Remote Payroll: Are you Worried About Fraud, Hacking, and Unintentional Misclassification?

Remote working has become the new norm, not just in our society, but globally. Due to COVID-19 and social distancing guidelines, remote working has become a means to keep employees, customers, and clients safe during this spreading pandemic.

While the health and safety of the population is a priority, the health of a company can often take a financial hit. One often overlooked area is the payroll department. We will look at how remote working can lead to payroll fraud and some strategies to avoid it.

Often neglected (and difficult to detect), payroll fraud is a significant threat to any business. Working remotely can dramatically increase the chances of this happening. Payroll fraud is categorized as fraud that uses the payroll system to steal company money, and often, this fraud happens with those working in human resources, payroll, and finance.

Why is this so prevalent in remote working? It can be challenging to monitor payroll tasks, verify correct paycheck information, and keep track of blurred job roles. Remote working has created scenarios and challenges that require adjustments in management workflows, leaving businesses (especially the payroll department) exposed and vulnerable to criminals.

Let us dig deeper. We will explain the different types of fraud and how to avoid them and keep your company safe.

Types of Fraud

Employee Fraud

Fraud can come from many places, not just from outside sources hacking into the system. In fact, payroll fraud, primarily when employees work from home, can be committed by the employees themselves. There are a few ways that this type of fraud is categorized.

• Ghost Employee Fraud: This involves an employee with access to the payroll system, either creating a fake profile, keeping a deceased employee on file, or continuing to “pay” an employee who no longer works for the company.

• Manual Check Fraud: This happens when an employee not only writes the checks but also signs them. Separation of duties is crucial in keeping people honest. Finding a way to accomplish this in a remote working environment can prove to be complicated.

• Pay-rate Alteration Fraud: This happens when an employee involves HR or finance departments to increase an hourly pay-rate in the payroll system, for themselves or someone else.

• Purchasing Card Fraud: When employees hold company credit cards, there can be a temptation to use them for personal use. This happens more frequently with managers and executives, believing that they are above scrutiny, have the purchasing card at their disposal.

• Timesheet Fraud: This happens when employees pad their time in small increments by forgetting to clock in and out for lunch or a shift. Or, while working remotely with little to no managerial oversite, they log inflated hours and take advantage of this lack of oversite.

Employer Fraud

Risk can also come from an employer, not just employees. This type of fraud does not tend to happen in as many forms as employee payroll fraud can.

• Employee Misclassification: This occurs when an employer identifies employees as contractors to avoid paying the correct amount of taxes and workers compensation.

Third-Party Fraud

The third source of payroll fraud is that which comes from an outside source. There are numerous ways for a third-party to access sensitive information from the finance and payroll departments. The most vulnerable systems for an outside source to hack into are unencrypted and still run manually.

Phishing: Often, this happens through email, W-2 scams, and payroll diversion.

• Email requests coming from a personal email account, not a company email account, should not be granted access to any payroll information.

• W-2 scams involve a third-party to convince payroll, finance, or human resource departments to divulge sensitive or personal financial information.

• Payroll diversion occurs when a company receives an email from a personal account asking for a change in direct deposit information or asking to gain login info to the overall payroll system.

Hacking: When an employee works remotely on an unsecured network, payroll systems can easily be hacked. Payroll should be done on company issued devices, using company issued software and not personal devices. Failure to do so jeopardizes the integrity of organizational data security measures.

• Personal use of a company device. When an employee uses a company device for personal use, they can unknowingly allow a breach of security.

Prevention and Mitigation

It is crucial that a company set itself and its employees up for success while exercising remote working. Data protection must be of utmost priority. A company can take a few measures to ensure that no door is open to payroll fraud.

• Regularly, your company should run parallel audits of each pay period to catch any ghost employees and ensure there are separate duties assigned to the correct employees.

• Set strict policies for your employees and share with them clear security guidelines and training resources. Verify that they understand the responsibility of safeguarding employee data while working remotely.

• Equip them with specific hardware and software for them to use while working at home and emphasize the importance of solely using company-issued devices for work.

• Update and distribute sufficient data and security measures to all employees working remotely.

• Be clear about proper communication channels. If necessary, have IT set up internal communication tools for messaging and video conferencing and meetings.

• Require managerial approval of all payroll records, especially timesheets and overtime claims and make sure access to payroll records is as strict as possible.

Ideally, it is your responsibility to equip your employees to succeed in working remotely and avoiding fraud. Do all you can to help your team work efficiently, prevent fraud and data theft, and safeguard profits.

Keep your employees informed of any policies, processes, and changes pertaining to their position and hold them accountable to these. Implement a strong anti-fraud policy and run data-analytics often to avoid any significant company loss.

Contact Us

With an uptick in remote working, there is now more of a need than ever to make adjustments in business workflow and to pay closer attention to payroll security in order to avoid payroll fraud. If you do not know where to begin, contact us! Cornerstone Payroll Consulting has years of experience in working remotely. Whether you are running your payroll local or remote, we are here to help you with all your payroll needs.

For more information from the American Payroll Association about fraud awareness and Covid-19, click here.