Direct deposit, pay cards best defense against fraud

It’s payday and the end of a shift at the quick-service restaurant. Employees begin filing out to their cars in the parking lot when one of them is approached by a man asking how much the employee got paid that week. The employee looks at his check and tells him he got paid $225. The stranger offers the employee a deal almost too good to pass up: Give me your paycheck and I’ll give you $300 cash. The employee thinks about it for a moment, considers the fact he doesn’t have to go to the bank and that he gets an extra $75.

Sure, he says. What do I have to lose?

For the employee, maybe nothing. For the employer, this transaction could cripple his business.

Payroll fraud can be like a cancer for owner/operators. In situations like the above scenario – one that has happened to more than one of our clients – the fraudster may not even try to cash the ill-gotten payroll check. Instead, he knows he has access to even more: the owner/operator’s bank and account information.

We have been successful in identifying payroll theft situations like this in the early stages because we reconcile payroll accounts for our Monthly Accounting clients every month and often are able to catch red flags. Even so, by the time we recognize it, much of the damage has been done.

Paper payroll checks are too often an invitation for fraud and theft. Anyone with access to a check and a computer can create fake checks to look like a corporate paycheck, print them in the same sequence and begin writing checks off those accounts, draining the account of funds before the owner/operator knows what is happening.

This is why we recommend that our clients use direct deposit or pay cards for their payroll. With direct deposit, the money is moved to employees’ bank accounts without exposing the business’s own account information.

For those owner/operators who have employees who may not have bank accounts, pay cards are a good solution. Pay cards operate like pre-paid debit cards where the employer moves money onto the card. The employee can then use this card as any other debit card, even if he or she does not have a bank account. If the employee should lose the card or it is stolen, the employer can cancel that card and reissue another one.

There is another solution we recommend if you want to continue using paper checks:  positive pay via the payroll company. With this form of positive pay, paychecks are issued out of an account with your payroll service – not an account held by the owner/operator. That way, if fraud should occur, the owner/operator is insulated. Just like with pay cards and direct deposit, positive pay does require business owners to prepare for one lump sum to be withdrawn every pay period for payroll purposes.

If you choose to continue using paper checks for payroll, we suggest you keep your payroll account balance limited, moving just enough money into that account each pay period to cover the payroll expense. That way, should fraud occur, criminals would not have access to larger general operating account funds.

Please let us help you find solutions to keep your operating and payroll accounts secure. In the meantime, if you discover or suspect you are victim of payroll fraud, please take the following steps:

  • Close the compromised account immediately;
  • Open a new account; and
  • Never leave excess money in a payroll account.
  • Call us and your payroll company immediately.

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