States eye safeguards for payroll after MyPayrollHR fraud

Payroll processors are anticipating closer scrutiny after a high-profile scandal involving MyPayrollHR, a Clifton Park, New York-based company that suddenly collapsed last month after its CEO reportedly absconded with $35 million in payroll and tax withholding deposits for its customers, prompting paycheck deposits to briefly disappear from the bank accounts of employees who work at nearly 1,000 of its client companies.

The CEO, Michael Mann, was arrested last week and charged with bank fraud. Mann admitted to FBI agents to diverting approximately $70 million from MyPayrollHR to his own accounts since around 2010 or 2011, according to the security blog Krebs on Security. In an effort to avoid similar misconduct in the future, the New York State Department of Finance sent subpoenas last week to over 40 payroll-processing companies who do business in the Empire State, according to The Wall Street Journal. The department asked payroll companies to provide more information and documents about how they move and control funds. Some New York lawmakers have also introduced legislation in response to the scandal to further regulate payroll processors and impose criminal penalties for misappropriating funds.

Paychex, based in Rochester, New York, is bracing for regulation, not only in New York, but in other states as well. “There have been pretty significant frauds involved with smaller payroll companies where they made off with money, and there have been rumblings about proposed regulations for the payroll processors,” said Frank Fiorille, vice president of risk management, compliance and data analytics at Paychex. “That could increase the things that payroll providers need to do.”

He has been told that in the case of MyPayrollHR, all of the employees who had funds removed from their bank accounts have gotten their money back, but some of the companies who were counterparties still have not received their funds.

Separately, Paychex released its monthly report last week on small-business hiring and wages. It found that job growth increased in September, seeing its biggest gains since 2016. Hourly and weekly earnings also grew last month, according to the Paychex | IHS Markit Small Business Employment Watch. Hourly earnings growth increased at its fastest one-month pace since 2016 to 2.77 percent ($0.74), while weekly earnings growth continued an upward trend, growing 2.93 percent. However, the jobs index remained down 0.97 percent on a year-over-year basis.

Fiorille cautioned against reading too much into the numbers. “One month doesn’t make a trend,” he said. “It’s the strongest we’ve seen in three years, and there’s a really strong uptick in wages. It’s an interesting change in direction. We’re going to watch it and see what happens.”

A separate report last week from the Institute of Supply Management indicated a slowdown in the manufacturing sector, but Paychex saw some positive indications in its September report for the small businesses it tracks.

“We actually saw a little uptick in manufacturing in our footprint portfolio,” said Fiorille. “There was a nice jump up in construction. We’re seeing some strong housing numbers. There really was an across-the-board jump. It also looks like hours worked continues to increase.”