Employee theft is stealing an employer’s property or misuse of company assets for personal use. It includes the more traditional ideas of theft, such as stealing merchandise or money, as well as stealing confidential data and “time” (i.e., not working as many hours as recorded or performing personal tasks on company time).
Our guide takes you through the types of employee theft, prevention strategies, and red flags. We’ve also created a free downloadable employee theft policy template that you can use to guide your theft prevention and resolution process.
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Types of Employee Theft
Employees can steal from your business in many ways. Explore the sections below for details on the most common types of employee theft.
How to Prevent Employee Theft
Even small businesses are at risk of employee theft, so learning how to handle suspected employee theft—or reduce it at least—is essential for all business owners. Preventing employee theft does not have to be overly intrusive or complicated.
Developing and implementing an employee policy, having good audit procedures, completing due diligence on new hires, and resolving employee issues can greatly reduce the odds of theft.
1. Develop an Employee Theft Policy
One of the best ways to prevent employee theft is deterrence. This can be done by creating relevant policies and procedures, which are generally included in your company’s employee handbook.
An effective employee theft policy will contain the following information:
- Types and examples of company theft: This section should remind employees that theft is illegal. It also should give different examples of employee theft, such as those mentioned above (data theft, inventory theft, time theft, etc.). You should also explain common types of theft in your industry, such as hospitality employees giving food, drinks, and lodging to friends and hourly employees clocking in and out for co-workers.
- Commitment to investigating theft: This section will explain that you actively put measures in place to detect theft (including an internal reporting system, which we cover just below), will follow up on all evidence or reports of theft, and will discipline those who deliberately make false accusations.
- Consequences of committing theft: This section should clearly state the repercussions to the employee for committing theft. It may point to your company’s progressive discipline policy or other disciplinary procedures.
Implement an Employee Policy Reporting System
Along with your employee policy, you should have a policy reporting system. An effective reporting system enables anonymous and confidential reporting, allows both internal (co-workers) and external (clients and customers) shareholders to report, and includes multiple ways for an individual to report a theft—e.g., email, phone, physical dropbox. You should also provide continuous training on the reporting system.
2. Train Managers to Monitor Time Sheets
Because managers set their employees’ schedules, they’re the best ones to monitor whether an employee is stealing company time. Some managers are diligent, but others may be inattentive and sign off on time sheets without verifying their accuracy.
All managers should receive training on reviewing all time sheets before the employee gets paid. They may not catch everything, but a manager will be able to spot glaring errors that could be an example of employee time theft. Catching it before your team runs payroll allows you to speak with the employee to gauge whether it was intentional or accidental and take appropriate action.
Consider the following scenario of what could happen if your managers are not properly trained in this area:
You run a business with 100 employees and dozens of managers who approve time sheets.
- Over two years, one of your inattentive managers, Jack, approved the time sheets of Allen without verifying whether Allen really worked.
- Allen manually entered the time into a spreadsheet he gave Jack every two weeks. Allen only worked five days per week, but Jack didn’t notice that he routinely added hours for days he didn’t work.
- During a routine HR audit, Allen’s time sheet discrepancy was uncovered.
- Because of how long this was going on and the number of hours Allen falsified, your company overpaid Allen $15,000 plus thousands more in employment and business taxes.
If any of the above scenarios are true, you are now in a position where you must terminate an employee, discipline the manager, and potentially sue for fraud. You may not want to get involved in a time-consuming legal battle with a now-former employee—but that’s a substantial amount of money your company has lost, and other employees may take advantage of the situation if you don’t make clear that your company will not stand for this type of behavior.
3. Conduct Unannounced Audits
Having routine audits is a great way to discover fraud at your company, but going even further with random, unannounced audits will prevent some employees from disguising their misdeeds.
The following tips will help in a successful audit:
- Hire an external accountant and auditor to conduct the audit.
- Conduct audits, both payroll audits and HR compliance audits, at different times of the year.
- Conduct random checks of petty cash, register cash, inventory, supplies, and merchandise.
- Conduct periodic internal audits of financial records and vendor files.
- Encourage your managers and HR personnel to review employees’ timecards to see if they match expectations for hours worked. For more tips on processing payroll, visit our article with tips for managing payroll.
4. Develop Company Procedures That Discourage Theft
You can reduce the risk of company theft by creating processes to increase the visibility of all your company tasks.
- You can assign multiple employees to job tasks with an increased risk of theft. Examples include scheduling two workers per shift to restock inventory, count cash, and process customer returns.
- You can also segregate duties as a deterrent to theft since employees will know that a check-and-balance system is in place. For example, you can make sure:
- An employee handling money or checks has a receipt signaling that a co-worker has reviewed it
- An employee writing checks has their activity reviewed and reconciled by another co-worker
- Employee timecards are reviewed by someone other than the person running payroll
Some employees try to weigh the benefits of theft versus the odds and penalties of getting caught, while others simply believe they can get away with it. Too many businesses make the mistake of believing the company culture is solid enough that there is no need to have anti-theft safeguards.
