How to Prevent Fraud in Contingent Hiring

Fraud in contingent hiring is a growing challenge for HR leaders, but it is also one that can be managed. Contractors, consultants, and temporary staff are essential to business operations, yet they create vulnerabilities when onboarding is rushed or oversight is inconsistent. The Association of Certified Fraud Examiners has estimated that organizations lose about 5% of revenue to fraud each year. For a mid-sized business, that can mean hundreds of thousands of dollars annually.

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The good news is that most fraud risks can be reduced with straightforward compliance practices, stronger oversight, and support from the right partners. A structured fraud prevention checklist helps HR teams ensure that no detail is missed, while an Employer of Record (EOR) can add another layer of protection by handling payroll, employment verification, and state-specific compliance.

This guide explores the most common categories of fraud in contingent hiring and shows how to prevent them:

• Identity and work authorization fraud
• Worker misclassification
• Co-employment responsibility
• Payroll and benefits integrity
• Timesheet and billing fraud
• Vendor and contractor verification (vendor fraud, credential fraud, expense fraud)
• Access and data security risks
• Technology in fraud prevention
• Governance and oversight
• How an Employer of Record can help

By applying safeguards in these areas and using a checklist to track progress, HR leaders can reduce exposure, build confidence with executives, and create a contingent workforce strategy that is both secure and scalable.

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Identity and Work Authorization

Remote onboarding makes it easier for fraudulent identities to enter the workforce. Workers may use stolen or falsified documents, and mistakes in Form I-9 or E-Verify can lead to fines ranging from hundreds to thousands of dollars per violation. The Federal Trade Commission has recorded over a million identity theft complaints in a single year, underscoring how common this threat is.

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Practical safeguards include centralized I-9 storage, audit-ready records, and watching for red flags like duplicate addresses or mismatched IPs. Every fraudulent worker who passes onboarding represents wasted payroll dollars and compliance exposure.

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Practical Step: Audit a sample of I-9s each quarter and verify that every field, signature, and document is complete.

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Worker Misclassification

Misclassification is one of the costliest mistakes in contingent hiring. When workers who meet the definition of employees are treated as independent contractors, companies face penalties, lawsuits, and back wages. In 2020, the U.S. Department of Labor recovered over $257 million in back wages, much of it tied to misclassification.

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States have also increased enforcement. New Jersey’s Department of Labor has issued multi-million-dollar penalties for violations of its ABC test. For a mid-market firm, even a handful of misclassified workers can create six-figure liabilities.

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Practical Step: Create a classification record for every contractor engagement and retain it with payroll files.

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Co-Employment Responsibility

Co-employment occurs when two organizations share responsibility for employment decisions such as supervision, training, or scheduling. If boundaries are unclear, both parties may be held liable. The National Labor Relations Board has reported that a notable share of unfair labor practice charges involve joint employer disputes.

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The fix is consistency. Define responsibilities in contracts and confirm that day-to-day practices match those agreements. Training managers to follow the documented roles reduces the chance of liability.

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Practical Step: Review a recent contractor engagement to confirm supervision and direction align with agreements.

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Payroll and Benefits Integrity

Payroll and benefits are frequent targets of fraud. Mistakes in tax withholdings, improper benefits eligibility, or inaccurate workers’ compensation codes can quickly escalate into compliance problems. The IRS has identified payroll tax noncompliance as one of the largest sources of lost revenue.

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On the benefits side, improper enrollments can trigger Affordable Care Act penalties that climb into six figures. Transparent reporting, SOC 1 Type 2 audit documentation, and quarterly reconciliations between payroll, benefits, and employee rosters provide critical protection.

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Practical Step: Require quarterly payroll-to-benefits reconciliations with finance and HR.

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Timesheet and Billing Fraud

Timesheet fraud drains resources in ways that are often hidden. The American Payroll Association has estimated that buddy punching alone can cost a company up to 2.2% of payroll. For a $50 million payroll, that equals more than $1 million lost each year. Other common schemes include ghost workers and inflated hours.

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Digital systems requiring manager approval, exception reporting for unusual hours, and reconciliation with system or building access logs are effective safeguards. In one case, a healthcare provider uncovered a ghost worker scheme simply by comparing timesheets to login records—several “employees” had never accessed the hospital’s systems.

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Practical Step: Randomly audit timesheets each quarter against system or project access data.

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Vendor and Contractor Verification

Fraud in contingent hiring does not always come from individual workers. It can also originate from the vendors and contractors who support your workforce. These external risks are often harder to spot because they are one step removed from daily operations, yet they can drain resources just as quickly as payroll or timesheet fraud. Vendor and contractor fraud typically shows up in three areas: vendor legitimacy, professional credentials, and expense claims.

