ALBANY, N.Y. (NEWS10) — On September 8, the Department of Financial Services (DFS) released a report that provides much-needed information regarding the largely unknown payroll service provider industry. The report, titled “Payroll Service Provider Regulation and Business and Employee Protections,” was mandated by A.7786/S.3577, a bill sponsored by Assemblyman Kevin A. Cahill (D-Ulster, Dutchess) and Senator Neil Breslin of Albany.
The bill, signed by the Governor in May, required DFS to study the number and size of payroll service providers in the state and the businesses they serve and to assess whether more risk mitigation practices and employee and employer protections are needed in the industry.
“I thank the DFS for shedding light on payroll service providers, companies we knew very little about prior to this report,” Cahill said. “It is essential that policymakers are informed about an industry whose actions impact the financial well-being and solvency of New York small businesses and their workers.”
The DFS report and its empowering legislation were in response to growing concerns of mismanagement within the payroll service provider industry. In September 2019, MyPayroll HR, a payroll service provider in upstate New York with clients across the state and nation, abruptly ceased operations and left thousands of small employers with outstanding tax obligations and delayed employee paychecks.
The firm’s CEO, Michael T. Mann, had misappropriated millions of dollars collected from client companies meant to administer payroll and tax liabilities on their behalf. In 2021, Mann was convicted on federal fraud and conspiracy charges, sentenced to 12 years in prison, and ordered to forfeit $14 million in assets and pay more than $100 million in restitution to victims.
“This report provides important insight into the payroll services industry and the details of the fraud schemes payroll service providers have perpetrated,” said Superintendent of Financial Services Adrienne A. Harris. “DFS looks forward to continuing to collaborate with our colleagues in the legislature to identify important protections for New York’s consumers and businesses.”
The report found that in one out of the 28 cases of payroll service provider fraud prosecuted nationwide between 2010 and 2019, four were committed by New York-headquartered businesses. In each New York case, executives of payroll service providers diverted tax withholdings to improper purposes and filed fraudulent reports to the IRS and their clients.
However, the report concedes that cases documented in court records and news reports may not reflect the full scope of fraud occurring within the industry. Data available from the Census Bureau and the New York State Department of Labor does not provide an exact number of companies serving as payroll service providers or the number of businesses they work with. Furthermore, the report found that a requirement that payroll service providers be bonded, purchase insurance, or adopt risk management tools are unlikely to be effective at this time.
“This report represents just the first step in building a comprehensive understanding of how payroll service providers operate in New York State. It is clear that more research must be conducted into the industry so we can protect small businesses and their employees to the best of our ability,” Cahill concluded.