Payroll management is another critical aspect of business operations. Not only does it involve demanding tasks, such as compensating employees, calculating deductions, and remitting taxes and social security contributions, but it also entails handling sensitive and confidential data. Therefore, payroll security is a serious issue that requires attention.
Data security, in general, is becoming more and more important in today’s digital age, especially for institutions and organizations that access, process, and store other people’s sensitive information, may it be personal, employment-related, financial, or social security data. In the Philippines, the Republic Act 10173 or Data Privacy Act of 2012 provides a legal framework for the protection of personal and sensitive information used in communication systems in the public and private sectors.
The law comes in response to the prevalence of cybercrimes that relate to unlawful access, fraudulent misuse, unconsented disclosure, and unlawful disposal of personal and sensitive data. With regard to payroll management, there have been alarming cases of hacking, data breaches, and the compromise of employees’ details.
For instance, in 2021, Arup, a UK-based engineering firm, revealed to thousands of their employees across 140 countries that the latter’s personal details — addresses, bank account numbers, sort codes, and national insurance numbers — had been compromised after a ransomware attack. The same case happened to Yum! Brands, the parent company of popular fast food chains KFC, Taco Bell, and Pizza Hut in 2023.
In cases like these, the blame will always fall on the employer, or its payroll service provider, if any, for not being diligent enough in implementing adequate data security measures. For companies and employers, then, it’s not yet too late to evaluate payroll security and do what needs to be done.
So, in this article, we’ll cover the importance of payroll security and provide the best practices that employers can always employ to secure their payroll data. Feel free to leave your comments below and reach out to us for inquiries.
Payroll Security
Payroll security involves all the processes that a business implements to safeguard the integrity, confidentiality, and availability of payroll data. It consists of all the measures taken to protect sensitive employee information (e.g., bank details, addresses, social security numbers, etc.) from potential threats both inside and outside of the company.
4 Common Payroll Security Risks
Generally, potential payroll security risks include internal threats from employees, especially those at the forefront of payroll processing, external hackers and data breaches, system failures and data losses, and even human errors.
Insider Threats
Internal employees might manipulate payroll data for the benefit of those favored, leak payroll information accidentally or deliberately as a form of sabotage, or just fall victim to phishing attacks. Insider threats may include embezzlement, fraud, or theft of sensitive information. Some of the most common forms of payroll fraud include:
Ghost Employees. As the name implies, these are real or fictitious persons recorded in the payroll system who receive regular salaries but do not actually work for the company. They may be former employees who continuously get paid even after leaving the company or fake employees created by a payroll staff.
Time Theft and Timesheet Fraud. These usually happen when a company does not have an automated timekeeping system for employees’ work hours, or when employees are given all the liberty to declare reporting hours and prepare timesheets on their own. For instance, they may falsify their timesheets or DTRs to include extra hours that they have not worked in order to receive extra payments. Sometimes, they also get their co-workers to clock in and out on their behalf.
Employee Misclassification and Salary Fraud. There are employers who assign employees with classifications different from those in their job contracts or arrangements, e.g., as independent contractors instead of full-time employees, to reduce costs for taxes and statutory benefits. It also happens that employees, administrators, or payroll staff illicitly manipulate salary figures for their own or their colleagues’ benefit.
Data Breaches
Not only government agencies, but private companies also experience external cyberattacks targeting their payroll systems and databases that often result in data breaches and exposure of sensitive employee information. After taking advantage of the system vulnerabilities, hackers may use the stolen information for other cybercrimes and for financial gain. Payroll staff and other company employees with access to payroll systems may also misuse their privileges for personal gain or inadvertently compromise sensitive data. Equally, third-party service providers may also expose sensitive payroll data to security risks if measures are inadequate.
System Failures and Data Losses
Payroll disasters, such as system failures and data loss, which may be partial or total, temporary or permanent, may be caused by technical inefficiencies, lack of backups, natural disasters, and sudden disappearance of key people or payroll staff, among others. Without expecting these, the company may experience a major disruption in its operations, particularly the accurate and timely processing of employees’ salaries.
Human Errors
On the part of the payroll team, these usually happen due to negligence, failure to follow payroll protocols, or lack of proper training. These errors can have a profound effect on people, result in financial losses and waste of company resources, and at worst, put the entire company in jeopardy.
8 Essentials of Payroll Security
Payroll security is vital because systems hold sensitive information that, if compromised, can result in serious consequences. Below are the essential or basic features of secure payroll processing:
Data Privacy Act Compliance
The collection and processing of personal information, including employee data, is governed by the Data Privacy Act of 2012. Company administrators and payroll staff, in particular, should know and comply with the provisions of the law in order to safeguard sensitive information. Thus, they must be at the forefront of practicing extra caution when sharing information with individual employees or third parties.
Encryption
Encryption is a critical component of data security. It involves encoding data in such a way that only authorized parties can access it. By encrypting payroll data, organizations can ensure that even if it is intercepted or accessed by unauthorized individuals, it remains unreadable and unusable.
Access Controls
Access controls are measures that restrict who can access specific data within the payroll system. These can include password protection, multi-factor authentication, and role-based access controls. By limiting access to only those who need it to perform their job functions, organizations can reduce the risk of data breaches.
Data Backup and Recovery
It is not enough to just have robust security features, like encryption and access controls, to protect payroll data from all sorts of possible disasters, including system failures and data losses. It is also required to have the data regularly backed up on reliable and secure storage media, such as cloud services, external hard drives, or even flash drives. In worst-case scenarios, the backup copies may then be easily recovered, and there will be no major disruptions in payroll processing.
