How to Spot, Prevent, and Respond to Payroll Fraud in New York

Payroll fraud is one of those threats most businesses don’t see coming. It doesn’t make headlines like a data breach or a lawsuit. It doesn’t arrive with alarms or warnings. But it can quietly drain your revenue, wreck internal trust, and leave you questioning how well you really know your team.

In New York’s fast-moving business world, it’s easy to miss the warning signs. Especially when the fraud comes from inside. Someone who knows your systems, understands how to bypass controls, and takes advantage of the blind spots most companies don’t realize they have. And when money starts disappearing through payroll? That’s not just a bookkeeping error. It’s theft.

Our commercial litigation attorneys at Horn Wright, LLP, help New York business owners take action when payroll fraud threatens everything they’ve built. Whether you’re seeing suspicious numbers in your reports or have uncovered a ghost employee scheme, we’re here to help you take back control and protect your business from further loss.

Ghost Employees Are Bleeding Your Payroll, Here’s How You Can Catch Them

Ghost employees aren’t just a technical error. They’re part of a deliberate scheme. Someone, usually with internal access, creates a fake worker in your system, then diverts the wages into their own account. It looks like business as usual on paper, but your company is footing the bill for someone who doesn’t exist.

In bigger teams or high-turnover industries, it’s easy for this type of fraud to fly under the radar. And that’s exactly what makes it effective.

Watch for these warning signs:

• Duplicate addresses or bank accounts connected to more than one employee.
• No logged hours, badge-ins, or vacation activity. Just regular paychecks.
• Unusual salary spikes or overtime payouts without explanation.
• No HR documentation. No ID, tax forms, or onboarding records.

This kind of payroll theft can go on for months or longer. Every missed clue means more dollars lost and more damage to internal trust.

Payroll Fraud Isn’t Just Costly, It’s Criminal

This isn’t just an HR issue. In New York, payroll fraud can lead to serious felony charges.

Depending on how the fraud was carried out and how much was taken, the consequences may include:

• Grand larceny. Theft over $50,000 is a Class C felony, punishable by up to 15 years in prison
• Falsifying business records. Altering documents or payroll entries can result in felony charges
• Forgery. Creating fake documents or signatures to commit fraud
• Identity theft. Using someone else’s personal data to reroute paychecks
• Conspiracy. When multiple individuals are involved in planning or carrying out the scheme.

New York prosecutors treat white-collar crime seriously, especially when financial harm spreads across multiple departments or stakeholders. Payroll fraud can even lead to broader business fallout if it impacts relationships with partners, vendors, or clients.

When tensions rise among leadership or ownership groups, having partnership dispute attorneys in your corner can be key to resolving issues and avoiding internal legal battles.

Build Stronger Payroll Systems to Protect Your Business

While no system is perfect, the right controls can make payroll fraud much harder to pull off. You don’t need an overhaul. You need practical protections that fit your business and grow with it.

Here’s where many businesses strengthen their defenses:

• Separate job duties. Don’t allow one person to enter employees and issue payments
• Use payroll platforms with fraud detection. Good software flags duplicate bank info, unusual wage increases, and unverified profiles
• Conduct unannounced internal audits. Random reviews are far more effective than scheduled ones
• Verify employment annually. Require ID checks or updated documentation for all active employees

If your business has grown rapidly or shifted to remote work, your risk profile has changed. A corporate litigation firm can help evaluate where your current process may be vulnerable.

What to Do If You’ve Discovered Payroll Fraud

Finding out someone inside your organization committed fraud is a tough realization. But acting decisively can minimize further risk and set a clearer path forward.

Here’s what the response process generally looks like:

1. Secure evidence. Save payroll logs, banking records, emails, and any internal communications.
2. Isolate access. Revoke system permissions from those under investigation.
3. Notify law enforcement. If the financial loss is significant, police or prosecutors may need to get involved.
4. File a civil lawsuit. This may allow you to recover stolen funds through asset freezes or restitution.
5. Review your business insurance. Some policies include coverage for internal employee theft.
6. Speak with a tax professional. Fraud may require adjustments to prior payroll filings or IRS notifications.

Fraud doesn’t always happen in isolation. It can lead to broken business agreements, missed deliverables, and financial penalties. In those cases, companies may also face breach of contract claims or need strong commercial lawsuit representation to recover damages and repair their reputation.

Real Help from Top Commercial Litigation Attorneys at Horn Wright, LLP

If payroll fraud has disrupted your business, you don’t have to handle it behind closed doors. Our business fraud litigation lawyers at Horn Wright, LLP, help New York companies pursue legal solutions with precision, discretion, and strategy. 

Our experienced legal team knows what it takes to uncover the truth, pursue those responsible, and rebuild stronger systems. When it matters most, hire one of the best law firms in America to stand behind your business.

Contact us online or call (516) 714-5975 to schedule your complimentary case review.