How HR Can Dodge Payroll Fraud

Minimize payroll fraud with strong HR security

Payroll fraud is a common problem that HR professionals can counter with risk-based management of employee data and processes. A sophisticated security system is also vital, as it makes it easier to safeguard data and tackle fraud.

Here’s everything you need to know about how human resources departments relate to payroll fraud and what measures your company can take to protect employees from fraudsters’ schemes.

Understand Payroll Fraud and its Impact on HR

When an employer or employee exploits their company’s payroll system for their own gain, they commit fraud. Some HR staff members themselves often commit such crimes.

There are six types of payroll schemes to be aware of:

• Ghost payroll — Someone creates fake staff or doesn’t remove members who have left the organization. The fraudster then cashes in their paychecks.


• Misclassification — A worker classifies their job role and other details wrong in order to earn the perks of a better position. Companies also do this to reduce their expenses on things like staff benefits and taxes.


• Timesheet fraud — An employee logs and get paid for more hours that they’ve worked. Someone might also change their pay rate in the system to illicitly boost their income.


• Compensation fraud — A worker tries to claim compensation by faking an injury or lying about it happening at the workplace.


• Commission fraud — When someone profits from loopholes in commission schemes.


• Third-party scams — External bad actors manipulate a company’s workers to steal their paychecks or file false tax returns.

With a sound strategy and the help of digital tools, HR can make sure nobody can take advantage of any payroll system or individual. As demanding as it seems, neglecting fraud detection is far more dangerous.

Take a 2021 payroll-related criminal case in Texas, for example. Two transportation companies lost over $1.4 million to six fraudsters, one of them an existing employee in charge of payroll processing. The scheme involved overpaying other workers and adding ghost employees for a share of their extra income.

The criminals were caught, but the affected businesses suffered massive losses. The stolen money was one thing, but their trust both in and from their employees was damaged, too. If that’s not enough, their HR systems came into serious question.

To dodge such disasters, take care of your company’s HR department and provide the best possible resources to protect it and, consequently, your whole organization.

Fraud Monitoring in HR Needs a Proactive Approach

The key to combating fraud in business is tactical preparation. You need to be in control of the situation before a bad actor can even try anything.

This doesn’t mean, however, that HR is responsible for everything security-related. Robust monitoring systems are a plus, but smooth collaboration between departments, especially HR, Finance, and IT, is vital to your company’s defenses.

With a comprehensive and proactive approach such as this, you can ensure the integrity of your data, finances, employees, and reputation in the corporate landscape, defined more than ever by smart threats and countermeasures.

Key Factors in HR's Payroll Data Protection

Accurate worker clssification is a good first step to creating an efficient security system: one that allows real-time fraud monitoring, behavior tracking, risk-based authentication, fraud scoring, and other functions that don’t work very well with incorrect employee details.

So, follow the example of companies that generated a 5-times boost in fraud management investment by 2022. Besides improving your recordkeeping, apply the measures below, if only to avoid adding to the $5.1 trillion that the global economy loses to fraud each year.

Role-based Access Controls

Once you know who is classed as what, you can better control what information each staff member is allowed to access. Then, when you see an unauthorized login, you can immediately investigate it under the suspicion that it’s dubious behavior.

It could be a clerical error or a bug, but the likelihood of internal fraud or identity left is high enough that thorough checks are warranted.

According to identity and access security studies, 79% of businesses had their data breached in 2022 and 2023, while 61% of all breaches were committed with credentials stolen through social engineering and brute force.

You can’t be too careful, especially when protecting sensitive payroll information. Make sure your access protocols are strict and based on risk analysis and clear-cut roles.

Secure Authentication Methods

Your HR department’s fraud monitoring should also use sophisticated authentication methods. When it comes to setting up your system, start with strong passwords and ID checks.

Next, incorporate processes like data enrichment for more detailed user profiles, custom rules to tailor algorithms to your needs, and alerts that instantly spot and report noteworthy activity.

For even better results, make the most of machine learning, too. Automated tools can streamline data, behavior, and risk analysis, while completing tasks and making suggestions for greater efficiency.

Encryption and Data Protection

There must be end-to-end encryption when transmitting and storing employee payroll data. Any information that internal or external bad actors might want to target should have robust data protection backing it.

At the very least, this means keeping sensitive details under lock and key, implementing cybersecurity software and policies that can handle any fraud and hacking attempts, and ensuring your identity and access management (IAM) is up to scratch.

Regular Software Updates and Patches

One of the most common methods criminals use to access resources is by exploiting vulnerabilities in companies’ programs.

If your HR is to stave off payroll fraud or any other threat, their systems’ software must be updated and patched up on a regular basis.

Whether you noticed a flaw in your anti-malware’s performance, or you just installed a new program that might affect others, take the time to update your system’s components – even those that seem insignificant. The slightest crack in your defenses is an asset to hackers.

Embrace Fraud Monitoring Solutions in HR

Don’t underestimate the positive impact that technology can have on your workflow and security. HR already benefits from it in several ways.

60% of companies surveyed about AI in HR claim to personalize their recruitment procedures and employee experiences with the help of artificial intelligence. Other popular uses include matching candidates to roles, answering questions via chatbots, mapping out career paths, and training.

When it comes to data protection, you can leverage advanced analytics and AI tools to monitor activity in real time, detect anomalies in payroll data, flag up and report fraudsters, and more.

But there’s a final and essential step to successfully integrating fraud monitoring software with your payroll management system: Supply your staff with adequate training.

To do their part in detecting fraud and responding in accordance with protocols, your HR personnel must be able to work well with their digital system as much as other departments.

Minimize Payroll Fraud with Strong HR Security

Managing and securing employee data and processes are part of HR departments’ responsibilities. It’s just as important to apply the best possible methods to combat threats like payroll fraud and data breaches.

Keep sensitive information safe by understanding the risks attached to payroll data and maintaining a security system with advanced fraud monitoring solutions. Above all, build your worker’s skills and trust.

Once again, try to look past the complexity of all these steps. Their outcome is bound to be worthwhile: You’ll see a stable and financially secure organization.

Author Bio

Tamas Kadar is Co-Founder of SEON Fraud Fighters.