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When The Middleman Disappears

black door with red sign that reads 'Payroll Department'.
photo by Matt Brown

When you run a small business, paying your employees on time, every time, is probably the most important part of your job. For many owners like me, it is also a source of considerable satisfaction and pride.

I hired my first full-time employee 24 years ago this month. In the beginning, I sat down once a week and calculated our payroll by hand using the published federal and state tax withholding tables. Then I wrote the checks, printed the pay stubs and handed them to the tiny staff that shared my small office in a converted movie house in Westchester County, New York.

This ritual instilled in me – I think, really, in all of us – a visceral understanding of the obligations each of us undertook toward the others and toward the business we were building together. I expected employees to give maximum effort toward serving our clients and becoming the best professionals we could be. In return, they had every right to rely on me to pay them fairly for their labor and skill, as agreed, in a timely and reliable way. They counted on those paychecks to support their households and families.

It does not matter whether an enterprise makes fasteners or financial plans. Responsible business owners share the sense of duty I feel to fulfill that obligation to our employees.

Today our staff numbers about 27, spread through six states across the country. The imperative of making timely, reliable, accurate payrolls remains as strong as ever, despite some changes in the mechanics. Every two weeks, one of our firm’s financial managers calculates payroll using an online service. Funds are withdrawn from our company bank account on Friday and reach employees’ accounts no later than the scheduled pay day on the following Monday, although usually the money is available for withdrawal as early as Saturday. Millions of businesses handle employee paychecks this way, and neither employers nor workers usually give it a second thought because the system works so reliably.

Until it doesn’t.

Around Labor Day, something went very wrong for thousands of small businesses relying on a company called MyPayrollHR to process their payrolls. Not only did employees fail to receive their normal paycheck, but in many cases, employees’ banks withdrew deposited funds. Some especially unlucky workers had funds withdrawn twice. Roughly 8,000 employees were affected overall, to the tune of $26 million in wages (and an additional $4 million in employer tax payments).

Suddenly losing an amount equal to your normal paycheck, or twice as much, would be unpleasant for anyone. But a significant number of Americans live paycheck to paycheck – an estimated 78%, according to a recent study from CareerBuilder. This means that workers suddenly had no way to cover monthly mortgage payments, rent, car loan payments or other major expenses, many of which were likely due on Sept. 1.

Some employers stepped in to make employees whole while trying to find out what happened. Not every small business has the resources to immediately cover a missed payroll, but all responsible business owners would want to do their best to take care of their workers in whatever way they could. In the meantime, MyPayrollHR had abruptly gone dark. A voicemail message instructed clients to try back later, and clients reported the firm’s social media accounts had disappeared. Eventually the company posted a message online saying, “we are no longer able to process any further payroll transactions” without elaborating.

Meanwhile, employers and employees had discovered an additional, undisclosed party in the payroll process. MyPayrollHR had partnered with Cachet Financial Services to process transactions for more than a decade. Cachet, it turned out, was the party responsible for the abrupt withdrawals from workers’ accounts. According to Cachet, the process usually worked this way: MyPayrollHR submitted data files for the pay period and, at the same time, placed employers’ funds in a Cachet holding account to be disbursed to employees. At the end of August, Cachet received the data as usual and initiated the direct deposit process – before anyone noticed the funds had been deposited elsewhere, in an account at Pioneer Bank. Cachet scrambled to claw the direct deposits back from workers, but the first time sent an erroneous code to the banks. Assuming that code would fail, Cachet sent a second request. Some banks processed both requests; thus the double withdrawals.

MyPayrollHR’s business clients presumably had no idea that their money was going through Cachet until this fiasco left their employees unpaid and justifiably upset. By Sept. 13, the FBI had opened an investigation into MyPayrollHR and its parent company.

Some employees were able to resolve the problem directly with their banks and credit unions, the New York Daily News reported. While Cachet initially insisted that it should not be held responsible for paying workers with its own money, the company’s attorney later changed course and said all affected employees should get their money back. The National Automated Clearing House Association (NACHA) told The Wall Street Journal that Cachet should not have tried to reverse the deposits at all, much less twice. Roughly 97% of affected workers have since been made whole, according to reports from NACHA.

The story is far from over, however. On Sept. 23, federal prosecutors charged MyPayrollHR’s owner, Michael Mann, with $70 million worth of bank fraud. In its criminal complaint, the Justice Department said Mann had admitted to a scheme going back to 2010 or 2011.

According to a report from The Wall Street Journal, Mann had been diverting money through Pioneer on its way to Cachet in order to temporarily reduce the amount he owed to the bank. Pioneer, along with Bank of America, froze Mann’s accounts due to the discovery that he had been “kiting” millions of dollars back and forth between accounts at the two banks. Check kiting is a form of fraud in which a person intentionally writes a check from an account in one bank for more than the account balance, then writes a check from another bank’s account, also with insufficient funds. The second check serves to cover the first account’s nonexistent funds, making the fraudster appear to have more money than he actually does. When Pioneer froze Mann’s account, the money could not continue through to Cachet as usual, creating the problems that ended MyPayrollHR.

At my firm, we have used Intuit Online Payroll ever since Intuit bought our former vendor, Paycycle, in a private equity deal about a decade ago. Given Intuit’s size and the scope of their business, it is probably as reliable a payroll solution as a business our size can find. But even with Intuit, the process is opaque. Do they use an intermediary to actually move money to our staff? If so, who? What are the controls in place to prevent a situation like the MyPayrollHR debacle from happening to us, beyond the accounting and managerial standards we would expect of a vendor this size? Beats me. Intuit’s ads are quick to tell us how many businesses they serve, but they don’t tell us how.

It is ultimately a leap of faith on the part of business owners to believe that when we push the button on our online payroll, what happens next will be what we expect. The system generally works well … right up until it doesn’t.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us” and Chapter 4, “The Family Business."

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One Response to "When The Middleman Disappears"

  • Zach Kettman
    October 3, 2019 - 11:04 am

    A nightmare for me as well, fortunately not a reality. I do recall reviewing mypayrollHR as a solution on two occasions in the last 10 years. I suspect it was as much luck, as it was other factors, that led to it being crossed off the list.