Payroll Security
What Is Payroll Security?
Payroll security is defined as the steps, processes, or technologies a business implements to help protect the way it pays its employees.
There are many different types of payroll systems, but whichever you use, following payroll security best practices can help to prevent fraud and accidental and malicious data breaches at your company.
It aims to protect against threats from internal employees and external cyber criminals and hackers by using software with advanced security features, regular auditing, and adherence to cyber security best practice.
Why Is Payroll Security Important?
Payroll security is important to your business for many reasons. First, there are financial reasons—should you fall victim to payroll fraud or a payroll data security breach, your business could stand to lose money.
Second, payrolls contain masses of sensitive employee data, including employee personal records (personally identifying information like Social Security numbers), salary and wages, tax records, bank account information, benefits information, and more. A breach poses significant reputational, legal, and financial risk to a company.
There’s an urgent need for better HR data protection, as 31% of HR professionals say their company isn’t equipped to keep their workers’ information safe.
Here are other reasons to prioritize the security of your payroll:
It Can Be Costly
One key reason to invest in payroll security is to protect your business against long-term fraud. The average payroll fraud can go on for 36 months before it’s detected. That’s a long time to lose money!
It Can Have Legal Consequences
These consequences include legal and regulatory issues. Firms in the US can face substantial fines or penalties for failing to protect their employees’ data under federal law, such as the Federal Trade Commission Act and the Fair Labor Standards Act.
Common Types of Payroll Security Breaches
Payroll fraud is a common type of occupational fraud. Some 15% of all occupational fraud in the US and Canada is related to payroll fraud schemes, according to the ACFE’s 2024 report. But in 2023, only 5% of auditors planned to do an internal audit for fraud.
There are many ways criminals can commit payroll fraud or businesses can fall victim to it, depending on the different types of payroll systems in use.
- Payroll Diversion: This advanced phishing tactic involves cybercriminals infiltrating an employee's work account to reroute salary payments to their own bank account. Despite FBI warnings in 2018, payroll diversion remains one of the most prevalent payroll security threats today.
- Ghost Employees: A ghost employee is a fraudulent profile created within a company's HR system. Typically, a manager adds this fake profile to the payroll and diverts the ghost employee’s wages to their personal bank account.
- Overpayment Schemes: In these schemes, employees falsely log overtime hours on their timesheets. This can be an individual act or a larger operation led by someone in a senior role, resulting in undue payments for hours not actually worked.
- Withholding Embezzlement: This occurs when an employer makes required deductions for taxes and insurance but fails to remit these payments, keeping the money instead. This is illegal and can lead to prosecution, as seen in cases like a Maryland woman sentenced to over a year in prison.
What Can Threaten Payroll Security?
Criminals from outside your organization may be the first thing that comes to mind when you think about the security of your payroll and payroll security breaches. But your business is also vulnerable to employees who commit payroll fraud (and commit a crime themselves in the process).
Internal Employees
Your own employees can threaten the security of your payroll. That may be by either committing payroll fraud themselves or indirectly by failing to follow data protection rules and processes in full.
External Risks
Businesses face a significant threat to their payroll security from IT risks and hackers operating outside of their business. Cybercriminals are always trying to identify and target vulnerabilities in a company’s data. These include weak credentials, design flaws, and vulnerabilities in your third-party vendors.
Payroll Security Best Practices
You can improve your payroll security by following best practices to guard against data breaches and fraud. Learn more about our six strategies for stronger payroll data security, from keeping software up-to-date and educating employees on data security to choosing a trusted payroll service provider.