Payroll Fraud Detection: How to Prevent and Protect

Imagine that someone in your organization was quietly taking $2,800 from your business every month. Chances are that you may not notice the theft for 18 months — by then, you've lost $50,000.

A staggering 87% of organizations reported being victimized by digital fraud during 2024. Your payroll is one of the fraudster's primary targets. The good news? Modern payroll solutions include security features to help protect your records, while PEO partnerships bring expertise to handle compliance across state lines. This guide outlines the steps to protect your business.

What is Payroll Fraud?

Payroll fraud happens when someone manipulates your payroll system to steal money. The perpetrator might be anyone with payroll access: employees padding timesheets, managers creating ghost employees, or payroll staff redirecting payments.

Common Payroll Fraud Examples

While you're busy growing your company, fraudsters are searching for ways to exploit your payroll system. Watch out for these schemes:

1. Ghost Employees

Ghost employees are fake people created to collect real paychecks. Remote work makes these schemes more difficult to detect. When managers oversee teams they've never met in person, fictional employees slip through payroll unnoticed.

2. Time Theft

It starts small: an extra hour here, a missed lunch break there, logging phantom overtime. These minor thefts quickly compound into significant losses. Remote and hybrid teams are at risk, particularly when they rely on manual time-tracking systems that depend solely on trust.

3. Commission Fraud

Salespeople working remotely can inflate sales numbers or take credit for phantom deals, turning your incentive program into their ATM. PEO partnerships give you access to HR experts who can set up proper approval workflows and documentation standards. 

Red Flags: Spot Fraud Before it Strikes

Every payroll scam leaves traces — if you know where to look. Automated systems detect several discrepancies, but sharp eyes and good judgment make the difference. 

1. Payroll Record Red Flags

Your payroll records tell stories. Normal patterns create predictable ripples — legitimate changes to employee information usually follow life events, such as sick days or vacations. Fraudulent changes disrupt these patterns in distinct ways. Most suspicious activities often hide in plain sight, masked as routine updates.

When reviewing payroll records, pay special attention to:

• Multiple employees sharing the same bank account.

• Paychecks going to addresses outside your service area.

• Employees taking no tax or benefit deductions.

• Sudden spikes in overtime for specific teams.

2. Time and Attendance Signals

Remote teams need different time-tracking methods. Real work patterns show natural variation — people occasionally run late or start early to meet deadlines. When time records appear too perfect, that's a clue that something is wrong.

Look for these patterns:

• Clock-in times that never vary.

• Remote employees logging hours during odd times.

• Managers approve their own time records.

• Employee time tracking patterns that don't match work output.

3. System Access Patterns

Your payroll system's audit trail can reveal behavior patterns that separate legitimate work from suspicious activity. Most payroll tasks occur during business hours and follow predictable workflows. Deviations from those norms deserve investigation.

Modern payroll platforms monitor these access patterns automatically, flagging unusual activities, including:

• Payroll data being accessed during unusual hours.

• Multiple failed login attempts from unknown locations.

• Changes to employee records without authorization.

• Delayed or missing approval documentation.

Each red flag signals potential fraud, but context matters. A single warning sign might have a legitimate explanation. Multiple flags across different categories typically indicate a more significant issue. That's where a PEO invaluable — partnering HR expertise with proper payroll oversight.

Prevention Strategies That Work

Catching fraud matters. Preventing it matters more. Smart technology, combined with clear processes, creates a payroll system that fraudsters can't easily crack.

1. Build Better Approval Flows

Adhere to a simple rule: No single person should have control over payment approvals from start to finish. In these systems, every change creates an immediate digital fingerprint, while unusual patterns trigger alerts before money is paid out. Multi-factor authentication blocks unauthorized access, and role-based permissions ensure employees see only what they need for their jobs. This turns your payroll system from a potential vulnerability into a strong defense.

2. Make Your Team Fraud-Smart

Your employees can spot problems before your systems do when they know what fraud looks like. Regular training helps keep payroll scam prevention at the forefront of employees' minds. Educate your team about common fraud examples and how these schemes operate. Walk them through the proper documentation steps. Explain clearly when and how to report suspicious activity. 

3. Set Review Schedule

Prevention is most effective as an ongoing process rather than a one-time solution. Monthly reviews help catch overtime and commission irregularities while they're still small. Quarterly audits ensure that employee records and access permissions remain accurate and up to date. Annual process reviews help you spot and fix workflow gaps before fraudsters can exploit them.

Modern payroll solutions like Justworks, support these regular checkups with reporting tools that highlight issues that human reviewers might miss. This automated oversight creates a strong, sustainable defense against payroll scams.

Put Your Prevention Plan into Action

Strong prevention strategies need equally strong implementation. Start with your biggest vulnerabilities and build from there. Here's how to make these changes stick.

1. Check Your Current Setup

Begin by assessing your existing payroll processes. Which manual steps could automated systems handle? Where do approval workflows break down? A payroll assessment can identify gaps before they become problems.

2. Choose the Right Tools

Modern HR tools and software do more than just process payments. They integrate time tracking, expense management, and compliance monitoring into one secure system. This integration makes it harder for fraudsters to exploit gaps between different software systems.

3. Build Your Support System

Strong payroll processes require the right foundation. Protecting your payroll requires specific steps: multi-factor authentication for system access, separate approval chains for payment processing, and regular audits of employee records. These controls help safeguard every dollar your business earns.

Protect Your Payroll, Protect Your Business

Platforms like Justworks enforce security measures automatically. Built-in features such as role-based access and detailed audit logs maintain accurate records. Add compliance support to navigate state-specific requirements, and you have all the elements of secure payroll management.

Ready to strengthen your payroll security and management? Get started with Justworks today.