How to stop ghost employees from haunting your payroll, HR

Ian McAlister, General Manager at CRS Technologies. (Image: CRS)

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If something strange seems to be going on in your payroll and HR department and your company’s profits are vanishing into thin air, chances are you have ghost employees draining your bottom line.

The presence of ghost employees on a company’s payroll system ranks as one of the most difficult types of payroll fraud to detect, especially in larger organisations with decentralised operations or weak internal controls, says CRS General Manager, Ian McAlister.

“Industries that frequently hire large numbers of workers and experience regular staff turnover, such as construction, public service, healthcare and education, are particularly vulnerable.

“Limited oversight, inadequate segregation between payroll and HR, and reliance on manual systems further increase the risk. Over time, this can pose a serious threat to the organisation’s profitability and long-term sustainability.”

Ghost employees are fictitious or former employees who are kept on the company payroll so that someone – usually an insider – can collect their salary, McAlister explains. “These ‘employees’ don’t perform any work for the organisation, but they receive regular pay, which is diverted to someone else’s bank account. It could be someone with a fake ID number but a valid bank account, or a real employee who left the company but was never removed from the payroll system.

“Another example is when a clone of a real employee is created using a different ID number. The employee’s salary is then split between the two identities, but only one receives a tax certificate, enabling the perpetrator to declare less than what they actually earn to the tax authority.”

Ghost employee fraud is often committed by individuals within payroll or HR who have access to employee records and salary disbursement processes. The rise of remote work and digital HR systems has made physical employee verification more difficult. Creating fake profiles or tweaking records from a distance is now much easier, and if digital systems aren’t well protected, they can open the door to fraud.

“Once the ghost is created, payments are processed without the need for further action or review by the payroll team. All the perpetrator has to do is sit back and collect the payments. Their actions can go unnoticed for months or even years if proper controls aren’t in place.”

One possible sign of payroll fraud is when the payroll manager or administrator always arrives early, stays late and never takes holiday or sick leave. Being away from the office would force them to hand over their responsibilities to someone else and risk exposure.

Other red flags that could indicate ghost employees include duplicate bank account numbers or personal details appearing across multiple employee records, as well as payments being made to inactive or non-existent employees.

“You might also notice individuals listed without supervisors, job descriptions or any measurable work output,” McAlister adds. “Unfamiliar names claiming excessive overtime, rising payroll costs that don’t match your actual headcount and employees who are never seen in meetings, reviews or other HR interactions can all point to potential ghost employee fraud.”

According to McAlister, the best way to bust ghost employees is to implement a cloud-based, automated payroll and HR system with role-based access and strong cyber security protocols.

“The system should include ID number verification so that if someone tries to enter a ghost employee, the system will immediately reject the ID number as invalid. The CRS solution, for example, incorporates unique ID numbers for each employee, which cannot be duplicated. This ensures that an employee cannot appear twice on the same system.”

Audit and risk management policies are also vital for preventing and detecting payroll fraud. McAlister recommends conducting audits at least quarterly to ensure that the number of employees on the payroll match the number of people employed.

“Additionally, perform regular spot audits to check that employees’ earnings, allowances and other remuneration additions are correct and align with their employment contracts. Any changes to an employee’s earnings must be approved by a senior manager and not the payroll administrator. If possible, a multiple-party approval process should be followed to mitigate collusion. It is also advisable to run comparison reports between various payroll periods. Any variance above a set threshold should raise a red flag.”

For businesses that cannot afford the luxury of an internal audit department, McAlister recommends entrusting the payroll to a third-party professional.

“Outsourced payroll providers offer a powerful line of defence against ghost employee fraud. Their systems and controls are usually more robust, and include audit processes in place that make it harder for fraudulent activity to slip through the cracks.

“CRS’s outsourced payroll services include multiple levels of accountability, with different people managing separate payroll duties. Fraudulent activity is further prevented by rigorous internal controls, and the clear separation between your internal HR and the outsourced payroll function adds an extra layer of security. It's this tighter oversight that helps safeguard your business against the hidden cost of ghost employees.”

Ghost employee fraud may be difficult to detect, but it’s far from impossible to prevent, McAlister concludes. “With the right combination of technology, internal controls, regular audits and professional support, organisations can keep their payroll clean and secure. Whether it’s through investing in a secure, automated system or partnering with a trusted payroll provider, taking action today is essential to avoid being haunted by losses tomorrow.”

For more information, go to: https://www.crs.co.za/.