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Payroll security: 12 tips to protect your data

Payroll security

As an employer, one of the most crucial roles of your HR department is ensuring payroll security. Your employees need to feel confident that all their sensitive personal data is confidential, including their social security numbers, bank accounts, payslips and home addresses. However, unless you establish the right security payroll systems, then it’s very difficult to guarantee complete security in a world full of increasing numbers of hackers and data breaches. And this can prove to be very costly. In fact, according to IBM Security’s Cost of a Data Breach Report, the average cost of a breach has risen by 2.6%, from USD 4.24 million in 2021 to USD 4.35 million in 2022.

Those are some pretty scary figures, right?

So, what exactly is payroll security and how can you protect your employee payroll data?

What is payroll security?

Payroll security involves implementing a series of measures to protect all confidential employee data relating to employee benefits and compensation. This usually includes names, addresses, social security numbers, taxes and deductions, medical insurance data, salaries and other regular workers’ compensation payments, additional fringe benefits, and variable data including bonuses, hours worked, holidays, and sickness. By its very nature, this data is obviously highly sensitive. It is therefore vital that you include as many safeguards in your compensation strategy as possible in order to ensure confidentiality and protect you from potential hacks, leaks and data breaches.

There are a number of methods you can use to secure payroll data in your company, as we will see shortly. Generally speaking, though, the process involves maintaining the confidentiality and security of your payroll records, your payroll department and your payroll staff. You also need to ensure that your payroll manager or human resources manager works in conjunction with your information security department to create a highly secure and efficiently organized payroll environment.

One of the best ways to do this is by using robust security payroll systems.

Payroll security systems

As we just mentioned, implementing the right payroll security systems is an essential part of keeping your data safe.

In order to process payroll each week or month, your payroll department has to handle a lot of data. This includes keeping track of worked hours and the various types of leave (sickness, vacation, parental, etc.), calculating wages, withholding taxes and other deductions, printing and delivering paychecks, and filing government employment taxes. You also need to provide payroll data to certain external third parties when requested, such as banks and mortgage lenders. That’s a lot of information, and a lot of opportunities for data to fall in the wrong hands. Plus, you have to consider where you are storing all this information. If you lack the right security systems, your database can be vulnerable to potential hackers.

To ensure maximum protection, you can use a secure payroll system to manage every stage of your payroll process. Security payroll systems are encrypted tools and platforms used to store, manage and process all confidential payroll data. A good payroll system can track the number of hours each employee works, account for rates of pay and calculate taxes and other deductions to provide an accurate figure for how much each employee should be paid.

Many systems can also track attendance, manage time off requests, calculate your tax obligations, and help you manage employee expenses. This not only provides you with the assurance that all your data is encrypted and safeguarded but it also ensures that your employees are paid the right amount, on time. And this is vital for improving your employee experience and boosting that all-important EVP.

We’ll take a look at this in a bit more detail below in the section on payroll software.

12 Payroll security tips: ensuring secure payroll processes

Now let’s take a look at what you’re really interested in: those vital payroll security tips to help you create a secure system that safeguards all your sensitive employee data.

Here are our top 12 tips to help you secure your payroll data.

Define a clear payroll policy

The first step in creating a secure environment for your payroll data is defining a clear and comprehensive payroll policy.

A payroll policy is an established set of internal guidelines and regulations for managing each stage of the payroll process. This includes the administration of salaries, timekeeping, payroll schedules and payment methods. It also includes guidelines relating to what happens when an employee is under or overpaid, the deductions you are required to withhold by law, timekeeping and overtime rules (including breaks), and the types of wages that employees receive (minimum wage, fair wage, living wage, etc.). Also, most importantly, your payroll policy defines the responsibilities and accountabilities of all payroll staff and managers, including access and security levels.

By clearly detailing all this information in an accessible employee handbook, you can reduce the chances of errors or misunderstandings. You can also ensure compliance with federal, state and local laws, especially those that relate to taxes, Medicare, Social Security and fair labor standards.

Establish defined payroll procedures

Although the terms policies and procedures are often used interchangeably, there is a distinct difference between the two concepts. Your payroll security policy defines your internal regulations relating to payments (how and what employees are paid). In contrast, your procedures relate to the controls, guidelines, and methodologies you use to ensure the correct handling of all your payroll data (how your payroll department processes payroll). This includes time collection, report handling, data entry, payment processing, and record-keeping. Think of it as an operating manual for your payroll department.

Make sure you clearly document your payroll procedures so that all your HR staff know how each and every secure payroll HR process works and what their roles and responsibilities are as members of the payroll department. Also makes sure that you regularly review and update your procedures to ensure legal compliance and to help you avoid any potential gaps in security that may arise.

Include payroll in your business security strategy

Aside from creating clear and comprehensive payroll processes and procedures, you also need to make sure that payroll data security is included in your overall business strategy. This ensures that all relevant policies can be accessed by your employees and makes it much easier to integrate your organization’s security measures so that you are able to address any potential weaknesses or gaps in your business strategy.

For example, you should include the following payroll security measures in your business strategy:

  • Conduct extensive background checks before hiring new employees
  • Limit the number of employees that have access to sensitive employee personal data
  • Engage an automated clearing house (ACH) filter to prevent unwanted parties from accessing your business bank accounts
  • Encourage employees to use direct deposit instead of printed checks, which are more susceptible to payroll fraud.

Control access

Make sure you restrict who has access to all your personal employee payroll data. That includes access to physical files and records (such as timesheets, raise authorizations, bonus and commission paperwork and other payroll documents with sensitive and confidential financial information), as well as all your electronic data and software.

