Payroll fraud is most simply defined as employees cheating the payroll system at their place of employment in order to receive funds to which they are not entitled. There are a number of ways payroll fraud can be committed, including from salary, hourly and commission workers, as well as ways to prevent  and detect it.

What is Payroll Fraud?

For workers who receive a salary, the most common form of payroll fraud involves fraudulently boosting the amount they should receive or adding a false employee to the list and collecting these wages.

For workers who are paid hourly rather than on a salary, payroll fraud methods can include altering the number of hours worked, signing in and out of work at incorrect times or claiming to have worked shifts when they were not actually in work.

Commission workers or employees who work in manufacturing and are paid by how many units they produce can also commit payroll fraud. This is done by falsifying records such as how many sales they have made or units they have produced.

The final common form of payroll fraud comes in false claims for expenses. This can range from a meal with family or friends being claimed as being part of business with a client, to taking trips away falsely labelled as business trips or meetings.

How to Detect Payroll Fraud

Clearly, while payroll fraud is uncommon, there are plenty of examples where it has happened and it can potentially lose businesses and employers a significant amount of money. A study in 2011 found that businesses in Britain lose around £38 billion a year due to payroll fraud. Five per cent of all expenses claims were found to be false, a total of over £150 million. However this figure just covers what is detected, so the actual figure is likely to be significantly higher.

Due to the high financial cost of payroll fraud and the serious nature of such offences, a number of methods have been developed to help to detect payroll fraud and provide evidence if it is suspected. Some of the key signs that payroll fraud is taking place are as follows:

  • Signs of an employee living an overly expensive lifestyle for their earnings
  • Multiple employees that are not family members sharing an address or bank account
  • Payroll audits
  • Having a member of staff unfamiliar with the payroll system check records
  • Anomalies in payroll records

Preventing Payroll Fraud

While it is important to detect if fraudulent activities are taking place at a company, it is equally essential to do everything possible to ensure that it does not happen in the first place. As well as frequent checks of the payroll records, this can also be done by making sure employees are aware of the full consequences surrounding payroll fraud. The punishments relating to payroll fraud go far beyond a work disciplinary or having to repay money, with significant jail sentences frequently being handed out for offenders.

Getting an outside body or a member of staff from outside the team to check records every so often increases the likelihood of wrongdoing being discovered. Not every case of an employee being overpaid will be fraudulent, mistakes can be made and frequent checks of the system can also help to quickly correct these errors, without significant financial loss to the company or the employee involved.

Consequences of payroll fraud

Payroll fraud is a serious offence, with severe punishments for those individuals who are proven to have carried it out. In July 2012 a British man who had carried out serious payroll fraud worth millions of pounds was sentenced to 17 years in prison. While most cases do not involve amounts as large as this, a custodial sentence is a common punishment for payroll fraudsters. Making employees aware that not only will they lose their job, but potentially their freedom is one sure-fire way to reduce the risk of workers considering payroll fraud. As well as the risk of imprisonment, they will have to repay the money they obtained during their fraudulent activity, as well as facing a further fine.

Many legal experts who specialise in fraud believe that payroll fraud is committed as it is seen as a ‘victimless crime’ and that such actions are commonplace anyway. Ensuring employees know that their actions are damaging and will result in significant sanctions is a good way to prevent this behaviour, and may encourage anyone who has been committing undetected payroll fraud to desist with their actions.

By taking care to only appoint top quality candidates when filling your payroll vacancies, businesses can ensure they have trustworthy and reliable staff who will not commit fraud themselves, as well as picking up on any suspicious activity from other employees.

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