Employee Theft Guide for Small Business: What It Is & How to Prevent It
This article is part of a larger series on How to Do Payroll.
Employee theft is the stealing of an employer’s property or 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).
Historically, it’s been reported that some 95% of businesses have experienced employee theft, yet there are actions you can take to prevent or reduce it. This includes implementing a company-wide policy, training your management team, and conducting audits.
Types of Employee Theft
There are many different ways employees can steal from your small business. Click through the tabs below for details on the types of employee theft.
Inventory theft is when an employee steals a product at any point in the inventory management cycle—including when receiving inventory from a supplier, when the product is displayed in your store, or when an item is returned by a customer. The employee may steal for personal use or with the intent to sell to others. Examples of stolen inventory include office supplies, retail merchandise, medical devices, and computer software.
Case in Point: A recent inventory theft case highlights two employees who stole 10,000 grams of medical marijuana from the distribution facility of a Florida cannabis company. The theft was uncovered by the company’s loss prevention officials.
Service theft is when an employee uses a service for personal gain without permission from your company. Many companies offer employee discounts for the services they provide, but those are typically limited in scope or eligibility. Examples of service theft include an employee allowing friends to use an employee-only membership or selling your exclusive company discount online to earn additional money.
Case in Point: A Detroit car salesman was charged with arranging and directing a seven-year scam in which he illegally sold employee purchase control numbers on Facebook that allowed non-qualified buyers to receive employee discounts. Not only is he alleged to have profited financially but he received company bonuses and accolades as a top-seller.
Data theft is when an employee steals information contained on computers, servers, and other electronic means. The information then may be deleted, altered, or restricted depending on the employee’s motive. This information is typically confidential or proprietary and can be used for financial gain or to tarnish the reputation of your company, other employees, or partners. Data theft examples include an employee taking bank account information to commit fraud, stealing online passwords to classified information, or using medical information for blackmail. This type of theft can particularly be damaging because it can harm the reputation of your organization.
Case in Point: In August 2021, a husband and wife pled guilty for stealing confidential property and trade secrets. They both worked for biotech firm Genentech at one point but the husband eventually left to work for a competitor. The wife provided confidential information to her husband, which he provided to his new employer.
Money theft, of course, involves an employee physically taking funds from the organization. This typically occurs at retail organizations since those establishments carry higher cash balances. Examples include an employee overcharging a customer and taking the overcharge for themselves as well as an employee taking money from a petty cash or tip box. On a larger scale, money theft can involve members of the accounting or finance team, who steal checks or cash before it’s recorded.
Case in Point: In March 2022, a former Hewlett Packard employee pleaded guilty to wire fraud, money laundering, and a related tax charge for stealing more than $5 million over the period of four years. The employee used her position as finance planning manager to direct payments to her personal accounts instead of Hewlett Packard’s vendors.
Payroll theft, a subset of money or data theft, is the stealing of money and information from the organization’s payroll system. This type of theft is typically committed by staff with authorized access to the data such as payroll, finance, and HR professionals. Examples include a payroll employee changing another worker’s direct deposit to their own account or paying fictional employees and cashing those checks.
Case in Point: An airport contractor is accused of using “ghost employees” to defraud his employer. He allegedly manually added workers (who were real people but not actual employees) to the payroll system; those real people received salaries and benefits and would reward the airport contractor financially or through other means. The scheme was uncovered in an audit of service contracts.
Time theft occurs when an employee records more time than they actually worked. This can be done by adjusting their own or a co-worker’s time records. This type of theft is typically done by hourly employees trying to steal money from the company or salaried employees trying to cover for missed time. Time theft also includes employees being at work but not completing work tasks outside of normal breaks. Payroll theft and time theft are very similar but there are some key differences.
Case in Point: A fire chief was arrested in March 2022 for payroll fraud after a four-month investigation. He was accused of manipulating time entries using computer software for his financial benefit. This included putting in time that he did not actually work and classifying some of his hours as overtime, which led to a total of $22,000.
Time theft itself is not actually a crime. While you may be able to sue your employee for fraud to recover losses, you will need to provide clear evidence that the employee falsified their time sheet and that you overpaid them. In most cases, litigation simply is not worth your time and money.
Similarly, you should not simply deduct from an employee’s pay if you suspect they are not working for part of their shift without substantial evidence. Otherwise, you may find your business subject to a costly wage and hour lawsuit, as the Fair Labor Standards Act (FLSA) requires employees be paid for any hours they work.
For an overview of how to do payroll, check out our guide. We also have an article on payroll security if you need assistance on how to prevent payroll theft.
How To Prevent Employee Theft
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 go a long way in reducing the odds of theft.
Develop an Employee Policy Regarding Theft in the Workplace
One of the best ways to prevent thefts is deterrence. This can be done by creating policies and procedures regarding employee theft. This type of policy is typically contained within your company’s employee handbook.
An effective employee theft policy will contain the following information:
- Company policy on 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 for them to receive pay for hours not worked.
- Consequences of committing theft: This section should point to your company’s discipline policy, which should clearly state the repercussions of committing theft.
- Commitment to investigating theft: This section will explain that you actively put measures in place to detect theft, will follow up on all reports of theft, and will discipline those who deliberately make false accusations.
Get a jumpstart by downloading and customizing our sample employee theft policy.
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, a physical dropbox). You should also provide continuous training on the reporting system.
Train Managers To Monitor Time Sheets
Because managers set their employees’ schedules, they’re the best ones to monitor whether an employee is stealing 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 how to review 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 gives you the chance 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 sheets into a spreadsheet that he gave to Jack every two weeks. Allen only worked five days per week, but Jack didn’t notice that Allen routinely added hours for days he didn’t work.