5. Evaluate New Applicants Thoroughly
You can reduce your odds of employee theft by using thorough applicant screening procedures, including background and reference checks, to identify red flags applicants show before an offer letter is presented. Specific issues to be aware of include dishonesty—whether on their resume/application or during an interview—and an unwillingness to agree to a background check or explain the results.
Speaking with an applicant’s former managers can also be a key element of a thorough evaluation. In addition, for positions that require handling money, you may consider asking the employee to submit to a credit check.
For more information, check out these guides:
6. Resolve Employee Issues
One way to reduce employee theft is to meet the needs and wants of your employees, as some employees consider stealing money from the company (or time, data, etc.) as a way to “get even” when they feel like their employer has treated them poorly. You can do this by providing a good company culture, competitive compensation, and recognition for great work.
Also, consider a robust benefits program that includes health insurance and other medical coverage (i.e., mental health counseling) and perhaps even legal counseling and financial planning guidance. Personal, legal, and financial issues can lead an employee to commit workplace theft, so providing these types of benefits can help employees deal with issues in a healthier and more productive way. Proper management, where employees feel they are being treated fairly and respectfully, is also important.
Understanding your employees’ needs can go a long way in reducing discontent, which is one of the reasons employee theft occurs. Check out the following articles to learn more about keeping your employees satisfied and engaged.
7. Use an Electronic Time Clock
The best way to eliminate time theft is to use software that prevents it for you. With an electronic time clock system, you can restrict your employees from changing their own time sheets and prevent them from having a colleague clock them in. Employees clock in and out electronically with their own unique login information, creating a trail that, unlike pen and paper, can only be modified with your approval.
Time clock software can:
- Restrict where employees can clock in and out
- Prevent buddy punching
- Require regular time tracking updates on projects
- Restrict employee’s ability to modify their time sheets
- Run detailed reports on employee productivity, attendance, tardiness, and labor costs
How to Handle Suspected Employee Theft
Even the best prevention techniques cannot stop 100% of employee theft, so as a small business owner or manager, you may be faced with a situation where you have to deal with this issue. This is why having a policy is so key, as you will already have a plan to follow. You will want to follow your policy consistently for all employees.
Human resources and, depending on the severity of the situation, your legal team or legal counsel should be involved in this process. You want to make sure you handle the situation appropriately, which includes complying with all employment laws and respecting all employee rights.
Recovering Assets From Employee Theft
Recovering money and assets following employee theft is not always easy. However, there are some steps you can take to help ensure recovery.
- Notify the authorities immediately: Once you discover the theft, it is important to contact the police.
- File a civil action: With a police report and evidence of the theft you can file a civil action against the alleged perpetrator. A mediator, or judge, may require the employee to repay the money or return the property taken.
- File an insurance claim: If goods have been stolen, you can file an insurance claim against the cost of the goods. Your insurance company may pay restitution to help you recoup some of the monies lost.
- File a tax deduction: Losses from theft or fraud may be deductible on your annual tax returns. This will not recoup the money lost, but may create less owed in taxes.
- Create a repayment agreement: If the theft is minimal, or you’ve decided not to press charges against the employee, you can have the employee sign a repayment agreement. This will set forth requirements for repayment, as well as actions should the repayment not occur.
- Deduct money owed from the employee’s paycheck: Under the Fair Labor Standards Act (FLSA), in the case of theft or fraud, employers may be allowed to deduct money directly from the employee’s paycheck. However, check the laws in your state and payroll compliance law, as some states do not allow deductions for stolen property.
Recovering money lost from time theft will be almost impossible to receive. If you suspect employees of stealing time, it’s a good idea to run payroll and timekeeping reports. Have HR verify the accuracy of all reports. Then put measures in place to further prevent time theft.
Employee Theft Warning Signs
There are common warning signs at both the employee and organization levels that fraud is occurring. It is important to note that these warning signs do not mean an employee is committing theft, as other reasons could explain the situation. However, these warning signs should encourage you to investigate further.
Employee Theft Frequently Asked Questions (FAQs)
Inventory theft is the most common form of theft in the workplace. This may be due to the accessibility of company products in places like retail stores and restaurants. It is reported that nearly half of all inventory theft is a result of employee theft.
The most common way to detect for employee theft is to look for discrepancies (i.e., missing merchandise, cash receipts that fall short, and employee behavior). You can also set up cameras around the workplace, especially in areas where you’ve noticed missing items. Work detecting software can shed light on employees that may be stealing time.
Bottom Line
Employee theft is an issue that affects all companies but can have a bigger impact on small businesses. These issues impact not only company finances but company culture, employee morale, and your company’s relationship with its partners and customers. This article should help you reduce your risks by understanding the types of employee theft, prevention techniques, and warning signs.
