Payroll Security: 7 Best Practices to Protect Sensitive Data

Payroll security refers to the measures put in place to protect a company and its employees’ data, including salary details and tax information, from malicious attacks and theft. These measures can involve using payroll software, restricting access for certain employees, and monitoring payroll access logs to help prevent potential risks.

As an employer, keeping your employee’s information protected is a legal obligation, so it’s important to learn about proper payroll security to avoid repercussions. In today’s article, we’ll discuss the most common threats to payroll security and provide some best practices you should follow.

Let’s jump in!

Key Takeaways

• Payroll security is the process of safeguarding a company’s payroll system and processes to protect its employees.
• Common payroll security threats include fraud, phishing attacks, data breaches, overpayment schemes, ghost employees, and time entry manipulation.
• To boost payroll security, we recommend using secure payroll software, performing routine audits, and monitoring access logs.
• Some legal requirements for payroll data protection are the General Data Protection Regulation (GDPR), the Health Insurance Portability and Accountability Act (HIPAA), and the Gramm-Leach-Billey Act (GLBA).

What is Payroll Security, and Why Is It Important?

Payroll security is essential in safeguarding your business’ payroll data from unauthorized external access. This is important because it protects your employees’ personal and financial information, including their bank details and tax information, ensuring their privacy and safety from identity theft and fraud.

Moreover, compromised payroll data can lead to harsh legal consequences due to non-compliance with data protection laws and significant financial losses. But, before implementing payroll security measures, you must first understand the common threats you could be facing.

5+ Common Payroll Security Threats

Common payroll security threats can come from both external and internal forces, such as:

#1. Payroll Fraud

Payroll fraud occurs when an employee or external party manipulates payroll processing to gain salaries, increases, or bonuses. Fraud is one of the most common threats to payroll security, and businesses can lose up to 5% of their revenue each year, according to the Association of Certified Fraud Examiners.

While this offense usually starts out small, undetected payroll fraud can lead to severe financial losses over time. Common examples of fraud can include altering payroll records and making unauthorized changes to employee salaries.

#2. Phishing

Phishing is a threat to payroll security that involves targeted attacks on employees to trick them into revealing personal data or sensitive company information, such as login credentials.

Phishing attacks are often carried out through seemingly legitimate phone calls or emails and are designed to imitate trusted organizations like banks or government agencies. When successful, they grant the attackers access to the company’s payroll system, allowing them to manipulate data and steal company funds.

#3. Time Entry Manipulations

Time entry manipulation refers to the intentional altering of work hours or attendance to receive additional payment. This is often done to skip work without prior notice, exceed the maximum allowed late hours without deductions, and get paid for nonexistent overtime.

While this practice may seem minor compared to other payroll security threats we discussed above, manipulating time can lead to employees getting overpaid for months, affecting a company’s overall revenue and undermining workplace fairness.

#4. Data Breaches

A data breach in your payroll system can expose confidential company and employee information to hackers and lead to serious legal issues. Moreover, according to Verizon’s 2024 Data Breach Investigations Report, 62% of financially motivated data breaches can result in a median loss of $46,000 per incident, which can cause significant financial strain.

This payroll security threat can stem from various problems, including weak passwords, outdated payroll software, and unsecured systems. In fact, even accidentally clicking on a shady link can increase the risk of a data breach.

#5. Overpayment Schemes

Overpayment schemes occur when employees manipulate the payroll system to issue extra salaries for themselves. This can involve falsifying payroll records, duplicating entries, or taking advantage of poorly monitored payroll systems.

These kinds of schemes are rampant in organizations without a dedicated payroll department or those that lack a proper internal structure. Unfortunately, this payroll security threat can be difficult to detect without routine audits and can continue to drain the company's funds for years.

#6. Ghost Employees

Aside from overpayment schemes, another internal payroll security threat is the presence of “ghost” employees or fake profiles added to the company’s payroll. This scheme is often executed with the help of an employee in the payroll or HR department who manages company information.

Fortunately, ghost employees are one of the easier threats to resolve, especially in smaller businesses. For instance, to maintain payroll security, you can check emails and verify company records for every employee on the payroll roster to prove that they actually work for the company.

7 Payroll Security Best Practices

Now that you know what threats you should be concerned about when it comes to payroll security, here are seven best practices you can follow to start protecting your business and employees:

#1. Use Secure Payroll Software

The best way to ensure payroll data security is to use software specifically designed for payroll processing. Most modern payroll systems have advanced security features like data encryption and multifactor authentication to protect them from common threats like unauthorized access and leaks.

Aside from automation software, another platform you can use to improve payroll security is Paystubs.org’s form and pay stub generator. With our online tool, you can quickly draft professional pay stubs for multiple employees to make it easier to manage your financial records and avoid payroll errors.

