What is Payroll Fraud?

Estimated reading time
 5 min

Key points

• Payroll fraud occurs when someone intentionally manipulates the payroll system to gain money, such as reducing a worker’s hourly rate to save money or increasing it for extra pay.
  
  
• Whether deliberately changing a staff member from full-time to casual or creating fake employees to redirect funds into one's own account, payroll fraud takes many different forms.
  
  
• Regular audits and reconciliations, dividing the payroll responsibilities and establishing clear policies are some of the steps you can take to help prevent payroll fraud.

Paying your staff accurately is a lawful and crucial part of running a business. Not only does it help improve your business operations, but it also demonstrates how much you value your employees.

Payroll fraud can cause significant financial losses for a business or employee and can continue for a long time before being detected. That’s why we’re exploring payroll fraud and how you can potentially prevent it from happening to you and your business.
 

What is payroll fraud?

In its simplest form, payroll fraud occurs when an employer or employee deliberately changes the payroll system to affect a staff member’s pay. This type of fraud can look different depending on who is perpetrating it.

For example, a manager might deliberately reduce your reported hours so that you’re paid less. On the other end of the spectrum, a staff member might unlawfully access the payroll system and increase their hourly rate so they’re paid more.

The primary motivation behind this type of fraud is financial gain – pure and simple. The perpetrator either wants to reduce labour costs and increase their profit or (unlawfully) increase their salary and personal income.

5 different types of payroll fraud

Not all payroll fraud is the same, as it can present differently based on various factors – from who is perpetrating it to their goal. Here are the most common types:

1. Misclassification

In Australia, we have different employment types that come with their own entitlements, like annual leave, personal leave and tax benefits. Each of these employment types works differently – some require a set number of hours they need to work each week, while others might only work whenever you need them to.¹

In this context, misclassification occurs when an employer or employee deliberately misclassifies someone’s employment type in their payroll system.

For example, if you’re working full-time, someone with access to the payroll might intentionally change your employment status to part-time in the payroll system. This means you’ll earn less, receive fewer benefits such as annual leave, and save money for the company.

2. Timesheet fraud

Accurate timesheets are a legal requirement for employers in Australia.² However, some workers might falsify their hours to inflate their timesheets. So, you might pay that employee overtime, even though they didn’t do the extra work they claimed to do.

For instance, one of your employees might claim they worked extra hours during the week and two full days over the weekend. They document this in their timesheets so you can pay them correctly. Since it's mandated by your industry’s award to compensate overtime, you pay the employee extra without realising the hours were falsely recorded.

3. Reimbursement fraud

Reimbursement fraud occurs when an employee deliberately makes a false claim for a business expense. This might involve the employee submitting a fake invoice or inflating the amount they claimed they spent on the expense.

For example, an employee who went to a conference might submit a fake receipt for a taxi fare with an excessive amount owed to them. Or they might claim personal travel as a business expense to try and have their holiday compensated by your business.

4. Workers’ compensation fraud

Worker’s compensation can financially help employees if they experience an injury or become sick due to their line of work.³

There are different ways this type of payroll fraud can play out:

• Employees might fake an injury or claim they got injured at work. This will allow them to apply for worker’s compensation even though they don’t have an actual injury. The employee might also create fake medical certificates to make their injury and application look legitimate.
  
  
• An employee doesn’t notify you about their return-to-work plans or changes in income.
  
  
• An employer doesn’t take out workers’ compensation for legitimate claims, so they can save money for themselves by not paying injured staff members. If the injured worker asks about their worker’s compensation payout, the employer might fabricate a lie to try and cover their tracks.
  
  
• An employer doesn’t pass on any benefits from the worker’s compensation to the injured employee.

5. Ghost employee

A ‘ghost employee’ is a term for someone who is recorded on the payroll system but doesn’t actually work for the business. Someone with direct access to the payroll system often performs this type of fraud.

For instance, an employer might set up a fake employee (the ghost employee) in the payroll system. The accountant adds the ghost employee’s banking details to the profile. When the monthly pay is processed, the criminal receives both their legitimate pay and the additional amount intended for the ghost employee. 

How to try and detect payroll fraud

• Look for any noticeable errors or gaps in payroll records. These can be signs that someone is manipulating the system for financial gain.
  
  
• Keep an eye out for any unexplained changes in the payroll records, such as changes to payment details or hourly rates, and report them.
  
  
• If you notice multiple listings of identical addresses or bank account details (or both) across different employee accounts, it’s a red flag that someone might have set up a ghost employee.
  
  
• If you think your payslip looks wrong, it’s best to gather everything together (such as your timesheets or previous payslips), compare them for accuracy, and raise the issue with your supervisor or finance team immediately. 

How to try and prevent payroll fraud and help protect your business

• Split up the payroll responsibilities and avoid relying on a single person. For example, one person might input employee data, while another might review and approve payroll. This can ensure multiple steps are in place to pay staff correctly.
  
  
• Have regular audits and reconciliations to check and double-check the data in your payroll systems. These regular checks can help you spot anything unusual or inconsistent that you can then follow up on.
  
  
• Use strong passwords and multi-factor authentication (MFA). These can add extra layers of security to your payroll system and make it more difficult for cybercriminals to gain unauthorised access to your business data.
  
  
• Invest in advanced payroll software that can send alerts for unusual transactions and provide detailed reports to help you identify suspicious activity.
  
  
• Develop policies explaining payroll processes, what to do if your employees work overtime, and how they can report workplace injuries. Having proper processes in place can ensure everyone is on the same page regarding business operations. 

What can you do if your business is impacted by payroll fraud? 

• Contact your bank immediately if you’ve shared financial information or transferred money. If you’re an ANZ business customer, contact us immediately to report the fraud.
  
  
• If you shared business credit card details, ‘block’ or cancel those cards immediately. If your cards are with ANZ, you can report the stolen card through the ANZ app or by calling us.

Who can you contact if your business is impacted by payroll fraud?

• Report the fraud through your state or territory’s police. You can find your state or territory police website through the Commonwealth Fraud Prevention Centre.
  
  
• Help others by reporting to Scamwatch or to the Australian Signals Directorate’s Australian Cyber Security Centre’s ReportCyber.
  
  
• You can also contact IDCare, a not-for-profit organisation providing support to those experiencing identity and cyber security concerns.
  
  
• Contact your bank immediately if you share personal or financial information.
  
  
• If you’re an ANZ customer, you can report fraud or suspicious activity in multiple ways, such as through the ANZ app or by calling us.