PEO Payroll Fraud
Payroll January 24, 2020


Small to medium-sized businesses are starting to use PEOs more than ever. With the industry constantly growing and new trends popping up every day, there are many precautions that business owners should take to stay protected. We frequently hear reports of dishonest and fraudulent acts happening within companies. The question is, how do we prevent these acts from happening? In the Human Capital Management industry, the probability of monetary theft increases. Thus, companies must be hyper-vigilant to the different strategies that fraudsters might use to dupe PEOs out of their hard-earned money.

Identifying the Warning Signs

First, be sure to do all of the necessary research about your prospective clients, the company, and its employees.

Next, be sure to provide your employees with basic knowledge in recognizing fraud. Specifically, the employees who deal directly with the potential clients- such as the front line, sales associates, and onboarding personnel. Educating them on how to recognize some of the warning signs of fraud will help you in tightening up your business’ security.

The following are potential red flags to look for when considering doing business with a prospective client:

  • The prospective client requires urgency or requests a fast-track version of the onboarding process- The client might wait until the last minute to institute a renewed insurance or payroll plan. This may create a sense of urgency and the urgency can create errors, helping fraudsters slip through the cracks.
  • The Prospective Company requests for payroll services only- Health Insurance and Employee Benefits usually do not interest the prospective client when fraud is a part of the plan. They are primarily concerned with financial transactions, and thus, may request the PEO to only conduct payroll services for them.
  • Transactions via non-corporate email addresses- Small Businesses can use their personal email IDs to conduct business transactions. Your staff must be alert and trained to recognize those potential clients doing this to solely benefit themselves.
  • Be wary of individuals who are resistant to engage in face-to-face meetings, reluctant to respond to phone calls, and individuals that use multiple contact phone numbers. These actions are red flags and should be treated with discretion before proceeding to do business with the potential client.

  • Previous payroll and benefits documents are not provided- As a PEO, it is important to know the prior payroll system utilized by the potential client before you conduct business with them. Knowing the potential client’s history and acquiring the necessary documents allows PEOs to provide their clients with fundamental and systematic changes to their payroll processes. When a potential client withholds their prior payroll data, it should be treated as a red flag.
  • The potential client is not registered with the state and federal government
  • All routing numbers are the same.
  • Changes are made to direct deposit information immediately after the onboarding process is complete
  • The prospect does not have an official website or the website provided has a different address and phone number than the address and contact number previously provided
  • Credit checks on the potential client reveal details that signify possible deception

Assess, Verify, Proceed with Caution

Do you think you may be at risk of payroll fraud? What should you do next? The steps that you take to proceed will be most important when it comes to lowering your risk of being a victim of fraud.

Training, formulating, following standard operating procedures, and using common sense seem to be the most fundamental tools. Setting up alerts on high-risk components that may require further analysis can be key. Employing IP login tracking and implementing multi-factor authentications can also help you stay protected. Here are a few other things you can do to outsmart fraudsters:

  • Request for their Federal Employer Identification Number (FEIN) and state and local registration numbers- A reliable and trustworthy organization will have the proper IRS documentation. If the prospect can’t provide you with the necessary paperwork or seem reluctant to provide them, proceed with caution.*Note: It is possible for individuals to produce fraudulent IRS documents, so you must always stay on high alert.
  • Verify the company- The following tips can help you verify whether your prospect is a legitimate company:
  • Check the Secretary of State website
  • A Google search can help find the official website of the potential client. Be sure to note the number of corporations listed with the same name in the search engine and verify their areas of specialization.
  • Verify details about ownership, contact information, and team members posted on the official website. Double check that all information matches with the information that was provided to you.
  • Confirm the information with the Better Business Bureau to ensure the firm is authorized.
  • Review the information that is provided on various social media accounts.


  • Validation of Deposits- This verification will allow you to know whether the prospect is providing you with a legitimate account.
  • Ask for previous W-2 Forms- Previous payroll logbooks and W-2 forms (Wage and Tax Statements) can help in assuring that the employees listed are real employees. These documents are often very difficult to fake.
  • Request that the prospect provides contact references from clients and vendors
  • Examine the state tax statements
  • Attain and analyze the credit score of the business owner and organization
  • Visit the physical location of the company
  • Request copies of prior months’ payroll records to compare information provided about the employees
  • Consider asking for financial reports and tax returns

How can I Protect My PEO

  • Request an onboarding fee – A start-up fee in advance could help with alleviating the risks of fraud
  • A third-party bank affirmation and balance check service can be helpful- Bank API (Application Program Interface) Systems share data across internal systems and users. Private APIs let banks exchange data with their partners. This interface can make it simple for clients to link their payroll bank accounts to you.
  • Checks- It can be challenging to convert checks into cash due to identity verification. An individual committing fraud would abstain from receiving payments via check as it would require immense efforts to convert the funds into hard cash.
  • Cyber Security Insurance can protect you- Try to understand what can and can’t be indemnified under specific types of insurance plans and choose the most appropriate cybersecurity insurance policy for your company. It could help you recover unexpected losses.
  • Train your staff well. Train your staff often.
  • Conduct an in-person meeting with the prospective client.
  • Formulate strong standard and operational procedures and concrete internal controls


What to Do In

Case of Embezzlement

When it comes to fraud, time is of the essence. The following steps can help in minimizing the losses detected in cases of fraud:

  • Secure all relevant documents and records.
  • Verify that all the employees are aware of the theft, and stop any further payroll processing immediately
  • Inform the law authorities and NAPEO if you are part of the organization.

When it comes to fraud, staying alert and being mindful of the people that you do business with could in fact help you steer clear of fraudulent acts. Ensuring that your staff members are properly trained to recognize the warning signs of fraud is key when it comes to preventative action. Most importantly, staying alert and going through all the actions mentioned above, especially when you sense any kind of the potential red flags from a prospective client. It is always better to be safe than sorry and when it comes to fraud, your PEO depends on it.