What is Payroll Fraud? Types and How to Prevent It

Table of Contents
Payroll Fraud
Reading Time: 6 minutes

With the advancement of payroll software, payroll fraud is increasing day by day. There are several ways in which employees commit payroll fraud by receiving the money to which they are not entitled. It has become a nightmare for the company, how to detect those fraud strategies and curb them.


Among those, the common types of payroll fraud are buddy punching, disappearing between a punch in and out, timesheet padding, and more.


In this guide, we have discussed the definition of Payroll fraud, how many types of payroll frauds appear in the workplace and how to curb those fraud cases easily.


What is Payroll Fraud?

Payroll fraud is an act of manipulating or falsifying an organization’s payroll system to benefit oneself or someone else.


In the payroll fraud strategy, the employees or employers steal funds from the company payroll by fiddling with the received payment or compensation, falsifying timesheets or issuing unauthorized bonuses. Even companies face issues for tax fraud, which is intentionally misclassified by their employees and IRS reporting.


Payroll fraud can have severe consequences for an organization, including financial losses, legal action, damage to the company’s reputation, and even bankruptcy in extreme cases.


Also Read:- Top 6 Components You Should Know About the Background Verification Process


Top 6 most common Payroll Fraud at the Workplace

Here is a detailed description of the most common payroll fraud cases witnessed by almost every company.


1. Advance retention Fraud

Advance retention Fraud is one of the passive fraud types that mainly happens with start-ups and small companies. This fraud type defines the employees’ request for payment in advance and never paying it back. This type works best when a company doesn’t have any features of recording advance payment or never monitors repayment.


 The absence of proper recording and inactive payroll processes leads to organizations losing. A strategic procedure of integrating the right payroll software can eliminate this issue effectively.


2. Timesheet Fraud

Timesheet fraud is the most common fraud famous in start-ups and big companies. When an employee falsely claims payment for extra hours or days while he hasn’t been at work at the time is called timesheet fraud. Timesheet Fraud mainly occurs in industries where an hourly rate is available.


In fraud cases, employers can face various issues,


→ Incorrect Sign in and out time

→ False claiming on extra work at on-duty hours

→ False buddy punching


 Installing a proper employee performance management system with the features like face recognition punch in/out and time tracking systems can eliminate the issues.


3. Buddy Punching Fraud

Often employees arrange for their office buddy to attend the fake punching during office hours while they can take off. It is known as Buddy Punching.

Supervisory reviews or biometric logins is the right process to avoid fraud case. With this process, the organization can identify each person who is login to the timekeeping system.


4. Ghost Employee Fraud

Despite the physical appearance of employees at the workplace, the payroll of those employees is auto-circulating monthly. It is known as a Ghost employee Fraud case. This kind of fraud case mainly happens in big companies. As there are numerous workers, it results in misleading tracking compensation with sufficient details.


The payroll staff are often responsible for attending to this fraudulent activity by creating fake employees in payroll records or delaying closing the account of the already left employees by altering the payment records and more. Periodic auditing is the best for spotting ghost employees or organizations. It can keep track of the amount of deduction of uncertain employees.


5. Commission Fraud

Commission Fraud mainly occurs in the sales-related job, where employees try to increase their commission pay-out by adding their monthly sales number. Often employees plan to submit some fake customer feedback for extra commission on those falsified sales.


Creating commission fraud policies, applying them at the workplace strictly, minimizing the possibility of record tampering and setting some achievable goals can be the best option to curb the commission fraud case.


6. False Expenses Fraud

In many big companies or MNCs, the organizations often offer employees expense funds for education, training, or supplies, even on some maintenance and repair costs, travel cost, and more. In those cases, a false expense claim occurs when employees submit the fraud details of their spending to the organization.


Storing every document and receipt digitally and auditing regularly, maintaining the travel and expense policy, and accelerating the use of corporate cards, can curb the false expense fraud case.


Top 8 ways to prevent payroll fraud in your company


Payroll Fraudulent activities are a big problem nowadays. From start-ups to big MNCs, everyone is facing payroll fraudulent issues recently. Often organizations become messed up with the strategies to curb fraudulent activities. 


