Payroll Fraud: 7 Types Every Manager Must Know 

Payroll fraud isn’t always a top concern for business owners, but it should be.  Per a Forbes article, 27 percent of all businesses experience one of the common types of payroll fraud.  On average, perpetrators committed payroll fraud for about 36 months.  To protect their payroll process from any fraud scheme, employers must understand each type of fraud.  MP’s payroll management experts outline the seven major types of payroll fraud every company should beware of.  

7 Common Types of Payroll Fraud 

 

Type 1: Timesheet fraud.

This is one of the most common ways payroll fraud occurs.  Employees who are paid hourly can falsify their hours.  In some cases, employees may ask a friend to punch in or out on their behalf.  This is called “buddy punching.”  Another method employees utilize is taking unauthorized breaks.  Lastly, a less common method of timesheet fraud is when employees who are paid by the number of units produced (such as in manufacturing or sales) inflate their numbers.  Lastly, employers should be aware that an independent contractor may also commit this type of fraud when submitting their time or invoices.  Even if these infractions seem minor, such as 15 minutes here or there, this type of payroll fraud is still significant.  Together, employee violations across the organization may add up to a substantial amount on company payroll records—especially for a small business.   
 

Type 2: Sick leave fraud.

An employee may falsely claim an illness or injury to claim sick pay or take advantage of a paid leave program, such as the Family and Medical Leave Act (FMLA).  In some cases, the employee may take sick leave in one job while continuing to work another one.  It’s critical for employers to be cautious about making accusations of sick leave fraud, though.  Everyone experiences different symptoms of illnesses, and employers should be careful not to make assumptions about whether an employee is “truly sick” or not.  
 

Type 3: Ghost employees.

This type of fraud is also prevalent.  Somebody with access to the payroll process or payroll clerk creates a fake employee (or employees) and has paychecks mailed or directly deposited to the fraud beneficiary.  This type of violation may be carried out by employees, an outside party, or the company itself.  Organizations could use a fake employee to embezzle money.  During the pandemic, some fraudsters (employees and employers) had fake employees who were “on furlough.”  The state and federal money to pay for these leaves went into the pockets of the perpetrators.  This may still occur currently with other types of leave, including state-paid family and medical (PFML) leave programs, etc. 
  

Type 4: False expense fraud.

Employees or employers may perpetrate this type of fraud.  Employers or employees may request reimbursement for an expense that isn’t legitimate.  As mentioned in other types of fraud, it may include a spectrum, from small to large sums of money.  Even if the amounts are small, they may add up—especially if combined with other fraudulent payroll actions.  

Type 5: Changes to pay rate.

To commit this type of payroll fraud, employees will work with somebody with access to the payroll process (or, less frequently, they will gain it themselves) to change their pay rate or salary.  Some very adept fraudsters may change the pay rate right before payroll is run, then change it back.  This makes the fraud harder to detect, even for certified fraud examiners.  

Type 6: Advances that aren’t paid back.

Though it’s less common, employees may commit payroll fraud by never paying back an advance of their pay.  Sometimes this occurs because the employer has subpar systems for tracking advances.  They may forget the advance was made and never request repayment.   

Type 7: Billing fraud.

Employers in some industries, such as manufacturing, healthcare, and construction, are more prone to this type of payroll fraud.  Billing fraud occurs when employers need to order equipment and supplies, especially to stay ahead of projects and inventory needs.  If organizations aren’t closely monitoring these processes, dishonest employees may choose to overbill, bill for items that were never ordered, or misdirect supply funds in other ways.