What Is the Penalty for Payroll Fraud?

Some employees secretly increase their compensation rate by manipulating the payroll system, which can amount to payroll fraud. If you’re an employee who’s had your wages illegally withheld by an employer, you may be entitled to back pay . However, it’s important to act quickly if you discover your employer is committing payroll fraud. In general, the statute of limitations is two years for unintentional wage violations and three years for intentional wage violations. Though the taxes were withheld from employees wages, Leach-Bard did not pay them to the IRS, as she was required to do.

For example, a best practice is requiring workers that miss their approved window for clocking in or out to request a manual entry from their manager. The manager can review the circumstances surrounding why that employee was early or late and determine if the entry should be allowed or not. ‍Schedule a demo today to learn how Unit21’s Risk & Compliance Infrastructure can help your team manage payroll fraud threats—and keep customers (and your organizations) safe. Run regular audits that check employee behavior, verify records, and provide general oversight. Internal audits should be performed consistently to identify weaknesses and make adequate adjustments and improvements.

Proven Strategies for Preventing and Addressing Payroll Fraud

The financial implications can be devastating if it continues for a long time. As there are several compliance laws that a company must follow, it becomes easier to identify such frauds if your organization continues to implement compliance policies stringently. Some employees may receive bonuses or commissions attached to their sales targets. Also, some companies offer incentives to contractual workers for hitting milestones such certain percentage of project completion. The aim of providing such incentives is to encourage staff to work harder and excel at their jobs.

What you don’t want is to give your employees too much free reign over their hours to the point where they can easily abuse this policy. Ensure the policy clearly outlines the consequences of breaching the policy and failing to meet obligations. Explain what the internal, organizational punishment payroll fraud would be, as well as the legal consequences when they apply. Even when a company has insurance, they’ll eventually pay for this as well, through increased premiums in the future. An employee abuses a bonus or commission program by claiming a bonus or commission they aren’t entitled to.

Should I Talk to a Lawyer about Payroll Fraud?

When an employee “punches in” for another employee, they both commit timesheet fraud. In all of its various forms, time theft is a common form of payroll fraud. Payroll fraud seems straightforward enough—employees abuse the payroll system to increase their income. There are actually many ways payroll fraud can be committed, making it difficult for organizations to fully protect against—and prevent—payroll fraud. Look for payroll software with a time and attendance feature that tracks the locations of your employees’ punches. Through activities like payroll reconciliations and verification of employee direct deposit information, you might pick up on the ghost employees haunting your payroll records.

• And it’s often long-term, trusted employees who carry out these frauds, and companies with lax or non-existent controls are most often targets.
• MisclassificationEmployers classify their employees based on the number of hours they work, their relationship with the company, and other characteristics.
• Usually carried out by a business owner or trusted employee, an outside accounting firm could also carry out a payroll audit.
• With a third-party responsible for managing your payroll system, employees have less opportunity to commit payroll fraud.

Organizations should require proper documentation for any expenses filed, including a receipt, information on the payment method, and anything else that may be relevant. This needs to be verified prior to paying out any expenses to employees to prevent this fraud from occurring. Below, we look at the most common forms of payroll fraud and dig into how teams can prevent them. Timesheets are vulnerable to payroll fraud because they rely on the honor system. It’s nearly impossible to dispute a timesheet unless there are corroborative measures in place, like logs that show when employees are working on their computers or cameras in your store.

Payroll services companies

It’s often committed by an employee that (either accidentally or intentionally) fails to pay back an advance payment. However, it can also be done by someone with access to the payroll system, with the advance payment being recorded as another expense in an attempt to hide the payment. An employee’s pay is altered so they receive a higher hourly rate than they should. However, this typically requires the help of someone with access to the payroll system.

• As a result, you should conduct frequent audits of your company’s payroll and accounting records.
• A payroll administrator who’s cozy with the hourly employees might also edit timesheets to help their friends take home a bigger paycheck.
• Ensure the policy clearly outlines the consequences of breaching the policy and failing to meet obligations.
• This payroll fraud is typically committed by someone in human resources who has easy access to the organization’s payroll system.
• Another detection method would be to run exception reports that flag unusual shift lengths or excess overtime.
• Also, investing in a payroll software that has anti-fraud tools will be beneficial.