Conduct regular reviews of the roles and responsibilities of all your HR staff to determine what level of access they need in terms of any digital software or platforms. Make sure each member of staff that you determine needs access to electronic records has a secure payroll login and password which they do not share with anyone (or write down). Review access periodically and, above all, make sure you immediately delete accounts when an employee leaves your company.

Ensure physical security

Following on from the point we just made about access to paper records, make sure you implement safeguards to protect the physical security of your data.

Firstly, make sure you securely lock all your filing cabinets, and control who has access to them. Ideally, you should place them away from your general office space. Also, make sure you place any mainframes and desktop computers with sensitive payroll data away from common areas and ensure they are password protected. Your payroll department needs to have a secure working area that is separate from general employee and visitor traffic. If there are other members of the HR department (or wider organization) working in the same space as your payroll department, make sure you position your payroll staff’s desks and computers in such a way that screens are not visible by any passersby.

To ensure maximum security, you should ideally implement a swipe card access control system so that only authorized personnel are able to enter your payroll department.

Organize your payroll department

Maintaining a well-organized payroll department is vital in order to ensure payroll security. You need to ensure that there is a clear chain of command. You also need a logical organizational chart, and a clear delegation of payroll responsibilities. Everyone in your payroll department should know what they should be doing and who they should be reporting to. This will help to ensure that all processes run smoothly and, as a result, help you safeguard the confidentiality of all your payroll data.

Use payroll software

Payroll software is a form of people management software, also known as an HRIS. Put simply, it is an on-premises or cloud-based HR SaaS application that you use in order to manage, maintain and process payments to employees at the end of each payment period.

Managing payroll is about so much more than simply calculating paychecks, though. You also need to take into account tax compliance, reporting, and storing personal employee data. The right solution has the potential to transform your HR processes so that your company works more efficiently. It also helps you stay compliant with tax laws and other employment regulations. You can, of course, do all this manually. However, the right secure payroll software can help you safeguard your processes.

Factorial’s payroll software is a solid SaaS solution with a strong emphasis on data security. With Factorial, all database information is encrypted and GDPR-compliant. The application uses a Single Sign-On system and vulnerability diagnostics are performed regularly. This makes it a great HR software solution for small and medium-sized businesses looking to protect their data and stay compliant, without breaking the bank.

Update payroll software regularly

If you use payroll software, you also need to make sure you update it regularly to ensure payroll security. Whether it’s an app on your phone or the system your business uses to manage payroll, outdated software exposes you to a number of security threats. You should deploy frequent cloud software upgrades in order to add new features or to fix security vulnerabilities. Updating your payroll software also allows you to ensure that you have access to all the latest third-party integrations.

Make sure you include periodical software updates in your payroll and security policies and procedures. If you have added software to an employee’s individual devices, notify them in advance when they need to perform an update. Make sure you provide them with clear instructions and follow up to confirm that they have processed the update.

Train your employees

A recent study found that employees are responsible for 74% of cyber breaches, not external hackers. Some of these might be attributed to disgruntled employees. However, the overwhelming majority occur as a result of employee negligence.

For example, an employee might expose sensitive data through an unapproved cloud or mobile app. Or they might fall victim to targeted phishing attacks. And this is especially true if you have employees working remotely where you have less control over data. That’s why it is so important to make sure your payroll team is fully trained in payroll security.

Offering regular payroll software training to your employees ensures everyone understands how the platform works, especially in terms of security. Schedule additional training whenever you update software or add new features or procedures to your system.

Limit the data you include in payslips

There are obviously a number of important elements that you have to include in your payslips. This might include an employee’s name, date of birth, address, social security number, information relating to payroll tax, salary amount, and any benefits and deductions, amongst other details. However, make sure you don’t include any information that is not strictly necessary. Ultimately, the more information you include on your payslips, the more sensitive data you will need to store in your payroll software solution.

One handy way to ensure that you only include vital information on your payslips is to use a template. Payslip templates set out a general structure for companies to follow, which can be modified to suit the location and needs of the employer. Additionally, payslip templates can prove vital in making sure employers provide all the necessary components and information on each payslip.

Outsource your payroll process

If you are a small business with a limited staff then you may decide to outsource some of your HR processes, including payroll. Hiring a third-party payroll provider can help you protect your company data. If you do decide to outsource your payroll, make sure the provider has the right security safeguards in place. That way you can be sure that they will maintain the security of all your payroll data.

Here are a few things you should keep in mind:

  • Ask them which security features they use to process payroll information. Do they encrypt data? Do they store data on a secure server?
  • Confirm that there is a secure way for employees to access their payroll history when needed
  • Find out how they will distribute payslips to employees at the end of each pay period. (paper format or electronically?) What measures will they put in place to ensure that third parties do not intercept data?
  • Research the company’s reputation, including how it handles security issues. Have they had any incidents relating to data breaches or hacking in the past? Do they have a good track record when it comes to security?
  • Establish how you will integrate the company’s payroll services with your existing security measures.

Conduct a payroll system security audit

Finally, it’s a good idea to conduct periodical payroll security audits. This will help you ensure the continued integrity of your payroll security system. Talk to your team to find out what their experience of the system is like. Is there anything that’s not working well? Do they have any concerns about any payroll processes or procedures? Are they up to date with the latest internet scams, social engineering and phishing attempts?

You should also talk to your IT department to gather valuable feedback from them. Have there been any attempts to hack the system? Are there any security gaps or vulnerabilities that need to be addressed?

By conducting a regular payroll security audit, you will increase your chances of preventing a data security threat. Aim to conduct an audit at least once a year (or even once a quarter). That way, you will regularly gain valuable insights into the health of your payroll system.

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