Employee Theft Law and Legal Definition
Employee theft is a considerable problem for many companies, but its precise extent is poorly documented. The U.S. Census Bureau does not track employee theft as a category but refers researchers to the Annual Retail Theft Survey conducted by Jack L. Hayes International. The U.S. Bureau of Justice Statistics publishes data on larceny, theft, and embezzlement but not in categories that permit inference of the extent of employee involvement. The most recent Annual Retail Theft Survey was based on data from 27 retail organizations employing 1.7 million people. In 2004, 3.7 percent of the employees were apprehended stealing from their employers to the tune of $671 per incident. By contrast, the average "take" of shoplifters in the survey was $149. Employee apprehensions were up 4 percent over 2003—the numbers breaking a multi-year trend of declining employee theft.
The Hayes International survey identifies what might be called mid-level cases of employee theft. Minor theft is the taking for at-home use of rolls of adhesive tape or boxes of paperclips, etc., for instance, a very wide-spread practice. Major theft is of the magnitude reported by Leslie Shiner writing for The Journal of Light Construction. Shiner analyzed the case of a high-end remodeling firm where the sole bookkeeper of the organization had embezzled $550,000 during a seven year engagement—caught in the end because the business owner could not understand how, despite very profitable contracts, his company never seemed to have any money. Shiner reported on a small business case. Major fraud by very high-ranking employees of businesses like Enron are the theft-peak of the employee crime pyramid.
FORMS OF EMPLOYEE THEFT
Employee theft may be grouped into four major categories: 1) manipulation of company records either to embezzle money outright or to hide the theft of goods; 2) direct theft of inventory, products, or cash; 3) abuse of power in order to aid and abet thievery by partners; and 4) theft of information for sale to others or for direct use (e.g., credit card theft).
Employees directly involved in financial administration and with access to company checks and corporate records may engage in forging company checks for personal use. Creating "ghost payroll entries" and then paying "phantom" employees is another method, sometimes quite elaborate in implementation involving phony time cards. Forged billings by non-existent vendors is another method—with the accounts payable clerk writing checks to him or herself when paying the fake billing. Employees also destroy paper records so that "lost shipments" cannot be traced—or fake orders to cover items missing from inventory through their own thefts.
In its simplest form employees simply take cash from cash registers to which multiple individuals have access to dip into petty cash resources generally easily accessible to several employees. Direct theft of valuable products or materials invariable relies upon trust (the employee comes and goes, often with a truck, stashes goods away, is never checked) or opportunity (the employee has access to the warehouse and the warehouse is not effectively guarded).
Abuse of Position
In one form of this abuse, known as "sweethearting," an employee grants a friend a discount or rings up fewer items than are packaged for taking out—or rings up a cheaper item than the item that leaves the store actually cost. The goods acquired in this manner may later be shared. Individuals taking inventory may abuse this privileged status by counting fewer item than are present and, if this "mistake" is not detected, later personally "adjusting" the inventory by taking the uncounted items home.
As reported more fully in the Computer Crime essay in this volume, an increasing proportion of attacks on computer systems take place from within the company. The target of this type of thievery is protected personal data, such as credit card information, which, in the wrong hands, can be turned into cash. More sophisticated forms of such theft are conducted in order to sell information to third parties.
Signs of Employee Theft
Managers and small business owners need to be aware of tell-tale signs which, when they frequently repeat, may be the tracks of a thief at work inside the company. A useful checklist to keep in mind mentally includes—
- Missing records (such as shipping and/or receiving bills).
- Company checks that bounce or someone is surprised that the company is doing business with XYZ and then adds: "Who is XYZ anyway?"
- Customer complaints about missing, late, or short deliveries.
- Hefty payments made for "miscellaneous" purposes in employee expense claims.
- Frequent and puzzling mix-ups in inventory. And
- Managers who insist on performing clerical duties.
STOPPING EMPLOYEE THEFT
In the well-run small business employees are trusted to be honest but sensible policies and practices will be in place to detect the loss of product and closely to monitor financial and administrative transactions. Some of the tools include the following:
- Clear Policy and Good Example. The company will have and will publish its ethical stance and its managers will be seen to adhere to it strictly in spirit and in action, inside and out, with customers, vendors, and employees alike.
- Hiring Orientation. Newly hired employees must leave their orientation session fully aware that the company has zero-tolerance for any kind of irregularity—and the dire consequences that will follow pilfering, never mind theft.
- Adequate Controls. Controls will be in place so that physical goods are locked up, protected at night, and closely checked on paper. In a small business particularly, where time is difficult to find, the owner will, nonetheless, show a keen interest in accounting details, probe into them occasionally, and not simply let the "number crunchers" drift unsupervised. Financial controls will include some of the following:
- Checkbooks will be locked up, and access to cash and checks will be given only to authorized employees.
- Few individuals will have the authority to write a check, by preference one writing and one signing the check.
- More than one person will have insight into the total finances so that "lone wolf" strategies are forestalled.
- Handling of cash will always be accompanied by documentation.
- Books will be audited at intervals not necessarily known to accounting people in advance.
- Cash will be rapidly and immediately deposited rather than accumulating in cash registers.
- All invoices will be formally checked against deliveries before vendors are paid.
Berta, Dina. "Toomey: Ward off employee theft with internal checks and balances." Nation's Restaurant News. 12 December 2005.
Brandman, Barry. "Inside Job: Many food distributors find themselves victimized by internal theft. Most are guilty of committing at least one of the Seven Sins of Distribution Center Security." Food Logistics. 15 September 2005.
Fishman, Neil H. "Signs of Fraud." CPA Journal. December 2000.
McTaggart, Jenny and Joe Tarnowski. "Employee Theft, Shoplifting Prevail at Retail." Progressive Grocer. 1 November 2005.
"Mojoes Coffee House." Specialty Coffee Retailer. December 2005.
Niehoff, Brian P., and Robert J. Paul. "Causes of Employee Theft and Strategies that HR Managers Can Use for Prevention." Human Resource Management. Spring 2000.
17th Annual Retail Theft Survey, 2004. Jack L. Hayes International. Available from http://www.hayesinternational.com. Retrieved on 14 March 2006.
Shiner, Leslie. "Protect Yourself from Employee Theft." The Journal of Light Construction. October 2005.
Hillstrom, Northern Lights
updated by Magee, ECDI
Legal Definition list
Related Legal Terms
- Actuarial Experience [Employee Retirement]
- Actuarial Services [Employee Retirement]
- Administrative Employee
- Administrator of an Employee Benefit Plan
- Affected Employees
- Alien Employees
- Allotment from Federal Employee
- American Federation of Government Employees (AFGE)
- Anti Car Theft Act
- Anti Car Theft Improvements Act