The concept of a “phantom employee” is one that all business owners and HR professionals should be aware of. Phantom employees could be as innocent as individuals who have passed away and accidentally kept in the payroll system, but they are most commonly fraudsters manipulating the payroll system. This issue can arise due to administrative errors, fraudulent activities or gaps in payroll oversight. Either way, phantom employees leech onto your company’s bank account and can cost you a fortune.

How It Happens

Whether intentionally or accidentally, phantom employees occur under the watch of HR professionals with at least one of the following responsibilities:

• Creating and deleting employee records.
• Approving payroll disbursements.
• Posting time and attendance information.

After an employee gains access to the payroll system, they can easily create fake records to hire phantom employees and pay themselves and/or others the fake employee’s wages.

Tax deductions are programmed to fall within a specific range of employees. When phantom employees are added to an employee count exceeding that range, they fall at the end of the list and are not selected for deductions. From there, it is easy for fraudsters to use direct deposit to receive wages. Typically, financial institutions do not verify the name of the employee being paid with the name on the bank account. On top of that, it is not common for payroll departments to audit employees’ bank account information against their names.

How They Get Away With It?

While this sounds like a scheme that could easily be exposed, the larger the company, the easier it is for an unsuspecting supervisor to sign off on the fake payroll summary. Users can easily modify an existing summary and present it for approval, or even create copies of fake paychecks. To a busy supervisor overseeing hundreds of employees, a few new employees here and there wouldn’t raise any red flags.

Warning Signs

Potential red flags that signal a phantom employee could be on the company’s payroll system include:

• Missing or falsified employee files.
• Employees with overly vague (or no) job titles or descriptions.
• Multiple employees with the same mailing address or bank accounts for payroll deposits.
• Employees who don’t sign up for health care or retirement benefits or who fail to take paid time off.
• Employees who list a post office box as their mailing address.
• Employees who are no longer employed at the company.

By auditing your payroll on a regular basis, you can watch out for these warning signs and make sure your payroll records are accurate.

The Impact on Your Business

The presence of phantom employees can lead to several adverse effects, including:

• Financial Drain: Continuously paying salaries to non-existent employees drains financial resources.
• Data Distortion: Inaccurate payroll records can skew financial reporting and hinder strategic decision-making.
• Compliance Concerns: Non-compliance with tax and employment regulations due to inaccurate payroll records poses legal risks.

Protecting Against Phantom Employees

Protecting against phantom employees begins with implementing robust processes and controls within your payroll system. Start by conducting thorough background checks and verifying employment details for all new hires. Regularly audit your payroll records to detect any discrepancies or irregularities that may indicate the presence of phantom employees. Our payroll pros recommend the following to help keep your organization protected against phantom employees:

• Implement strong authentication measures to ensure only authorized personnel have access to make changes to employee information.
• Utilize advanced payroll software that offers features like automated alerts for suspicious activities or duplicate entries.
• Foster a culture of transparency and accountability within your organization and encourage employees to report any concerns they may have.

By taking these proactive steps, you can significantly reduce the risks associated with phantom employees and safeguard the integrity of your payroll system.

We’re Here to Help

Our software and processes are designed to proactively detect any discrepancies, allowing you to see fraud as it happens and stop payment on any suspicious activity. Easy-to-use dashboards and real-time reporting allow you to audit your payroll to identify any discrepancies or phantom employees and ensure the integrity of your payroll at each pay period.