is massive.

Put simply, payroll fraud exists when the payroll system is wrongfully manipulated by an employee or employer. Payroll fraud can exist by either giving payment to someone who has not earned it or withholding payment that was rightfully earned. There are a variety of ways in which payroll fraud typically occurs in this country, so being diligent about detecting and preventing its occurrence is critical.

Types of Payroll Fraud

Understanding the varied types of payroll fraud that can occur in the workplace is the first step to identifying it and being proactive in preventing its occurrence.

The following are some of the most common types of payroll fraud:

1. Outstanding Advances: failure to pay back an advance payment given to an employee.
2. Timesheet Fraud: falsifying timesheet submissions and thus getting payment for hours not completed.
3. “Buddy Punching”: when an employee arranges for a coworker to punch their hours on the company time clock.
4. Pay Rate Alteration: a scheme where an employee works together with the payroll department to increase their hourly pay amount in the payroll system.
5. Misclassifying Workers: classifying an employee incorrectly in order to avoid payroll taxes, workers’ compensation insurance, or unemployment tax.
6. Padding Work Hours: padding work hours in the timesheets, this is the most common type of employee fraud.
7. Ghost Employees: a fake employee or an employee who has left the company is kept on the payroll in order to shift direct deposits or paychecks to someone else.
8. Commission Fraud: either falsifying the amount of sales recorded or increasing the rate of commission.

Whether perpetuated by individual employees or the payroll department, payroll fraud is an all too common disaster in the workplace. Being vigilant and educating your top level executives about the most common types of fraud is essential to being proactive in reducing its likelihood.

Preventing Payroll Fraud

Detecting payroll fraud is certainly important for employers, but preventing it from taking place is equally as imperative. The most successful way to begin your efforts to preventing payroll fraud is by simply checking the payroll records. This is should be done frequently and publicly, making sure that all employees know that any behavior deemed fraudulent will not be tolerated.

In addition to conducting payroll record checks internally, it can be helpful to hire externally to ensure that the company is functioning properly. Whether detecting fraudulent behavior or innocent mistakes, hiring a professional for fresh eyeballs and an expertise can play a major role in reducing financial loss.