Common types of employee payroll fraud and how to prevent them

Employee payroll fraud is one of the most common types of workplace fraud you can encounter and will generally be committed by an employee attempting to receive any money they are not entitled to. If you were looking to define it, you would say that it’s the theft of funds from a business via its payroll processing system.

Any type of fraud – but especially payroll fraud – can be costly to your business, with payroll fraud costing UK companies around £12 billion per year!

This article will answer two questions. Firstly, what are the three most common payroll frauds you could encounter, and secondly, what are the easy methods to minimise this risk to your company?

What are 3 of the most common types of employee payroll fraud?

Preventing payroll fraud is the job of everyone in a business, but to do this, you need to have an idea of what type of fraud you could face. Specifically, both your HR and payroll teams should be aware of the following three most common payroll frauds.

The three most common types of employee fraud are ghost employees, sick leave fraud, and false expenses.

Ghost employee fraud

Ghost employee fraud occurs when ’employees’ listed within your company’s payroll receive payment but aren’t working for your company. It can also happen if an employee has left but has not been removed from your company’s payroll system. The fraud is usually found in larger companies, not smaller ones, and is more prevalent when employees are spread over several physical locations, but the payroll function is controlled from one central location.

Sick leave fraud

Sick leave fraud refers to an employee falsely claiming sick pay from their company while either not being ill or working on another job.

False expenses fraud

A false expense claim is when a member of your staff gets paid back for expenses that didn’t happen, were personal expenses, or cost less than the employee reported, with the staff member pocketing the difference.

It has been estimated that companies will lose over £100M each year in the UK due to travel and subsistence fraud. This is in the form of inflated or falsified expense claims. Common examples of fake expenses fraud include:

• Overstating the number of miles travelled on personal car mileage claims.
• They are claiming personal expenses, for example, meals with friends, as business expenses.
• They are splitting an excessive dinner bill with a colleague and then both claiming part.
• Falsifying or manipulating receipts to claim more than charged.

What are the nine ways to minimise the risk of payroll fraud within your company?

No matter the size of your company, there will never be a be-all-and-end-all solution or prevention strategy. Instead, much like IT security, several best practices can help minimise the risk to you and your business:

• A periodic review of your company’s expenses policy: Constantly updating your policy, when necessary, can also limit exposure to expenses fraud. For example, you could discover that you need to revise your policy due to inflation resulting in higher food and service costs.
• Make sure you check references: When conducting reference checks, make sure that any references are thoroughly checked so that you can ensure your new starter poses no risks to your company.
• Restrict access to your systems: Only your HR/Payroll team needs to see your employees’ bank details. Management doesn’t, nor does Jack in Sales. By restricting your payroll system so that only those with authorisation can see sensitive data, you minimise the risk of sensitive data breaches.
• Ensure updated workplace policies: In any workplace policy, ensure that staff members are informed on payroll procedures, including updating expenses or personal details. You may also want to consider outlining what is considered payroll fraud and the possible implications if found guilty of committing it.
• Enforce password management: Make sure you implement a password policy for all employees, and within it, ensure that they know what makes a strong password. Additionally, make sure that any software you use has two-factor authentication for security.
• Ensure your payroll has more than two people in it: By ensuring that your top-level payroll team (those who can access the sensitive data) consists of at least two people, you’ll be taking proactive steps like ensuring that no one individual can control, create and pay the company payroll. Similarly, you may also want to consider the entire payroll process and ensure you take more robust steps to minimise risks, such as ensuring all expense claims are countersigned to provide greater oversight.
• Always review your payroll data: It is essential to ensure that your payroll is thoroughly inspected throughout the year to ensure that no mistakes or issues are facing the company.
• Conduct a regular, random review of submitted expense claims: This should be carried out to ensure that your expenses policy is being adhered to and should be part of your expenses policy so that it can act as a deterrent to employees who may be considering committing fraud. A best practice tip is to collect data frequently and require reports from each department regularly.

Hopefully these proactive actions can help you minimise the risk of employee payroll fraud. You might also want to consider using payroll software to track and report upon your payroll data – find out more here.