Stopping Fraud in Contingent Hiring

Fraud in contingent hiring is a growing challenge for HR leaders. With more organizations depending on contract workers and consultants, the risks tied to identity verification, worker classification, and payroll integrity have become harder to manage. According to the Association of Certified Fraud Examiners, businesses lose an estimated 5% of annual revenue to fraud, with payroll fraud consistently ranked among the most common schemes. In contingent programs, these losses can be amplified because contractors are often onboarded quickly, work remotely, and are paid through separate systems from full-time employees.

An Employer of Record (EOR) can be an important partner in addressing these risks. By acting as the legal employer, the EOR provides structured onboarding, compliance oversight, and transparent payroll administration. This combination creates an added layer of protection against fraud.

How Fraud Occurs in Contingent Workforce Programs

Fraud in contingent hiring is not one-dimensional. It appears in several ways, each with significant financial and compliance consequences:

• Worker misclassification: Employees incorrectly treated as independent contractors, leading to tax penalties and lawsuits. The Department of Labor’s 2024 “economic realities” test has increased scrutiny of contractor status.
• Co-employment liability: Both client and partner organizations share employer responsibilities, exposing both to wage claims and legal disputes.
• Identity fraud: Stolen or fabricated documents submitted during onboarding, especially when I-9s are completed remotely.
• Fraudulent timesheets: Inflated hours, duplicate billing, or ghost workers who never performed the work.

These risks are not isolated. Misclassification cases alone have cost companies hundreds of millions of dollars in settlements, and timesheet fraud has led to federal investigations using access logs to prove hours were falsified.

Compliance as the Foundation of Fraud Prevention

Fraud prevention depends on compliance with existing laws. Several frameworks guide how HR teams must protect their organizations:

• FLSA (Department of Labor): Establishes standards for worker classification.
• IRS common-law test: Determines tax status and withholding obligations.
• NLRB joint employment rules: Define when two parties share employer liability.
• I-9 and E-Verify: Require timely employment eligibility verification.
• FCRA (Fair Credit Reporting Act): Governs background checks and notification requirements.

Because rules vary across states, especially with E-Verify mandates and workers’ compensation classifications, organizations must apply these frameworks consistently and document compliance in detail.

Best Practices for HR Leaders

Fraud prevention requires more than a single control. It is a layered system of verification, monitoring, and governance.

Identity verification should be a starting point. HR teams should use background checks that follow the Fair Credit Reporting Act and confirm both identity and work history. Remote I-9 verification, permitted for some employers enrolled in E-Verify, must be carefully documented to prevent fraudulent submissions.

Payroll and benefits compliance represent another critical layer. Clear tax withholdings, accurate workers’ compensation codes, and quarterly reconciliations between payroll and employee rosters prevent both errors and intentional fraud. Benefits eligibility checks help avoid claims that workers were misclassified to deny coverage.

Time and expense monitoring also play a central role. Digital timesheet platforms can require manager approval and generate exception reports to highlight unusual patterns such as excessive overtime or weekend work. For higher-risk projects, time entries should be cross-checked against system or building access logs.

Finally, governance reduces exposure. Separating duties across onboarding, payroll, and billing ensures that no single person controls every process. This creates natural checkpoints where fraud attempts can be detected before they become costly.

The Role of Technology

New tools give HR leaders greater visibility into contingent workforce risks. Biometric time capture reduces “buddy punching” and duplicate time entries, though it must be balanced with privacy protections. Automated compliance audits help detect anomalies in payroll data, while blockchain payroll pilots are testing tamper-proof payment records. Continuous monitoring systems now provide alerts for duplicate worker records, mismatched IP addresses, or suspicious login patterns.

These technologies add value, but they are most effective when combined with established compliance processes and consistent oversight.

The Human Side of Fraud Prevention

Fraud prevention is not only a matter of regulation or technology. HR leaders consistently express concerns about risk, cost, loss of control, and damage to reputation. These concerns reflect deeper priorities: peace of mind, trust, and confidence in the legitimacy of every worker. A fraud incident does more than affect finances. It can weaken internal credibility and public confidence, making prevention a leadership priority as well as a compliance task.

Why U.S.-Focused Compliance Provides an Advantage

Fraud risks in the United States are often shaped by state-level rules. Wage laws, tax requirements, workers’ compensation classifications, and E-Verify mandates differ across the 50 states. A U.S.-focused EOR provides:

• Consistent application of I-9 and E-Verify procedures
• Deep understanding of state-specific wage and tax regulations
• Accurate classification and workers’ compensation coding
• Transparent, audit-ready payroll and benefits processes

By focusing exclusively on U.S. compliance, a specialized EOR can move quickly, respond to state-specific changes, and give HR leaders assurance that fraud risks are being managed comprehensively.

Conclusion

Fraud in contingent hiring is not theoretical. Misclassification, co-employment liability, false identities, and fraudulent timesheets are all active risks. HR leaders who rely on contractors must adopt structured fraud prevention practices to protect their organizations. By combining compliance rigor, layered verification processes, and modern technology, organizations can reduce exposure and maintain confidence in their contingent workforce.

An EOR with U.S.-specific expertise offers an added safeguard, bringing state-level compliance knowledge and transparent processes that give HR leaders the confidence to scale without unnecessary risk.

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