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August 5, 2021 | Payroll Software | Posted by Ascentis Thought Leadership

The Most Common Types of Payroll Fraud and How To Avoid It

In the movies, employee fraud is usually something that occurs in a busy bank, an investment firm, or a crooked politician's office. There is certainly some truth to that portrayal -- a global study by The Association for Fraud Examiners (ACFE) found that the industries most frequently victimized by fraud are banking and financial services, followed by government and political organizations. Look past the top slots, though, and you'll find some potentially surprising targets.

The ACFE study shows that manufacturing was the third-most defrauded industry of 2020, with a total of 185 cases and a median of $198,000 lost to fraud. The healthcare industry ranks fourth with 149 cases and a median loss of $200,000. Construction firms also rank highly amongst the most common targets of fraud with 80 cases and a $200,000 median loss. Considering that the overall median loss for all industries was $150,000, these cases clearly represent some serious cause for concern. While there are various forms of fraud at work across these industries, payroll fraud accounts for 10 to 15% of all cases.

While there is no such thing as an industry that hasn't been impacted by time and payroll fraud, some industries are clearly at more risk than others. As the ACFE study shows, a number of blue collar industries that might not come to mind when people think of likely fraud targets are, in fact, among the most frequently affected. It's important to keep in mind that blue collar payroll fraud impacts more than just the directly associated employers and employees. A separate study of employment fraud in the Midwestern construction industry found that misclassified construction workers and illegal cash payments cost taxpayers $186 million per year in Illinois alone.

Weeding out fraud entirely is not possible for most employers, unfortunately. Even so, too many businesses continue to make it all too easy for bad actors to get away with costly and even criminal conduct. Let's look at a few common causes of fraud in labor-driven industries and what employers can do to combat them more effectively.

  • Time Fraud - The most basic form of payroll fraud is also one of the most common, especially amongst employers who lag behind the latest technology. For smaller businesses in labor-driven industries like manufacturing, construction, and healthcare, investing in upgraded time and attendance systems may seem like an expensive and time-consuming proposition. The trouble with that line of thinking is that outdated systems that rely on paper timesheets, manual punch clocks, or simple computer-based spreadsheets make it much easier for an unscrupulous employee to falsify time and attendance information. Common time fraud practices like taking unauthorized breaks, inflating hours on timesheets, and buddy-punching (one employee clocking in for another) may seem like relatively minor infractions, but they add up quickly. Studies show that American employers lose hundreds of billions of dollars each year to these so-called "petty" time theft practices. The best remedy for this kind of time thievery is more automation. Investing in automated time and attendance software with cloud-based data storage helps to create a consistent, trustworthy timekeeping experience that makes it considerably more difficult to falsify information. Biometric time clocks that rely on facial recognition and voice activation can drastically reduce opportunities for buddy-punching.
  • Billing Fraud - Manufacturing, healthcare, and construction employers are especially prone to fraudulent billing practices. All of these industries require constant streams of equipment and supplies to stay ahead of demand. That means there is a lot of pressure to order those items quickly and steadily. Failing to do so can lead to expensive delays in production or, in the case of healthcare facilities, physical danger to patients and residents. Unfortunately, the urgency of supply chains in these industries can also create openings for dishonest employees to overbill and otherwise misdirect funds. This is another situation where increased automation makes a major difference. Paper-based records and basic spreadsheet systems are much easier to falsify and much harder to audit for mistakes and fraud. A digital dashboard that can be customized to match the specific demands and requirements of your industry provides greater transparency to all billing functions. Performing regular digital audits of billing information helps to catch mistakes before they become a problem and discourages bad actors from taking a chance with fraudulent behavior.
  • Classification Fraud - On the other side of the fraud equation, employers who intentionally misclassify workers are a major problem in labor-driven industries. In this context, misclassification means classifying a full-time employee as a contract or contingent worker in order to reduce payroll tax expenses. Not only is this a violation of federal and state wage tax laws, it also cheats employees out of legally required benefits including overtime pay and federally mandated leave. Once again, an automated payroll system is the surest way to stay compliant with all worker classification laws. Customizable payroll software can ensure that all workers are properly classified, with all required tax withholdings properly applied. In the event that a classification error does occur, an automated system makes it much simpler to check your records and identify the cause, helping to eliminate future occurrences.

Unfortunately enough, fraud in the workplace is a problem that nearly every employer will have to deal with at some point. Putting proper safeguards in place before these issues become untenable can go a long way toward preventing the financial, legal, and reputational damage that comes with payroll fraud. Learn more about how workforce management software from Ascentis can help keep your business safer, more compliant, and ultimately more productive and fraud-free.

With more than 35 years of experience in providing Software as a Service (SaaS) solutions, Ascentis thought leaders have become a respected source for insights, tips, and innovations in the Human Capital Management (HCM) space.