Audit Trail
An audit trail is a sequence of computer events that records every business transaction. It includes source documents and entries in the company’s accounting system, enabling the administrators to trace each transaction from start to finish. Conducting regular security audits helps organizations identify vulnerabilities and ensure that security measures are effective. These audits can involve reviewing access logs, testing for vulnerabilities, and ensuring compliance with company security policies and regulations.
Intrusion and Threat Detection
This may already be an advanced feature of a payroll security system that extends beyond traditional antivirus measures; however, it is advantageous, especially for large companies that employ thousands of people. This entails continuous monitoring of network traffic and system activities to detect malicious behavior or unauthorized access attempts.
Biometric Timekeeping Solutions
Implementing a biometric attendance tracking system offers several advantages for businesses. It eliminates time theft and buddy punching, ensuring accurate attendance records. It enhances security with biometric access control, reducing the risk of unauthorized access. Additionally, it simplifies the collection of payroll data.
Data Disposal and Destruction Policy
This refers to the proper and secure removal of payroll and employee data when they are no longer needed or required. These data, however, may still be in a high degree of sensitivity and confidentiality. Not only does it free up storage space and reduce costs, but it also prevents unauthorized access or misuse of the data. Data disposal and destruction must be done in line with the company’s retention policies and schedules and must be fully documented.
12 Best Practices for Payroll Security
Just knowing the most common security threats and essentials of payroll security is not enough, so here are the measures and best practices to safeguard the sensitive data of your company and employees:
1. Establish clearly defined payroll procedures.
All aspects of the company’s payroll, including the requirements and procedures, must be fully documented to guide the HR and payroll staff in performing their roles and responsibilities, troubleshooting issues, complying with the laws and regulations on data privacy, labor management, and taxation, and ensuring payroll continuity amidst technical, manpower, and security disasters.
2. Include payroll in the strategic planning.
Payroll, although often underestimated, is also a critical aspect of business operations. It forms a solid bedrock of employee trust, satisfaction, and productivity. It is also the cornerstone of the company’s compliance with labor and tax laws, thus avoiding penalties and costly legal repercussions. Given these, it is crucial to include payroll in the company’s strategic planning and start discussing payroll accuracy and security.
3. Implement access controls.
Restrict access to payroll data and systems to authorized personnel only, such as HR and payroll administrators. Equally, system permissions must be role-based, as they do not need the same level of access based on their job responsibilities. Make sure as well to regularly review and update these access permissions, especially with the changes in the employee lineups.
4. Keep sensitive payroll files and data encrypted.
Encrypt payroll-related files, such as employee tax forms and payslips, to keep them unreadable once accessed by unauthorized individuals, as they require decryption keys or passwords.
5. Conduct an annual payroll security audit.
By conducting an audit regularly, potential vulnerabilities can be identified and immediately addressed before someone, internally or externally, exploits them. This may be started with a survey or direct interview with the payroll staff and the IT department. Monitoring systems may also be integrated to detect and alert people to suspicious transactions or potential security issues.
6. Update payroll software and other security patches frequently.
Keep the payroll software, computer operating systems, and other applications used for payroll up to date with the latest versions, updates, and security patches. These may reduce the vulnerabilities that may be used by hackers to penetrate the systems and steal sensitive data.
7. Educate and train employees on security best practices.
Payroll security is not just an HR and payroll team’s concern. It is a concern of the entire company and employees. Thus, it is a must that all employees be educated about data security risks, e.g., phishing and hacking, and trained on the use of strong passwords and other security measures. For instance, routine password changes may be enforced as part of the company’s standard operating procedures for data security.
8. Address security risks while offboarding employees.
Establish and implement strict protocols for employee offboarding, which may include recovering company assets, such as computers and security credentials, and removing employee access to payroll software and all other systems and databases.
9. Secure third-party services.
Before engaging with third parties and system vendors for their services, particularly those related to payroll processing, conduct thorough research and inquiries on their security standards and practices. Data security experts may also be consulted. Equally, always require contracts and agreements that define data security requirements and both parties’ responsibilities.
10. Backup payroll data regularly.
Implement regular backup procedures to create recoverable digital and physical copies of payroll data. For digital backups, ensure that they are encrypted and secured in reliable cloud storage. For physical backups, the files and data must be in secure storage facilities or locked cabinets.
11. Establish a disaster recovery plan.
The consequences of payroll interruptions brought on by insider threats and data breaches can be severe for both employees and the company. It is, thus, important to establish a payroll continuity plan or disaster recovery plan to mitigate, if not totally avoid, these consequences. The plan may even be tested in order to evaluate its effectiveness and make further improvements.
12. Outsource your payroll.
For small business and medium-sized enterprises with a small number of employees, it may be advantageous to outsource most of the human resource management needs, including payroll. When choosing an outsourced payroll service provider, it is always prudent to understand its data security measures from every angle. During consultations, ask all questions relevant to payroll security.
… and you might just need our assistance.
At FilePino, we employ robust data encryption, access controls, regular audits, and other payroll security measures to safeguard our clients’ data. We also ensure that our collection, access to, and processing of sensitive data are in compliance with the Data Privacy Act.
Outsource your company payroll to ensure that your data are protected. Set up a consultation with FilePino today! Call us at (02) 8478-5826 (landline) and 0917 892 2337 (mobile) or send an email to info@filepino.com.