Payroll fraud is the fraudulent theft of money from a business while exploiting the payroll processing system. Theft is defined as the wrongful taking and carrying away of another’s property. The property is taken with the intention of depriving the individual permanently. An employee or a company can commit payroll fraud.
When an employer hires a new employee, the employee is required by law to complete tax forms, which are subsequently incorporated into the employer’s payroll system. Payroll is a list of all the people who work for a company.
Many individuals, however, use the term to refer to the total amount of money provided to an employee on a weekly or biweekly basis.
When completing payroll, criminal fraud can occur. A person commits fraud when they behave in order to deceive another person. The deception is accomplished by making a false representation of a fact. Because of this reality, another party relies on the misrepresentation to their legal damage.
Examples of payroll fraud by employers include falsified timesheets, giving unauthorized bonuses and paying fake or terminated employees.
How Can an Employee Commit Payroll Fraud?
Workers can commit employee payroll fraud in addition to failing to repay an advance by:
- Buddy Punching: Buddy punching is when one person arranges for another employee to punch a time clock or record hours to prove that they worked. The employee did not, in fact, work those hours.
- Changing Pay Rate: An employee collaborates with a payroll clerk to raise their hourly compensation in the company’s payroll system.
- Paycheck Diversion: Paycheck Diversion occurs when an employee takes another employee’s paycheck and cashes it. The money is kept by the employee who cashed the cheque.
- Unauthorized Hours: An employee pads their own timesheet in minor increments that go unnoticed by managers.
Commission Schemes
Some staff may receive bonuses or commissions when sales or milestones are met. These bonuses serve as an incentive for employees to work hard and perform well. Employees may occasionally find out how to pay themselves commissions or bonuses they did not earn. This is referred to as a commission scheme and is usually penalized as payroll fraud.
Workers’ Compensation Fraud
Workers’ compensation fraud occurs when an employee fabricates an injury or falsely claims to have been hurt on the job to collect workers’ compensation. Being self-insured can have a direct impact on a company’s finances. Alternatively, this form of fraud can cost an insurance company a significant amount of money, prompting them to hike their premiums.
Scams By Third Parties
Payroll fraud is frequently conducted internally; however, it can also be committed by third parties. Third-party perpetrators target individual employees or corporate records in W-2 frauds and payment diversion schemes.
A W-2 fraud involves a cybercriminal tricking employees or HR staff into divulging sensitive employee information such as their income and Social Security number. They then utilize this data to prepare false tax returns.
In a payroll diversion operation, fraudsters deceive employees into changing their direct deposit information. Scammers can redirect employee paychecks into their own accounts this way. They may carry out this scam by sending bogus emails or directly hacking into a company’s payroll system.
Is It Payroll Fraud If I Do Not Repay an Advance?
Some employees may request a paycheck advance and then fail to repay it. This is a form of payroll fraud.
How Is Payroll Fraud Discovered?
If a payroll fraud operation is operating, it is usually discovered at some time. However, some types of payroll fraud might be challenging to detect, which means they can continue undetected for a long time. Payroll fraud schemes, on average, last for 24 months.
Typically, no single factor will be a surefire predictor of payroll fraud. However, there are a few red signals to look out for:
- Payroll record errors or gaps
- Payroll record changes that you did not make
- Employees who list the same residences or bank account information
- Unexpected emails about payrolls you did not submit
These are just a few of the red flags to look out for—remember, payroll fraud can take many forms. As a result, you should conduct frequent audits of your company’s payroll and accounting records.
How Does a Company Commit Payroll Fraud?
Having ghost employees is one approach for an employer to perpetrate payroll fraud. The payroll staff will either establish a fictitious employee or keep a terminated employee active in the payroll records. They tamper with documents to make checks appear to be made out to the ghost employee, but they pocket the money for themselves.
Payroll fraud is typically conducted by a human resources staff or someone with simple access to the company payroll system. The culprit may create a fictitious employee or continue to pay a staff member who no longer works for the organization. They can collect the ghost employee’s paycheck as if it were their own by faking employment documents.
Misclassification
Employers classify their employees based on the number of hours they work, their relationship with the company, and other characteristics. For example, someone can be classified as a full-time employee, a part-time employee, or an independent contractor.
Employees of various classes are eligible for varying benefits. Employers may misclassify employees in some situations to save money on items like unemployment taxes, payroll taxes, and employee benefits. Intentional misclassification can be deemed payroll fraud, which can lead to legal ramifications for the employer.
Is it Possible to Sue for Payroll Fraud?
Individuals or employers may face legal action if they commit payroll fraud. The injured party can frequently sue to recover the money that was stolen from them. These types of lawsuits are frequently subject to state labor regulations, so consult with a local attorney if you’re considering filing a payroll fraud lawsuit.
You may be entitled to back compensation if your employer unlawfully withheld your wages. However, if you learn your company is engaging in payroll fraud, you must act fast. In general, the statute of limitations for inadvertent wage infractions is two years, whereas the statute of limitations for purposeful wage violations is three years.
What Is the Penalty for Payroll Fraud?
An employer who commits payroll fraud may face audits/investigations, civil monetary fines, and imprisonment. Additionally, they might face other payroll fraud punishments, such as having to make repayments to the IRS.
Even if someone suspects you of committing this type of crime, you are not guilty. You might devote time to defending yourself against the charges leveled against you in order to maintain your reputation and achieve the best possible conclusion. Examining your defensive alternatives may assist you in determining the best line of action.
Payroll fraud can take many different forms and have varying degrees of severity. Whether or not payroll fraud is a serious felony is also determined by the laws of the jurisdiction where the crime was committed. In general, the more money a fraudster steals, the harsher the legal repercussions.
Should I Talk to a Lawyer about Payroll Fraud?
Payroll fraud can result not only in criminal charges but also in the loss of a job or career. As a result, it is vital to defend against any claims or charges of this form of fraud. If you have been suspected of payroll fraud, consult with a fraud lawyer.
