We may still be a ways from Halloween, but some spookier lore lingers all year round—like that of the mysterious “ghost employee.” And what exactly is a ghost employee?
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The explanation is less mysterious: A ghost employee is actually just payroll fraud. When someone is on a company’s payroll but doesn’t actually work for the company, he or she is a ghost employee. And this can take several forms: an actual employee who has left the company or passed away or an entirely fake persona, both of which receive actual payment intercepted by a very real perpetrator.
Ghost employees have been a phenomenon documented by numerous sources for years and can result in significant financial loss over an extended period of time if undetected. They are surprisingly difficult to detect, however. While larger, multilocation companies generally automate gross pay implementations in their main offices, what about the satellite office in Croatia? Or the 15 employees in South Africa? Organizations end up settling on outsourced or ad hoc solutions in these cases, leaving them overlooked and largely unattended. This is where some choose to take advantage, and the phantoms of the office appear.
This affects businesses across the globe, according to the Association of Certified Fraud Examiners. As many as 29% of businesses globally are affected by payroll fraud, and ghost employees rank at the top of the list for most difficult fraud to detect—taking up to a whopping 2 years.
Without real visibility into 100% of a company’s workforce, all HQ sees is a paycheck going out. Multiple time and gross pay functions add to the confusion, errors, and information gaps. Without a centralized system, it’s difficult to get a unified view of payroll, and control over gross pay processes and global compliance is diminished. Ultimately, there’s no real way to validate whether an employee even exists without an effective, streamlined system in place.
To combat this issue, HR has to make an easy decision between dealing with the financial repercussions after stumbling across a ghost employee or simply choosing processes with intrinsic preventive measures.
While the “choice” is obvious, selecting processes with the right features from the outset is easier said than done. First-rate workflows will incorporate these best practices:
- Include Multiple Levels of Accountability
A system working as a centralized, cohesive unit will naturally include safeguards to regulate an organization from facing payroll fraud. Built-in counterbalances and checks requiring more than one individual can disrupt the process necessary to create or use a ghost employee.
- Have Different People Manage Different Payroll Duties
Not unlike built-in checks and balances, assigning more than one individual to different functions within payroll can deter potential wrongdoers from the outset. Collecting time, ensuring accurate labor law application, and sending paychecks could all be done by different employees, thereby distributing payment authorization, access, and responsibility.
- Perform Regular Internal Payroll Audits to Help Uncover Fraud, as well as Other Process Inconsistencies
Internal payroll audits are a useful mechanism that every company should periodically perform to weed out the payroll poltergeists but also to identify other possible issues in the system. Selecting a handful of employees, verifying their pay rates, and comparing them to their time and attendance records will highlight any red flags in the process and prevent having to run an audit for the entire company should a litigation or compliance complaint surface.
- Provide Clear HR Policies on the Addition and Removal of Employees to Payroll
There’s no better problem-solver than plain, old transparency, and having crystal-clear policies on active and inactive employees is part and parcel. Communicate and review HR procedures often to avoid preventable oversights, such as former employees’ hanging around payroll long after they’ve stopped working at the company.
- Use a Time-Based System of Record
Ultimately, the simplest way to stop these payroll specters in their tracks is to use a system of record based on time and work done by employees. Payroll costs close to 60% of operating expenses, and without real visibility and control into its usage, the risk is high that it isn’t being handled optimally. When HR is given insight into employee productivity, projects, benchmarks, and outcomes, payroll fraud can give up the ghost.
Raj Narayanaswamy is the Co-Founder and Co-CEO of Replicon , a platform designed to support time, absences, gross pay, and compliance.