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Vendor legitimacy

Fraudulent or poorly vetted vendors may bill for services never performed. In some cases, fake staffing agencies or shell companies invoice for employees who do not exist. Others recycle the same identity across multiple projects to collect payment more than once. Without proper checks, organizations can end up paying for “ghost” vendors or phantom workers.

To prevent this, HR and procurement leaders should verify vendor registrations, validate Employer Identification Numbers (EINs), and run credit checks before signing contracts. Comparing vendor payment details against company records can also reveal red flags, such as mismatched addresses or unverifiable references.

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Credentials and licenses

In regulated industries like healthcare, IT security, or education, credential fraud carries significant risks. Contractors may present expired, forged, or fabricated licenses to secure roles they are not qualified to perform. If discovered, the company employing them can face penalties, legal exposure, or even safety incidents.

A CareerBuilder survey found that more than half of hiring managers have caught lies on resumes, including fake certifications. For contingent workers, where onboarding is often rushed, these risks multiply. Organizations should confirm credentials directly with issuing boards, require updated certificates during onboarding, and use digital verification services where possible.

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Expense claims

Contractors can also exploit reimbursement processes. Common schemes include inflating travel mileage, fabricating receipts, or submitting the same claim multiple times. While each case may seem minor compared to payroll fraud, the cumulative losses add up quickly. The Association of Certified Fraud Examiners has reported that expense reimbursement fraud makes up about 15% of occupational fraud cases, with median losses of $40,000 per incident.

Technology makes prevention easier. Automated expense systems that require receipts, match claims against policies, and flag duplicates help organizations catch fraud early. Requiring manager pre-approval for travel and expense categories adds another safeguard.

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Practical Step: Add vendor verification, credential checks, and expense controls to your fraud prevention checklist. Require EIN validation and credit checks for new vendors, confirm licenses for regulated roles, and mandate receipts for all contractor reimbursements.

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Access and Data Security Risks

Fraudulent workers may seek not just wages but also access to company systems. Once inside, they can steal data, disrupt operations, or commit further fraud. The Ponemon Institute has estimated that insider threats, including those involving contractors, cost organizations millions each year on average.

HR and IT must work together to minimize this risk. Strong identity verification at onboarding, careful provisioning of access rights, and quarterly reviews of system logins ensure that only authorized workers can reach sensitive data.

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Practical Step: Conduct quarterly audits of system access for all contractors.

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Technology in Fraud Prevention

Technology provides new ways to detect fraud across every category. Biometric time capture can cut down on buddy punching. Automated payroll audits flag anomalies before they escalate. Blockchain-based payroll systems are being tested to create tamper-proof payment and contract records.

Continuous monitoring is also gaining traction. These tools shift fraud prevention from reactive spot checks to proactive detection, providing alerts and audit-ready records.

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Practical Step: Ask your payroll or workforce provider how they use monitoring tools to flag potential fraud.

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Governance and Oversight

Fraud thrives where oversight is weak. Dividing responsibilities between onboarding, payroll, and billing reduces opportunities for collusion. Assigning a compliance owner ensures accountability for regular reviews and reporting.

Research from the Committee of Sponsoring Organizations (COSO) found that companies with strong internal controls detect fraud faster and cut their losses significantly. For HR leaders, that means governance is not just administrative—it is protective.

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Practical Step: Assign a compliance lead to deliver quarterly fraud prevention updates to senior leadership.

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How an Employer of Record Can Help

Even with strong internal controls, HR teams face complex and evolving fraud risks. An Employer of Record (EOR) adds an additional layer of protection by taking on the role of legal employer for contingent workers. This shifts responsibility for payroll, employment verification, tax compliance, and workers’ compensation away from the client organization.

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Because an EOR manages I-9 and E-Verify compliance directly, fraudulent identities are far less likely to slip through. Payroll is processed with built-in audit trails, which makes inflated timesheets or improper withholdings easier to catch. State-specific rules such as workers’ compensation codes or wage and hour laws are monitored continuously, closing gaps that organizations often overlook.

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An EOR also provides transparency. Audit-ready reports, documented classification decisions, and compliance records can be shared with HR leaders and executives. This allows organizations to demonstrate to stakeholders that fraud prevention is embedded in daily operations, not handled reactively.

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Practical Step: Request sample I-9 audit records, payroll reconciliation summaries, and classification documentation from your EOR. Reviewing these will show how fraud prevention is being applied in practice.

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Building Confidence in Your Contingent Workforce

Fraud in contingent hiring is real, but it is also preventable. By addressing identity, classification, payroll, billing, vendor, and access risks, organizations can dramatically reduce exposure. The fraud prevention checklist brings these safeguards together in one repeatable process.

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When these risks are under control, HR leaders can focus on strategy instead of constant firefighting. That confidence allows companies to scale contingent workforce programs while protecting both resources and reputation.