By standardizing employee’s financial documents, you can keep track of everyone on the company payroll, easily identify fake pay stubs, and prevent ghost employees and payroll fraud.

#2. Restrict Access to Payroll

Restricting access to your payroll system is one of the simplest and most important payroll security measures you can start implementing today. Ideally, only key personnel like your payroll administration should be able to access the company’s information to reduce the chances of time entry or data manipulation.

If necessary, you can provide limited access to the HR or IT department, but avoid giving too many employees full permission, as this can increase the risk of data leaks.

#3. Perform a Payroll Security Audit

Performing payroll security audits is essential for maintaining your payroll security and identifying any potential vulnerabilities, so it’s best to do it frequently. These audits should involve reviewing transaction logs, cross-referencing records, and evaluating payroll access.

We recommend conducting an audit annually or after any major changes to your employee structure to ensure that nothing is amiss. By staying on top of your payroll security, you can easily pinpoint unusual activities or discrepancies and avoid common threats.

#4. Protect Physical Payroll Data

If you keep physical copies of your payroll data, it’s crucial to have several measures in place to maintain payroll security from bank to employee.

For one, these copies must be restricted to general employees and located in a secure facility. However, if you plan on keeping them in the office, make sure to invest in state-of-the-art control systems to prevent unauthorized access.

As much as possible, limit printing sensitive information on the physical copies of your employees' payroll documents and shred any unused copies to ensure that they don’t fall into the wrong hands.

We also recommend implementing clear policies for handling these documents, such as requiring sign-ins for access, to reduce the risk of theft or loss.

#5. Educate Employees on Payroll Security

To ensure total payroll security, it’s essential that your employees are aware of the risks and common threats that they may encounter. You can conduct training sessions on recognizing and avoiding phishing attacks and creating strong passwords.

Keeping your employees informed about these risks will make them more wary and less likely to fall victim to common scams. You can also share updates about the company’s payroll policies and cybersecurity measures, so they understand the repercussions of not following these rules.

#6. Regularly Monitor Access Logs

Whether you use payroll software or manual processing, it’s important to regularly monitor who accesses payroll data and when they do so. After all, employees shouldn’t routinely be viewing payroll information unless they have a specific company-related task, such as reviewing wages or security measures.

Frequent monitoring will also highlight unusual patterns, such as repeated access from employees who don’t usually handle payroll tasks, which can be a sign of a potential security risk.

#7. Create a Strategy for Dealing With Data Breaches

Lastly, regardless of how well you secure your payroll system, it’s best to be prepared and have a clear strategy in case of a data breach.

IBM recommends developing a disaster response plan outlining the specific steps you would take when a breach happens to ensure the least amount of damage. This should include notifying stakeholders, identifying the affected data, and preventing further risks.

Once you have a strategy in place, make sure to test it regularly to ensure there are no weaknesses and keep your employees well-prepared.

Legal Requirements for Payroll Data Protection

There are certain legal requirements and regulations in place to protect the privacy of employees since payroll data contains important information, including their bank account details and Social Security numbers.

Some of these requirements include the following:

• General Data Protection Regulation (GDPR). Under GDPR, employers based in the EU are required to secure their employees’ data and notify the authorities immediately in case of a data breach.

• Health Insurance Portability and Accountability Act (HIPAA). HIPAA is a federal law in the US that requires healthcare providers to protect their employees’ personal information and medical records from unauthorized use or disclosure.

• Gramm-Leach-Billey Act (GLBA). Also known as the Financial Services Modernization Act of 1999, this federal law requires employers to safeguard their employees’ financial information and prevent disclosure without their consent.

Final Thoughts

Prioritizing payroll security can help you prevent any financial losses and legal penalties and protect your employee’s privacy. With that said, one of the simplest ways to boost payroll security is by using payroll software, like Paystubs.org, to generate pay stubs, invoices, and other documents.

Our pay stub generator allows you to easily input the necessary information, customize the document, and download your file in seconds without having to worry about any data leaks or breaches. Plus, using ready-made templates will help reduce common clerical errors and ensure accuracy for every financial record.

Payroll Security FAQ

#1. How often should you conduct a payroll audit?

You should conduct a payroll audit at least once a year to keep your systems protected. However, if you have the means for it, consider auditing your payroll every quarter to catch any errors or discrepancies right away.

#2. Can you protect payroll from internal threats?

Yes, you can protect your payroll from internal threats by constantly monitoring your payroll systems and limiting access to specific individuals in the company. We also recommend encrypting any sensitive information to ensure security from data breaches.

#3. Who should have access to payroll information?

The only people who should have access to payroll information are the owners of the business and the payroll administrators. In some cases, HR managers may need to access some payroll information, but this should only be provided when necessary.