Types of Payroll Fraud and How to Prevent Them


Does it seem like it was only yesterday when you were learning about payroll terms

If you think payroll’s easier now, that’s fantastic. However, you can never be complacent about money matters, especially when it’s detrimental to your business, such as payroll fraud. You have to be proactive to avoid losses.

So what’s payroll fraud? Some employees do this to get a higher paycheck, and there are many ways to cheat the payroll system. Here, we’ll talk about those methods, plus tips on how you can safeguard against them.

Buddy Punching

As an employee, have you ever asked a coworker to clock in or out for you? Even if you only do it once, you and your coworker are guilty of buddy punching.

No matter how you justify it, it’s fraudulent behavior. Now, as a business owner or someone in charge of payroll, you can ensure this never happens by installing a biometric time clock.

These devices use fingerprint, retinal, or hand scanners to verify identities. Biometric time clocks also pair well with video monitoring.

Padding Timesheets

Some workers may be tempted to pad their work hours when you don’t invest in the best payroll technology. 

Of course, it’s easier to do this with paper sheets. That’s why it’s worth getting payroll software that syncs with time tracking software to avoid inflated hours. 

The more automated your payroll system is, the less room for payroll mistakes. You see, even if your employees don’t pad their work hours, the ones encoding their data aren’t perfect, resulting in under- or over-payments.

Paycheck Diversion

This type of payroll fraud is tricky because the culprit can be another employee taking and cashing the check of another employee or a cybercriminal.

One way to prevent paycheck diversion is to pay employees by direct deposit or pay card. However, you need to beef up your security system because hackers could change direct deposit information once they obtain employees’ information through phishing. 

You can provide cybersecurity training to all your employees to prevent a breach of your systems.

Expense Reimbursement Fraud

When employees claim reimbursement for expenses such as supplies, gifts, or luncheons with clients that never happened, it’s called expense reimbursement fraud. 

Workers who do this use fake receipts, or they could claim they lost the needed receipts to back up their claims. You should have clear spending policies, security checks, and regular payroll reviews to prevent this. 

Partnering with a company that provides payroll services is also a good idea. You can learn more about that by researching online.

Other Types of Payroll Fraud

Pay rate alterations, not repaying overpayment of wages, ghost employees, and fake commissions are other payroll fraud examples to watch out for.

If you have evidence of a worker committing payroll fraud, you have the option to report it to the FBI. You may also call your state attorney general. 

Protect Your Bottom Line

An employee committing payroll fraud is a serious matter. Even if they’re only getting a few dollars every month, it can still affect your bottom line. You also don’t know if they’ll influence other workers to do the same, so be proactive.

For more business tips and advice, be sure to browse our other posts.


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About Marc Wallace

I'm never too busy to share my passion. I've created this page to help people learn more about business, finance and real estate. Besides all the serious stuff, I'm also a man that values family and healthy relationships. I hope you find my content insightful.

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