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How to Avoid Payroll Scam

Updated: Aug 7, 2023



Undoubtedly, payroll management is a crucial area that demands careful attention and oversight by every company, ensuring the well-being of all employees. As payroll software solutions bring convenience to the process, it's easy to overlook certain aspects. Regardless of the advanced features a chosen payroll software may offer, one aspect that cannot be neglected is security. Often, ill-intentioned individuals target vulnerabilities in a company's security infrastructure. These attacks can stem from the use of outdated software versions or other avenues. Needless to say, the aftermath of such attacks can result in considerable damage that no one desires.


One common scam that frequently raises its head within payroll software systems is the existence of phantom employees. In this scheme, individuals with malicious intent create fake identities and insert them into the company's payroll system as employees. If left unnoticed, every payment cycle rewards these ghost employees, leading to undeserved financial gains. As an organization expands and the number of employees increases, detecting anomalies within the system becomes more challenging.


Time Fraud for Personal Gain

Bad actors may not always be external threats; even internal personnel can manipulate the system to their advantage. An example of this is time fraud, where an employee manipulates their work hours to claim overtime, agent fees, or other compensation they did not genuinely earn. With the current work landscape embracing remote or hybrid models, and employees working outside the traditional office setup, tracking actual work hours can be challenging. Some employees might not report absences or even collude with colleagues to log in falsely, all for the purpose of gaining unearned compensation.


False Receipts, Fictitious Reimbursements

In some cases, employees might need to incur personal expenses and later request reimbursement from the company. This process requires submitting receipts or documents as evidence of these expenses. A step in this reimbursement process involves verifying the authenticity of these receipts, a task that, if not done rigorously, can lead to fraudulent actions. Employees might present fake receipts or inflate actual expenses to secure a larger reimbursement, causing financial losses to the company.


Safeguarding Against Payroll Fraud – What to Do?

The potential consequences of payroll fraud, including financial loss and reputation damage, are extensive. Regularly verifying the accuracy of data within the payroll software system can help prevent malicious attacks. Companies can implement settings within their payroll software to filter or pre-approve data, and then forward it to relevant departments for final approval. For instance, employee work records collected by the system could be sent to department heads for review before compensation is disbursed. This ensures that false data, such as manipulated work hours, is detected and corrected before payment is processed.


Another effective method is implementing a time-tracking system that verifies employee identities before allowing them to log work hours. This approach minimizes the risk of multiple employees punching in for one another.


Threats to payroll software security can arise both externally and internally. No one desires these scenarios to unfold. In the unfortunate event that a malicious actor is an employee, it can lead to detrimental consequences for the organization. Therefore, conducting periodic reviews and evaluations of employee behavior to identify patterns of misconduct can contribute to overall security."

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