What is payroll fraud? And how to prevent it?

payroll fraud, fraud small business

When you think of stealing, you probably imagine people shoplifting, robbing banks and breaking into homes. But those are only a few of the ways that someone can steal. One of the most common ways for people to commit theft in the workplace is through payroll fraud.

Payroll fraud occurs when an employee or employer manipulates a payroll system to take money they’re not entitled to. From misclassifying employees and padding hours to using ghost employees, payroll fraud takes on many forms, all of which threaten small businesses. In fact, payroll fraud is twice more likely to happen to small businesses when compared with large organisations.

In this article, we’ll take an in-depth look at what payroll fraud is and explain different payroll fraud schemes. Perhaps most importantly, we’ll give you tips for how to prevent payroll fraud in the first place. Read on to learn more about the causes of payroll fraud and how it’s detected, or use the links below to navigate the post.

• What is payroll fraud?

• What is considered payroll fraud?

• How is payroll fraud detected?

• Can you sue for payroll fraud?

• How to prevent payroll fraud

• Streamline your payroll and reduce your risk of fraud

Payroll fraud is when an individual illicitly alters a payroll system to manipulate employee compensation. It’s a crime that can be committed by both employees and employers.

Employees can commit payroll fraud by clocking hours they don’t work or secretly increasing their compensation rate. On the other hand, employers can commit payroll fraud by withholding wages and benefits that they owe their employees. In either case, one party is being deceitful and stealing from the other to enrich themselves.

What is considered payroll fraud?

Payroll fraud presents itself in a variety of forms. Some methods of payroll fraud are easier to detect than others. Below, we’ll look at some of the most common types of payroll fraud.

Misclassification

Employers classify workers differently depending on the number of hours they work, their relationship with the company and other factors. For instance, you may classify someone as a full-time employee, a part-time employee or an independent contractor.

Employees with different classifications are entitled to different benefits. In some cases, employers may misclassify employees to save on things like annual leave, payroll tax and employee benefits. Intentional misclassification can be considered payroll fraud, which in turn can result in legal consequences for the employer.

Timesheet fraud

Timesheet fraud is when employees manipulate their timesheet to make it appear as if they worked more hours than they actually did. Generally, there are two ways this happens. First, employees may pad their hours on the timesheet by clocking extra hours they didn’t work (a practice called “buddy punching” is when one employee clocks in or out for another). Secondly, employees may access the payroll system to falsify their wages and increase their hourly pay rate.

Commission schemes

Some employees may receive bonuses or commissions when they make sales or hit milestones. These bonuses act as an incentive for employees to work hard and excel at their jobs. However, sometimes employees may figure out how to award themselves commissions or bonuses they didn’t earn. This is known as a commission scheme and is typically punishable as payroll fraud.

Workers compensation fraud

Workers compensation fraud is when an employee fakes an injury or falsely claims they got injured at work to collect workers compensation. Being a self-insured company can directly impact its finances. Alternatively, this type of fraud can cost an insurance company a lot of money, which in turn can prompt them to raise their premiums.

Ghost employee

The term “ghost employee” refers to situations in which companies are unwittingly paying nonexistent employees. This type of payroll fraud is most often committed by a human resources employee or someone with easy access to the company payroll system. The perpetrator can create a fake employee or keep a staff member on payroll who no longer works for the company. By falsifying employment records, they can collect the ghost employee’s pay as if it were their own.