Payroll Security and How to Protect Payroll Data

Payroll data breaches impact small and mid-sized businesses just as much as larger companies, often leading to reputational damage, as well as significant legal and financial consequences. Whether it’s protecting your business from external threats in the form of cyberattacks or preventing internal fraud caused by an existing employee, there are a number of measures you can take to protect your business from acts of embezzlement, fraud, identity theft, and other common outcomes of a payroll security breach.

Payroll Security and How to Protect Payroll Data

In this article, we’ll explore the steps your business can take to develop a comprehensive payroll security plan that protects you and your employees and significantly reduces the likelihood of a payroll security breach.

How to Improve Payroll Security – Addressing External Risks

External threats to payroll security can include attempts at data mining, identity theft, and scamming, usually with the aim of securing both personal and financial information from your payroll system. In addition to the legal and financial costs that a successful data breach could cause, your business is also exposed to potential fines for privacy law non-compliance.

Educate and Train Employees

The first key step in protecting your business against external threats is fostering awareness among your workforce. Even if the majority of your employees only have limited access to your payroll system, non-HR employees can also fall prey to external attempts at phishing, scamming, or the solicitation of personal or financial information, especially by email or text message. Occasionally, these attempts will closely mimic an internal communication, using publicly accessible information about the business to create trust before requesting login credentials or other sensitive data.

Beyond covering these concerns in your employee training, you should also remind your employees to use strong/complex passwords that are much more likely to safeguard data. Additionally, on a policy level, you should continue to provide data access exclusively to those employees within your business who require it to fulfill core job responsibilities. In a later section, we’ll outline how delegating payroll responsibilities can also help reduce security risks.

Finally, if your business has any dedicated IT security personnel, be sure to involve them in any employee training procedures and notify them immediately if a data breach is suspected at any point.

Technology-Based Protections

On a practical level, to lessen external threats, you should also ensure that all company computers and devices have updated anti-malware and anti-virus software installed, as well as a reliable firewall setup that protects your online databases. Your payroll provider should not only be able to help you automate software and firewall updates across devices, but also to offer payroll software that uses layers of encryption, especially within a cloud-based system. A qualified payroll provider should also be able to help you designate banking and payroll operations on separate systems to mitigate risk.

Lastly, your business should use an automated clearing house (ACH) filter to ensure that only authorized personnel are using any business bank accounts.

How to Improve Payroll Security – Addressing Internal Risks

Although external threats like hackers, scammers, and cybercriminals can compromise your organization’s payroll system, it’s equally important to set up protections against payroll fraud that could be committed by an employee within your organization. Payroll fraud usually involves embezzlement of funds, but it can also involve attempts to alter timesheets, compensate non-employees, or issue illegal bonuses and other payments.

As an employer, you should be aware of a range of “red flags” that indicate internal payroll fraud could be occurring:

  • Unexpected changes to an employee’s status, pay rate, or bank account within your payroll system 
  • Flaws or discrepancies in payroll records that can’t be accounted for
  • Pays per cycle that do not align with your total number of active employees
  • Employees receiving and reporting extra funds in their accounts or signs of additional payroll transactions that are labeled as extra or supplemental deposits.
  • Evidence of an employee living well beyond their salary/means 
  • Employees sending direct deposits to multiple bank accounts or sharing a single bank account; in the latter case, excluding those employees who are related, this is a possible indicator of fraud.

Further Action Steps and Best Practices

Our related article offers a comprehensive rundown of best practices for payroll security in 2023, but here we’ll offer supplemental recommendations to specifically prevent internal payroll fraud:

  • In the event of payroll staff turnover, be sure to immediately change the passwords associated with any payroll-oriented systems the employee used
  • Develop policies for securing any computers or devices used by payroll staff and create protocols to routinely eliminate any confidential digital files that contain sensitive financial information
  • Delegate payroll management responsibilities across your workforce to ensure that payroll preparation is separated from payroll submission and payroll verification. By splitting these duties, you reduce the threat of an individual employee committing payroll fraud.
  • Although you cannot mandate direct deposit as a payment method in most states, it’s advisable to encourage your employees to opt in to direct deposits. Paper checks are significantly more susceptible to fraud and sometimes contain sensitive information like an employee’s address or social security number.

Optimize Payroll Security and Streamline HCM with Workforce PayHub

When your business processes payroll in house, you’re also tasked with keeping your payroll systems secure and in compliance with a host of local, state, and federal labor laws. This combination of responsibilities leads many businesses to consider professional payroll support. Workforce PayHub offers a comprehensive payroll solution that easily integrates with other HCM functions to let you focus exclusively on your mission and business growth. Contact us today to let us know how we can support your work.

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Eric Jones
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