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There’s a growing concern and awareness around payroll security issues, and for good reason. The average global cost of a data breach is now nearly $4.9 billion. The best payroll data security works to protect sensitive payroll information and payroll data while thwarting unauthorized access, phishing attempts, and payroll fraud. Payroll processing should be one less thing on your plate, rather than one more thing to worry about.
Key takeaways about payroll security
- Payroll security is critical, with data breaches costing businesses millions and affecting hundreds of millions of victims annually
- Best practices include regular audits, software updates, access controls, and employee training, with a focus on AI-enhanced security measures
- Researching providers with features like data encryption, compliance certifications, and integration capabilities is becoming increasingly important
In this guide, we cover the basics of payroll security, outline common risks to avoid, and provide guidance on how to stay ahead of digital bad actors who can affect your business.
What is payroll security and why is it important?
Simply put, payroll security encompasses processes and procedures that protect sensitive payroll data, such as bank information, Social Security numbers, and other identifying personal details, from potentially fraudulent activities. Safeguarding payroll information is critical to preventing identity theft, reputation loss, financial loss for customers and your business, and even potential legal and compliance issues related to data privacy. Several payroll security best practices can support ongoing enhanced security for all of your payroll processes.
Common risks to payroll security
There are three key risks when it comes to payroll security today:
Payroll fraud
When someone fraudulently takes money from a payroll system, this is what’s known as payroll fraud. Employees, for instance, can manipulate timesheets to increase their earnings, while employers can falsify expenses to save money.
Some more examples of payroll fraud include:
- Adding a fictional employee to the payroll, who is then paid
- Incorrectly classifying employees as independent contractors to circumvent labor laws
- Companies failing to withhold payroll and/or income taxes from paychecks
- Falsifying receipts for reimbursements
Data breaches
With more than 353 million victims, the number of data breaches increased 78% in 2023 over the previous year, according to the Identity Theft Resource Center. A data breach is defined as any unauthorized access to confidential information. With more bad actors across the globe attempting to gain access to valuable information, data breaches will continue to be a risk for businesses of all sizes.
Internal links
Also known as an insider threat, an internal link — when sensitive information is shared with unauthorized individuals — can be both intentional and unintentional. Either way, it exposes a lack of security in a payroll system and presents a danger. When an internal link occurs, an insider intentionally or accidentally misuses their access, or a cybercriminal hijacks someone’s account credentials.
All of these risks can be costly for companies. When added together, the risks only multiply.
Best practices for payroll data protection
While data breaches and fraudulent activity continue to rise worldwide, companies can use several savvy best practices to bolster their payroll data protection.
Regular audits and reviews
If you are not looking for payroll security issues, they will be that much harder to pinpoint. Companies of all sizes should audit and review payroll processes on a regular basis to look for any inconsistencies or compliance issues. The more familiar you are with this important data, the easier it will be to recognize an issue if one crops up. This is a simple but effective step every company can and should take.
Software updates and security patches
Your payroll software should be up-to-date at all times. Never put off a software update or security patch. These simple actions help you make sure that your payroll software is compliant and current, making it better able to fend off phishing attacks or other security issues.
Implementing access controls
Who has access to your payroll data servers? If the answer is, “I’m not sure” or “Too many people to count,” then your company should consider instituting access controls to limit who has access to sensitive payroll information and provide different levels of access as well.
Employee training on data security
Training on payroll data security should not be a one-time event. Regular training and education on payroll data security best practices can help your employees better recognize fraudulent activity and feel more comfortable reporting it. You should also test your team on their ability to identify potential fraud and verify that your disaster recovery plans are updated and actionable. Every employee in your company can be part of your data security team when empowered to fight fraud.
Choosing a service provider that understands payroll security
Choosing a payroll service provider is an important step in updating and securing your company’s payroll procedures. When making this choice, you will want to consider factors such as desired and required payroll features, cost, data and information security, the ability to integrate payroll software with your other technology and software, customer service, compliance features, and more. Your payroll administrator should be able to discuss their approach to data security and compliance confidently.
Evaluating security features
Payroll security should be at the top of your list when evaluating potential payroll providers. When it comes to security, your company should carefully review and assess the following with all of your payroll prospects:
- Data encryption: How do companies encrypt sensitive information to prevent unauthorized access? Data encryption is essential to payroll security, and all payroll data should be unreadable if it is intercepted by a third party.
- Compliance and certifications: The best payroll providers adhere to local and national compliance regulations related to multi-factor authentication, data storage and backup, and privacy laws. In addition, the ISO 27001 certification is the gold standard for risk and security management. Providers with this certification have data security systems that follow best practices to prevent cybercrime and data breaches.
- Access control: Companies should know (and limit) who has access to their sensitive information. Payroll security providers can institute various access levels to make sure that only authorized employees have access to secure information.
- Audits: When interviewing payroll providers, ask about their security audits, how often they perform them, and what they can uncover. You want to find a provider that takes regular audits seriously and provides actionable reports.
- Data storage protocol and disposal: Ask potential payroll providers where they store data and how they dispose of sensitive information, when appropriate.
Compliance with data protection laws
Data protection laws can vary by state and country, but they generally focus on secure data collection, storage, and processing of personal information. Compliance procedures might involve reducing data collection to minimize risks, obtaining consent from various parties before using or sharing their information, adding data security practices that support privacy and safety, and clear company guidelines on how to store sensitive information. All parties should know what data is kept and who is allowed to access it. Additional vendors with access to this data must also be in step with data protection laws.
Make payroll security a priority
Business owners will want to keep payroll security on their mind as cyber threats evolve and data breaches become more common (and costly). To keep pace with online fraudsters, solutions will continue to get smarter, likely leveraging AI and cloud-based technologies for proactive, round-the-clock protection. As data security laws and regulations change, it makes good business sense for employers to invest in cybersecurity training and advanced payroll security systems.
This article is provided for informational purposes only and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors for formal consultation.
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Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.