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How to Handle Employee Theft

Stephanie is a lawyer and owns a small business in Oregon. After she discovered employee theft, she's been working to prevent future losses.

How to handle employee theft

How to handle employee theft

How to Deal With Employee Theft

If you are a small business owner, trusting your employees is both necessary and risky. On one hand, you need people that can assist you with all aspects of running the business, from interacting with customers and clients to dealing with vendors, taking payments, bookkeeping, tracking expenses, and stocking shelves. However, even some employees with impressive resumes and references may be dishonest. When such an employee is in charge of taking payments, purchasing business-related items, and/or balancing accounts, the temptation to skim from your business may be too great. Some employees are adept at hiding their theft, but others just outright engage in fraud.

The statistics on employee theft are surprising, if not shocking.

In 2011, a survey by the National Retail Federation found that losses resulting from employee theft, shoplifting, paperwork errors and supplier fraud added up to $34.5 billion, or 1.41 percent of retail sales; of that total, 43.9% was attributable to employee theft, significantly more than shoplifting losses (35.7%).

While some employee theft can be categorized as relatively small (stealing office supplies, using company equipment for personal use), more significant losses occur from falsifying time records, stealing proprietary business information such as client lists, and doctoring accounts and records to put more money in the employee's pocket.

Unfortunately, I discovered that a trusted employee who had been with my law firm since the day it opened was both overpaying herself via payroll and using the business credit card for a wide variety of personal purchases over a 5-month period in 2019. She was my only employee, and I had worked with her when we were both employed by another company the year prior. This employee was in charge of client intake, payroll (for the two of us), accounts receivable, and she also served as my secretary and paralegal. She had access to both a company credit card and company checking accounts. The employee also set up, at my request, our payroll services, website, advertising and marketing. She repeatedly said to me, "I want you to be able to focus on practicing law—I will take care of everything else." Those words came back to haunt me as her employee theft cost me just over $20,000 in five short months.

What to Do If You Discover or Suspect Employee Theft

  1. Unless you catch the employee in the act (see #7 below), immediately report the suspected theft to your human resources department, if you have one, and coordinate with the department, following any and all published employee handbook procedures. You may wish to discuss the matter with your accounting department, if you have one, as well.
  2. If the employee has access to business credit cards, cash, bank accounts, customer accounts or merchandise, immediately restrict or freeze access. This includes reporting the suspected theft to banks and removing the employee as an authorized signatory or agent on all accounts. Restrict employee access to the business premises and any and all locations at which your business is transacted, if possible.
  3. If you do not have a human resources department and/or do not have a published employee handbook, arrange for a third party to be present on a telephone call or meeting with the employee suspected of theft.
  4. Prepare for a telephone call or meeting with the employee, pulling evidence you have that documents or supports the suspicion of theft.
  5. Immediately suspend or terminate the employee, depending on your evidence and if there is an employee handbook, after following published policies and procedures. It is suggested that you have a third person present during this meeting or phone call.
  6. Report the theft to the police department immediately.
  7. If you catch the employee in the act of theft, call the police immediately before allowing the employee to leave.
  8. Immediately report the theft to customers or clients if the employee has had access to sensitive information, including but not limited to social security numbers, bank account numbers and/or credit card numbers.
  9. If the employee has a laptop computer issued to him or her or another portable device on which sensitive customer or client information is stored, immediately secure the return of such computer or device(s). All company property should be demanded returned, including cell phones, membership cards and any other methods by which company expenses may be made (e.g. fuel credit cards).

Steps You Can Take to Prevent or Minimize Employee Theft

Hiring employees is a delicate practice. You may wish to consult an employment attorney to ensure that your hiring practices are not discriminatory. An attorney can also help you develop an employee handbook that addresses situations such as employee theft. A non-competition agreement may also be advisable to protect trade secrets and client lists.

Be proactive in loss prevention from the start. This, coupled with careful, legal employee screening practices, can provide some insurance for the small business owner.

Here are a few steps you can take to prevent or minimize employee theft:

  • Request and contact at least three professional references listed by a prospective employee before hiring
  • If the employee will have access to cash and/or accounts, perform regular audits and balance the books frequently (no less than once per month)
  • Explain and have the employee sign employment policies and procedures regarding authorized use of company credit cards and payment with company funds of any business-related purchases
  • Explain and have the employee sign employment policies and procedures prohibiting use of company credit cards and payment with company funds for any personal expenses
  • Consider requesting an attorney to draft an enforceable non-competition agreement to protect proprietary client lists and marketing strategies of the business
  • Consider requiring pre-authorization of any expenditure for a business-related purchase exceeding one hundred dollars in any single transaction and for any situation in which multiple business-related transactions exceed three in any given week
  • Consider requiring each employee (not on a time clock) to account for hours spent on a daily basis on work tasks with a description of each task
  • If you agree to pay for health insurance or other expenses (e.g. cell phone service), consider arranging for direct payment to the provider rather than reimbursing the employee directly
Know your rights if an employee has stolen from you.

Know your rights if an employee has stolen from you.

Employee Theft: The Take-Away

The lessons I learned as a result of employee theft were difficult. As of the date of this writing, the matter is in criminal justice proceedings. I have not yet determined whether to pursue my former employee in civil court proceedings.

This small business owner may never recoup the losses I suffered. I certainly will not recover the countless hours spent filing reports with the police and FBI, meeting with banking and credit card institutions, following up with clients to alert them to the theft and dealing with the potential compromise of clients' sensitive information. This time and the emotional toll it has taken far exceeds the actual amount of money stolen from my small business.

Since discovering the employee theft, I have learned that many other friends and colleagues have had similar situations happen to them. While I believe that complete prevention is difficult to achieve, small businesses certainly can take certain steps to minimize the risk of loss.

"Talking to Strangers: What We Should Know About the People We Don't Know"

Legal action may be necessary in the case of employee theft

Legal action may be necessary in the case of employee theft

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2020 Stephanie Marshall


Devika Primić from Dubrovnik, Croatia on February 25, 2020:

Informative and well written on this topic.

TAIZUL on February 24, 2020:

Nice article

Bill Holland from Olympia, WA on February 24, 2020:

Welcome back my friend. It's been a long time. Good to have you back.

Liz Westwood from UK on February 23, 2020:

This is a shocking personal story. Fraud in the workplace is probably more widespread than we realise. You make some good points, so that others can learn from your experience.

Umesh Chandra Bhatt from Kharghar, Navi Mumbai, India on February 23, 2020:

Interesting, informative and useful article. Thanks.

FlourishAnyway from USA on February 23, 2020:

I’m sorry this happened to you and your business. I used to investigate theft and fraud as well as other employee complaints and sometimes it was surprising who did it, how brazen they were and how they’d sometimes deny it even in the face of undeniable evidence.