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Effective Steps To Prevent and Detect Ghost Employees

HR & Compliance

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Updated on:
February 28, 2024
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Updated on :

February 28, 2024
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Effective Steps To Prevent and Detect Ghost Employees


Ghost employees are no mere supernatural phenomenon — they're a real threat to businesses that don’t take the necessary precautions. Fraudsters come in all forms, including pretending to be an employee on a company’s payroll. Companies with globally dispersed in-house payroll systems are at greater risk of ghost employees hiding in the margins, many of whom are even employed accounting members taking advantage of the system. Continue reading to learn about ghost employees: the definition, how this scheme works, and how you can detect and prevent this form of payroll fraud.

What is a ghost employee?

A ghost employee acts as a payroll employee despite not working for that company — a type of fraud conducted to collect [additional] payroll from one’s company. For example, a ghost employee may be an accounting employee with access to the payroll system, which siphons money to themselves, disguising themselves as an additional employee. Someone with access to your payroll system might also send paychecks to other real people who are not employees, splitting the profits with them.

The person conducting the fraud may go unnoticed by pretending a terminated or deceased employee’s account is still receiving payroll checks or by hiring a "new employee" who doesn’t exist. This behavior can often slip through the cracks, particularly at larger companies with little oversight. In most cases, the person conducting the ghost employee scheme is responsible for the following:

  • Posting and managing time sheets and attendance
  • Managing payroll accounting and distribution
  • Managing employee master records
  • Handling the financial onboarding functions of new employees

This scheme may also be carried out by multiple employees or by one or various coworkers of accounting members. What’s more, ghost employees are more common than you may think, with millions of dollars leached from companies worldwide each year. In 2020, members from a janitorial contractor company were exposed for stealing over $1 million from the Lee County Port Authority by acting as ghost employees. Additionally, a 2020 Association of Certified Fraud Examiners report discovered that businesses worldwide lose a combined total of $3.6 billion each year to fraud, with an average of $1,509,000 lost per case.

The ghost employee scheme is a real threat to businesses everywhere. So, how can your company detect and prevent ghost employees? We’ll answer this question and more below.

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How to detect ghost employees

Companies spend enough capital on employment costs and resources, so it’s important to ensure additional money is not lost to fraud. Fraudulent schemes like ghost employees are more likely in companies with poor organization, little oversight, and a lack of anti-fraud training and protections. Particularly for businesses with globally dispersed teams, having decentralized HR and accounting systems — perhaps even located in separate countries — cracks open the door for fraud.

Detecting ghost employees, particularly when composed of trusted or multiple team members, can be difficult for any company. However, there are precautions and audit processes that business owners can do to prevent and investigate fraudulent activity. These steps include tracking payroll budgets, auditing tax deductions, and checking for discrepancies, but let’s go over the ways to detect fraudsters in detail:

Run third-party audits

Partnering with third-party auditors can save thousands of dollars in theft for companies with in-house payroll systems. Auditors can take a closer look at your company’s finances, accounting, and payroll to check for suspicious payments and activity. If you choose to run in-house payroll, working with auditors is essential — particularly for bigger businesses with a higher potential for unnoticed ghosts.

Investigate employees with low or no tax deductions

A common sign of ghost employee fraudulence is consistent payroll checks released to employees with little or no tax deductions taken. These payments may fly under the radar for companies that estimate a range of total tax deductions for their employees. Thus, any paychecks with no tax deductions should cause suspicion.

Review canceled checks

An employee cancels their payroll check. Why would an employee cancel their payroll check? The answer is they probably wouldn’t. Sometimes fraudsters will distribute fraudulent checks to cover the cashing of separate checks. This can go unnoticed. Common accounting mistakes like this should raise suspicion.

Examine Social Security numbers

Actual employees have real Social Security numbers (SSNs), so ensure that’s the case for everyone on your payroll. You can reach out to the IRS or local government tax offices to verify your employees’ information. If the information provided by the authorities does not align with employee-provided details, it could be an innocent mistake or cause suspicion. For employee names that employers don’t recognize, conducting background check is a simple way to assess this person.

How to prevent ghost employees

Once fraud has taken place, it can be challenging to detect and end it. This is why companies need to try to prevent it from happening in the first place. There are numerous precautions, as well as organizations to partner with, that can help your business's payroll remain secure. Companies of all sizes can take the appropriate precautions to prevent fraudulent ghost workers.

Conduct background checks for employees

Preventing fraudulent activity is one of the many reasons to require background checks for your employees. Of course, if you discover a history of fraud, you will know not to trust that person with your financial processes. Additionally, background checks are essential to verify personal information, such as SSN and address. As the functions of accounting and employee background checks may fall under the same HR role, depending on the size of your company, ensure that multiple people are conducting these tasks.

Keep detailed records

While it may seem obvious to keep detailed records to prevent fraud, many companies get lost in business chaos and fail to have organized systems. To prevent fraud, businesses must make keeping detailed records a priority. An organized bookkeeping system should include keeping all financial statements for at least five years, maintaining an efficient digital and paper filing approach, and performing regular audits.

Have multi-party approvals

Having multiple employees in charge of checks and balances helps to ensure that fraudulent activity will not occur. For example, no employee who cuts payroll checks to employees should also be the one authorized to sign checks. Additionally, separate employees should be responsible for approving other employees' financial actions and decisions. While it’s possible for ghost employees to consist of multiple employees working together, the more employees involved in this process, the harder it will be for employees to commit fraud.

Provide anti-fraud training

Another smart way to prevent ghost employees is to provide anti-fraud training to your teams to educate them on various fraud strategies. According to a 2020 Association of Certified Fraud Examiners report, employees who were educated about fraud were 20% more likely to discover and call out fraud than uneducated ones. In addition to training, having formal systems for reporting fraud reduces this risk.

Have audit processes ready to go

While completing audit processes is an excellent way to detect fraud, this can be harder to manage without formal audit systems already in place. Additionally, if fraudsters know about existing auditing systems, they may be scared of attempting any crime.

Make financial procedures clear

Many perpetrators of ghost employee fraud attempt to write off suspicious activity as mistakes, but clear financial procedures make it more difficult for anyone to pretend they don't know what they’re doing. Thus, your financial, accounting, and checks and balances procedures should be detailed, precise, and thoroughly taught through training.

Use a payroll partner

One of the best strategies to prevent fraud in the first place is to outsource your payroll system to an expert payroll organization. Working with a payroll partner like Skuad makes it easy to manage payroll for globally-dispersed employees from one unified system.

How a payroll partner like Skuad can help

A payroll partner like Skuad allows businesses to outsource their payroll systems — and other HR functions — to the experts. Skuad uses efficient, user-friendly, and 100% secure payroll software to ensure payments are accurate and on time every time. This solution also allows businesses with international employees to be paid from one platform, resulting in the most organized global payroll system possible.

You deserve to stay safe from fraud, and your employees deserve to feel trusted. Working with a payroll partner like Skuad can eliminate the stress of ghost employees entirely so that you and your workers can focus on what you do best. Schedule a demo with Skuad today to learn how we can help keep your payroll efficient and secure.

About the author

Catalina Wang is a Human Resource Consultant. She manages recruitment, onboarding, and contract administration staffing for many organizations and remote teams. She’s passionate about efficient HR management and the impact of tech on hiring practices.

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