What is a Ghost Employee?
A ghost employee is a person recorded on a company’s payroll system who does not actually work for the organization. This is a prevalent form of internal fraud where an individual, usually someone with access to payroll or HR systems, creates a “ghost” profile to divert salary payments into their own bank account or the account of an accomplice.
The “ghost” in question might be a completely fictitious person, a former employee whose name was never removed from the system, or a friend or relative of the fraudster. Because these payments are processed automatically, a ghost employee scheme can remain undetected for years, costing organizations thousands or even millions of financial resources in lost revenue and tax liabilities.
How Does a Ghost Employee Scheme Work?
For a ghost employee fraud to succeed, the perpetrator typically needs to complete four distinct steps. Understanding this workflow is the first step toward building better internal controls.
- Adding the Name: The fraudster enters a new name into the payroll system or fails to remove a departing employee.
- Falsifying Documentation: To ensure the payment is triggered, the perpetrator must often submit fake timesheets or performance records.
- Issuing Payment: The payroll system processes the record as it would for any legitimate staff member, generating a paycheck or direct deposit.
- Collecting the Funds: The payment is sent to an account controlled by the fraudster.
In many cases, this requires collusion between a manager who approves timecards and an HR administrator who manages the database. This is why Global Payroll systems must have strict audit trails and multi-level approvals.
Warning Signs of a Ghost Employee
Detecting a ghost employee requires a keen eye for data anomalies. HR departments should be on the lookout for the following red flags during their regular audits:
- Duplicate Information: Multiple employees sharing the same bank account number, physical address, or national ID number (such as a Social Security or TIN).
- Minimal Deductions: A ghost employee record often lacks the standard deductions for health insurance, retirement plans, or local taxes that a typical employee would have.
- Missing Personnel Files: If a name appears on the payroll but has no physical or digital HR file (contracts, performance reviews, or emergency contact info), it is likely a fraud.
- No Vacation Taken: Since the “employee” doesn’t exist, they never request leave or take sick days.
- Unfamiliar Names: Managers should be required to verify every name on their departmental payroll report to ensure they recognize everyone being paid.
The Role of the Agent of Record in Preventing Fraud
One of the most effective ways to eliminate the risk of a ghost employee is to utilize a third-party compliance partner. By partnering with an Agent of Record (AOR) or an EOR provider, companies add an external layer of verification.
An AOR conducts its own rigorous vetting and Know Your Customer (KYC) checks on every worker. This independent verification process makes it nearly impossible for an internal staff member to slip a fictitious name into the system, as the AOR requires legal identification and tax documentation for every individual being paid.
Frequently Asked Questions About Ghost Employees
Is ghost employee fraud a criminal offense?
Yes. Creating or maintaining a ghost employee is considered a form of embezzlement and wire fraud. In most jurisdictions, it is a felony that can lead to significant prison time, heavy fines, and a permanent criminal record for the perpetrator.
How can small businesses prevent this type of fraud?
The most effective defense is the segregation of duties. The person who adds new hires to the HRIS should not be the same person who processes the payroll or approves the final payment. For small teams, a monthly “physical headcount” or a simple review of the payroll register by the business owner can prevent a ghost employee from remaining on the books.
Can a ghost employee be a real person?
Yes. Sometimes a ghost employee is a real person who is in on the scheme. For example, a manager might hire a friend who never shows up to work but collects a salary, which they then split with the manager. This is why performance tracking is a critical HR function.
How does global expansion increase the risk?
When companies hire in countries where they do not have a physical office, the risk of a ghost employee increases because local oversight is limited. This is why many multinational firms rely on Employer of Record services to manage international staff with local compliance expertise.