The recent news about a payroll provider that closed suddenly leaving hundreds of companies and thousands of workers struggling has created a lot of anxiety with business owners. MyPayrollHR was based in New York and had over 1,000 clients. In early September this year its clients received an email that said (in part):

“…we are no longer able to process any further payroll transactions. Please find alternative methods for processing your payrolls. For any payroll….submitted during this week………be prepared to find an alternative method to pay employees……” (from KrebsonSecurity.com)

Workers in the companies that were clients of MyPayrollHR complained that their August 30 pay had not been deposited as expected but had actually been withdrawn from their existing balance. As a business owner you can imagine how that email would strike you. It turned even worse for some who had two payroll amounts withdrawn.

The CEO of the company was executing fraudulent activity when he instructed various banks to withdraw funds from workers accounts. The $26 million of funds were to be deposited in an entirely different bank account that was controlled by MyPayrollHR. In addition, another $9 million of funds that were to be used to pay various payroll taxes were also re-directed to that bank account. All told about $35 million of funds that belonged to workers were in the process of being stolen.

The FBI is now involved and has already raided the owners home and MyPayrollHR offices. The owner, Michael T Mann was arrested. It turns out that he was also borrowing funds from banks under false pretenses and has been charged with those crimes as well. The total of the payroll issue and lending schemes is close to $70 million.

How can you be sure that your payroll provider is not the next one to take your payroll funds? Obviously checking references from other clients is important. The two most important factors are bonding and insurance.

The payroll company should maintain its own insurance that includes coverage for liability and customer harm. The company should also carry a fiduciary bond by a major insurance company to cover financial losses to customers. A reputable payroll company will provide you documentation for both insurance coverage and bonding.

Every year, be sure to get copies of both and confirm the coverage with the insurance companies.

Remember:

P > (FL + LR + I)

Prevention is better than Financial Loss + Loss of Reputation + Investigation