- During the course of a routine HR audit, Allen’s time sheet discrepancy was uncovered.
- Because of the length of time this was going on and the number of hours Allen falsified, your company overpaid Allen $65,000 plus thousands more in employment and business taxes.
- Time to terminate Allen, potentially sue for fraud, and discipline Jack. Because of the amount of money stolen by Allen, it may also result in criminal charges as well.
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.
Conduct Unannounced Audits
Having routine audits is a great way to discover fraud at your company. Having 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 it matches their expectations on hours worked. For more tips on processing payroll, visit our article on managing payroll.
- Use Benford’s Law for auditing large data sets. This mathematical observation shows that most numbers in a natural data set (such as ledger entries) begin with smaller numbers like one and two; so, if your data set shows eight or nine as the first digit more frequently, Benford’s Law would at least indicate that is an anomaly.
Develop Company Procedures That Discourage Theft
You can reduce the risk of company theft by creating processes to increase visibility of all your company tasks.
- You can assign multiple employees to job tasks where the risk of theft is increased. 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 there is a check and balance system in place. Examples include making sure that any person handling money or checks has a receipt signaling that a co-worker has reviewed it, making sure that the employee writing checks has his activity reviewed and reconciled by another co-worker, and that employee timecards are reviewed by someone other than the person running payroll.
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 shown by applicants before an offer letter is presented. Specific issues to be aware of include dishonesty, whether that is on their resume or application or during an interview, and an unwillingness to submit or explain results on a background check.
Speaking with an applicant’s former managers can also be a key element of a thorough evaluation. (For more information, check out our article on employee reference checks.) In addition, for positions that require handling money, you may consider asking the employee to submit to a credit check.
Resolve Employee Issues
One way to reduce employee theft is to meet the needs and wants of your employees. Some of these items include a good company culture, a robust benefits program, competitive compensation, and employee recognition for great work. Understanding your employee needs can go a long way in reducing discontent employees, which is one of the reasons why employee theft occurs.
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 sheet 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
Check out our list of the best time tracking software. If you need platforms with zero cost, then head over to our best free time tracking solutions.
Employee Theft Warning Signs
There are common warning signs at both the employee and organization levels that fraud is occurring at your organization. It is important to note that these warning signs do not mean that an employee is committing theft for certain, as there are other reasons that could explain the situation. However, these warning signs should encourage you to investigate further.
Employee-level warning signs are actions that an individual or group of employees are taking that should be cause for concern.
- Unusual Work Behavior: Employees who begin to openly complain about their job or get into frequent arguments with the co-workers is a sign that something is going wrong—especially if there is no obvious reason for the change in behavior. On the other hand, an overly friendly relationship between an employee and a client, supplier, or company executive without an obvious explanation is also a cause for concern.
- Poor Work Performance: Employees who have not performed well on the job may be focused on non-work activities instead of the job.
- Change in Personal Lifestyle: Sudden expensive material purchases that signal an employee living above their means could be a sign that they are siphoning money from your organization. Also, employees dealing with an addiction may also be led to commit theft to fund their habit
- Unwillingness to Transition Tasks: This might be a signal that the employee is using their autonomy on a project to mask their theft, and they feel they are likely to be uncovered if someone else audits their work.
- Unusual Work Hours: An employee may decide to work very early or very late to have fewer people watching their activities. This is especially true when an employee is committing inventory or money theft.
Organizational-level warning signs are company results that may signal a cause for concern.
- Reduced Profit Margins: If your accounting team cannot determine the business reason for why your company is losing money, employee theft may be at play.
- Client Payment Issues: If you are having multiple customers complaining about their transactions (i.e., being charged for a service they did not agree to or being billed twice for the same invoice), data theft could be the culprit.
- Damaged, Destroyed, or Missing Property or Merchandise: Unexplained changes to inventory can be inventory theft in itself or a way to disguise other theft in the organization, like payroll or data theft.
Why Employee Theft Occurs
Employees commit theft for a variety of different reasons. Some of the main reasons are mentioned below.
- Employee Workforce Issues: Many times, employees feel like their employer has treated them poorly and would like to “get even.” This can be broken down to failed relationships between their co-workers or managers, or with the organization in general. Some examples of these issues include being in constant disagreements with the teammates in a department, feeling that a manager is showing favoritism to certain employees, and/or workplace harassment.
- Employee Personal Issues: Employees may have personal issues that lead to them committing theft at the workplace. These items can include unexpected expenses, such as legal and medical expenses, as well as loan payments that have increased due to penalties and interest.
- Limited Theft Prevention Measures: If your organization has security vulnerabilities known by employees, it is more likely that employees will attempt theft. There are some employees who try to weigh the benefits of theft versus the odds and penalties of getting caught. There are other employees who commit theft simply because they 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 such as installing a business security system like SimpliSafe.
- Inexperienced or Untrained Staff: Employees who commit theft may try to take advantage of employees who they believe are inexperienced in their job or not properly trained. For example, employees may ask your payroll or human resource professional to enter time on their behalf without checking with their manager.
Employee theft is an issue that affects all companies, but can have a bigger impact on small businesses. The Association of Certified Fraud Examiners found in a recent study that companies with fewer than 100 employees had a 50% higher median loss from occupational fraud than larger companies (and the duration of the fraud was longer).
If you would like more statistics, please see our article on employee theft statistics.
These issues impact not only company finances but it company culture, employee morale, and your company’s relationship with its partners and customers. This article should help you reduce your risks through understanding the causes, warnings signs, and prevention techniques.