3 Tips to Protect Your PEO from Fraud

Tuesday January 19th, 2021

Even before the pandemic, professional employer organizations (PEOs) were at high risk for payroll fraud. The uncertainty brought on by COVID-19, however, could lead to a rise – with research suggesting that fraud tends to increase during times of economic instability.

This means that PEOs need to be prepared for the potential of fraud within their business and put safeguards in place. Here are three tips for how to prevent payroll fraud and protect your business:

Tip 1: Watch for Red Flags

When it comes to payroll fraud, there are red flags that can signify something isn’t right. To effectively find these flags, however, PEO owners and their employees must be trained on what to look for. Here are just a few scenarios highlighted by the National Association of Professional Employer Organizations (NAPEO), that may suggest something is amiss:

  • Prospects demanding a quick turnaround on the onboarding process.
  • Prospects requesting payroll-only services.
  • Suspicious email addresses or use of a P.O. Box.
  • Concerning interactions, including no in-person or virtual meetings, doesn’t answer phone calls, uses multiple numbers, no voicemail message, etc.
  • No business registration in the state of business or incorporation.
  • Prospect has an unreasonable reaction to making a wire payment for the first payroll.
  • Numerous employees change their direct deposit information shortly after onboarding.
  • Lack of a website or information on the website that doesn’t match onboarding paperwork (like business address and phone number).

Tip 2: Put Added Security Measures in Place

Although identifying red flags can help detect the possibility of fraud, there are other security measures that should be considered. According to isolved’s Director of PEO Solutions Shane Underwood, PEOs can leverage technology to protect against fraud. 

“Technology can help PEOs put safeguards in place to protect their business from fraud,” said Underwood. “In addition to using secure FTP websites to transfer files, PEOs should look into setting up notifications within their human capital management (HCM) or payroll platforms that will alert them when direct deposits change. These alerts will allow PEOs to closely monitor any changes on behalf of their clients.”

NAPEO also outlines additional ways PEOs can mitigate the potential of fraud, including:

  • Requiring an onboarding fee.
  • Requiring wire-only payments for the first initial payrolls.
  • Having face-to-face or virtual meetings with prospects.
  • Requiring a security deposit or letter of credit from prospects.
  • Using a third-party bank verification and balance check service.
  • Checking with your current banker and looking into its security software.
  • Checking with your insurance agent to see if they have a payroll fraud protection product.
  • Establishing strong standard operating procedures pertaining to payroll and onboarding.

Tip 3: Have a Plan of Action.

Even with proper staff training and security safeguards put in place, there is still a possibility that fraud could happen within any organization. If there is a possible payroll fraud situation, a plan of action is needed to minimize impact and potential loss. If there is not a fraud action and response plan in place, PEOs should develop one. Underwood notes the first steps in this plan should be to notify employees and freeze transactions until an investigation is conducted.

“If fraud is suspected, you need to shut things down immediately,” said Underwood. “You need to track down how the fraud occurred and collect all relevant information to share with necessary parties, such as the police and your bank.” 

PEOs should also consider notifying other brokers and NAPEO of fraudulent activity. Doing so can reduce the likelihood that others will fall victim to similar fraud situations in the future.

Minimizing Fraud for the Future

Although there will always be a risk for fraud within any organization, the best way to protect against it is with a comprehensive training program and technological safeguards. This will ensure that staff members know what to look out for, how they can do their part in mitigating risk and what to do should fraudulent activity occur.




Allie Howen

Senior Content Manager