We are sharing eight effective steps so that you can reduce the risk of payroll fraud and protect your company from financial losses and reputational damage.



1. Deploy Payroll Management System

Deploying payroll software with specific features is one of the best ways to reduce payroll-related fraud cases. Employees use biometric data, such as thumbprints or facial recognition verify their identity. Using payroll software, the organization can track employee activity and recognize suspicious movements on payroll reports. Once the payroll software has been installed, the company can deploy appropriate access control tools for specific tracking as well.


Integrating the payroll software must reduce fraud cases like buddy punching, ghost employee fraud, timesheet fraud, and more.  


2. Secure Database

A secure database can include features like role-based access control, encryption, and regular backups, which can help prevent unauthorized access and ensure acute data integration.


Role-based access control ensures high-end security of the specific data, while encryption protects the data from unauthorized access in case of a breach.


Additionally, implementing regular auditing and monitoring of the database can help detect any unusual activities or patterns that may indicate fraudulent behaviour. With proper controls in place, a secure database can help prevent payroll fraud and ensure the accuracy of payroll records.


3. Geofencing based attendance

 A geofence is a virtual perimeter that detects the location and time. It counts the employee punch time. The facial recognition feature with a location tracking option diminishes the hassle with attendance sheets and also ensures the work duration minutely. 


With the geofencing-based attendance feature on payroll management applications, the organization can curb fraudulent activities like buddy punching and timesheet mismanagement. 


4. Implement Clear Policies

What else is essential to inform an employee during onboarding besides company culture and domain details? The answer is a ‘code of conduct’, related to anti-fraud policy. Every organization should provide an employee handbook which conveys zero-tolerance policies related to payroll and other fraudulent activities.


An anti-fraud policy is also essential for onboarding it is helpful for offboarding procedures. It reduces the risk of payroll ghosts. Additionally, a detailed anti-fraud policy helps keep employees accountable for the claims they submit.



5. Review Payroll Reports

It is essential reviewing the payroll reports in short intervals for every workplace. In detailed reviewing and analysing, every detail can help the organization to spot any errors and irregulates or fraudulent behaviour. A routine review of payroll taxes allows the organisation to detect the source of fraudulent activity and prevent big payroll issues.


6. Fraud Awareness Training

Normally, when employees, mainly freshers join a company they don’t have enough knowledge of payroll fraud cases. Employee training covers topics like the proper handling of sensitive payroll data, identifying potential red flags or suspicious activity, and reporting any management concerns. So that employees become more aware of the risks and take appropriate actions to prevent fraud.


Overall, employee training is an important component of any anti-fraud program and can help prevent payroll fraud by raising awareness and providing employees with the tools and knowledge they need to prevent and detect fraudulent activity.


7. Monitor Employees

Payroll fraud is costly nowadays, especially for start-ups and small businesses. Monitoring employee behaviour is one of the best ways to reduce payroll fraud. Organizations can use system access control, keystroke tracking or installing CCTV systems to prevent fraudulent activities of payroll data. 


Moreover, frequently tracking the employee’s activities of those employees who are responsible for managing payroll data and daily audit check-ups is one of the finest options to curb fraudulent activities.


8. Positive Work Culture

Why do your organization face such fraudulent activity? It happens due to employees’ fraudulent behaviour and the negative workplace culture. 


Positive work culture is one of the best ways to curb payroll fraud cases. Coordination between employers and employees builds transparency and integrity, leads to organizational strength and reduces the risk of fraudulent activity.


When a company clarifies the job descriptions, policies and procedures and describes the friendly work culture or open lines of communication between management and employees, an employee feels valued. It results in minimum payroll fraud cases.


Additionally, transparency in the work culture develops mutual respect and a friendly environment between staff. Employees can communicate their salary issues to their HRs easily instead of stealing.


By implementing these steps, you can reduce the risk of payroll fraud and protect your company from financial losses and reputational damage.



Research first what kind of fraudulent activities are taking place at your workplace. And hire a third-party payroll provider or integrating the right payroll software management system must be the one-stop solution for every organization. It must assure that employee must not have access to payroll resources.

Found this article interesting? Share it on

Contact Us

Contact Us

We use cookies on our website to provide you with the best experience.
Take a look at our ‘privacy policy’