Data Security in Payroll Processing: 9 Best Practices for Businesses

Man performing online login with two-factor authentication on mobile and laptop

Whether you’re a finance manager or a full-on business owner, implementing appropriate payroll security measures can be a real headache, especially if you’re keeping a close eye on your payroll costs and don’t have much of a budget to work with.

Improper payroll security measures often result in breaches of personal employee data, which can cause operational disruptions, reputational damage, and millions of pounds in legal fees. And with half your teams probably working remotely via home Wi-Fi, it’s harder than ever to keep everyone on the same page.

Given the importance of payroll security, many small businesses outsource payroll to an external firm. But if you choose to keep payroll in-house, you’ll need to know some best practices for how to maximise your security framework.

We were unable to find all nine of these best practices in one place—which is why we wrote this article.

1. Regularly Update and Patch Your Payroll Software

Why it’s important: Most people know software updates enhance user experience and fix bugs. What many don’t know is that those bugs are often security flaws that hackers can exploit.

How to implement: Schedule monthly or quarterly meetings with your software provider or IT team to check for available updates and patches. If you’re using cloud-based payroll software, pending updates can usually be found in the settings menu. You can also check if your software allows for automatic updates and patches.

2. Limit Access to Payroll Data to Only Those Who Need It

Why it’s important: People aren’t perfect. Malicious intent or not, the fewer people who have access to your payroll system, the less of a chance that sensitive data will be leaked.

How to implement: Most payroll software platforms in 2024 have role management features that allow you to permit and restrict access based on company role. Keep a close eye on these permissions, especially during transition periods when employees change job roles or new ones join your company.

3. Enforce Strong Password Policies for All Users Accessing Payroll Data

Why it’s important: Users that can access payroll data access it through their computers—and computers can be broken into. Strong password protection provides a double layer of payroll security against unauthorised access to payroll data.

How to implement: Set some common sense rules for password strength, including a minimum length, a mixture of letters, numbers, and symbols, and password changes every 60-90 days. You could also implement multi-factor authentication, which would require users to enter their password and confirm their identity some other way, usually by inputting a code sent to their email or mobile number.

4. Use Secure Connections When Accessing Payroll Information Remotely

Why it’s important: Every time you access data over the internet, it becomes vulnerable to cybercriminals. When you’re in the office, you can rely on your business’s secure connection. When you’re using the public Wi-Fi at your local Starbucks, not so much.

How to implement: Enforce the use of Virtual Private Networks (VPNs) for all employees accessing payroll data remotely. VPNs hide your location, making you a tougher target for hackers. VPNs also encrypt—or scramble—all data you access and send over the internet. It’s like sending a secret letter in a locked, unmarked box instead of a transparent envelope.

5. Regularly Back Up Payroll Data

Why it’s important: Hardware failures and cyberattacks may never happen to you—until they do. To mitigate this risk, it’s vital to have a plan for recovering any lost payroll data.

How to implement: Work with your IT team or your payroll company to schedule automatic backups to independent, offsite cloud servers—and make sure these backups are encrypted. Also, regularly test your backups to ensure the data has remained intact and can be restored to your regular servers with minimal headaches.

6. Ensure Compliance with GDPR Data Protection Regulations

Why it’s important: Data security regulations exist for a reason. By staying compliant with GDPR, you’re not only adhering to Europe’s most up-to-date security protocols for your industry but also protecting your company against legal action in the event of a payroll data breach.

How to implement: The most comprehensive way to ensure GDPR compliance is to work directly with a government compliance officer or a legal expert. Have them conduct a review of your current payroll security framework to identify any gaps, and then implement their advised changes as soon as possible.

7. Securely Dispose of Outdated Payroll Records

Why it’s important: First, the more payroll data you have on hand in your system, the more buried treasure internet pirates can uncover. Second, if you dispose of your payroll records irresponsibly, you can make it easier for hackers to access the information.

How to implement: HM Revenue & Customs (HMRC) requires that payroll records be kept “for 3 years from the end of the tax year they relate to.” Once these three years are up, the Data Protection Act 2018 specifies that no personal data should be kept longer than absolutely necessary. Once you’re ready to dispose of old payroll data, do it securely—shred paper documents, wipe your SSDs, and physically destroy CDs and tapes.

8. Regularly Audit Your Payroll Security Measures

Why it’s important: One of the best ways to prevent cybercriminals from exploiting payroll security gaps is to find the gaps yourself before they do. Regular audits of your payroll security measures and broader payroll processing system help you do exactly that.

How to implement: If you run a large company, you probably already have an internal audit team. For smaller companies, hire an external auditor who specialises in data security. When your auditors find weaknesses (and they probably will), follow up and make the necessary changes as soon as you can.

9. Conduct Regular Payroll Security Training for All Employees

Why it’s important: Unfortunately, employees are often the weakest link in payroll security. Proper training—though it’s sure to elicit some eye-rolling—can seriously reduce the risk of phishing attacks and similar schemes.

How to implement: Organise regular employee security training, both in person and through online platforms. Though gamification can make training more engaging, it can also increase training time, leading to employees just clicking through to completion as fast as possible. Emphasise concise, timely explanations of the most important points.

Why Data Security is Critical in Payroll Processing

Here’s what happens if you don’t take any of our advice and neglect payroll security entirely.

  • Legal problems: Affected employees can file (and win) lawsuits against your company if you fail to protect their personal information. Failing to adhere to the GDPR can result in fines up to €20 million or 4% of annual global turnover over the past year.
  • Operational disruptions: After a payroll data breach, your company will probably need some downtime to sort everything out before resuming normal operations. This can result in everything from lost revenue to full-on worker strikes, depending on how long operations are halted.
  • Reputational damage: Severe payroll data leaks can result in a firestorm of negative publicity. This will make it harder to attract and retain talent, gain trust from new customers, and receive capital from investors.

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Adhering to some common-sense best practices for payroll security can make a night-and-day difference in the strength of your data protection. Namely, you’ll be better able to guard against costly legal troubles, operational hiccups, and reputational damage.

If this is all a bit much for you and you’re leaning towards outsourcing, read our guide on how much it costs to outsource payroll.

Payroll Security FAQs

What is payroll security?
Payroll security refers to the measures and protocols taken by a business to protect the confidentiality of its payroll information, which often includes sensitive, personal employee data.
How do you conduct a payroll security audit?
Conducting a payroll security audit involves everything from reviewing access controls and password protection, to double-checking payroll data backups, to comparing existing protocols with GDPR requirements.
Written by:
Robbie holds a BSc in Accounting and Finance from Centenary University, New Jersey. He’s worked as a staff accountant at Unity Bank and Kering (Gucci, Balenciaga), focusing on financial reporting, account reconciliation, and complex accrual analysis. In addition to banks and private companies, Robbie also has experience working in the luxury hospitality and construction sectors, giving him a well-rounded understanding of each sector’s unique needs.