Avoiding and Dealing With Employee Theft

Every business takes pride in its ability to recruit and manage excellent employees. When counting your own successes, you might include:

Your competitor’s key employee, who came to you looking for a job.
The problem employee, who is now your most enthusiastic worker.
The bookkeeper who takes care of your business but won’t take a vacation.

Unfortunately, you may not find out until it is too late that:

Your competitor fired the key employee for embezzlement.
The problem employee got a lot happier after he started stealing from you.
Your bookkeeper stays in the office to keep covering her tracks.

AVOIDING HIRING MISTAKES

Although we can wish for a world where information about prospective employees is freely exchanged, it’s not the world we live in. There are many restrictions on an employer’s ability to get the inside scoop.

Employers may lawfully do background checks and verify criminal records, so long as they are careful about the questions asked and who is checked. But to avoid disparate impact discrimination, employers must proceed with caution. For example, don’t inquire about arrests – only convictions. The inquiry must be necessary and job related. Asking about the credit history of your applicant for entry-level ditch digger is not appropriate. As to criminal convictions, the older a conviction or release from prison is, or the less serious the crime, the less relevant it is in making your hiring decision.

Because employers don’t want to be sued for defamation, it may be difficult to get a former employer to discuss your job candidate. Sometimes, the candidate may be willing to sign a release allowing the former employer to speak freely. Without a release, it is very risky for any employer to provide any job reference (positive or negative) about former employees.

In Oregon, an employer can’t give prospective employees a polygraph examination or psychological stress test. Although written skill tests are allowed, be careful that the test is not racially biased. For example, if the job doesn’t require the ability to read English, a written exam written in English may be an unlawful bar to employment.

Before seeking the assistance of a third-party consumer reporting agency, be sure to comply with the disclosure requirements of the Fair Credit Reporting Act (“FCRA”). For example, the FCRA requires that employers inform employees in writing about the background check and get a signed authorization. The FCRA imposes many other requirements. See our website for more information about complying with FCRA.

MANAGING THE RISK OF THEFT

To avoid the risk of theft, employers should closely supervise any employee with access to the Company’s checkbook. Your CPA can show you how to create and implement controls that help monitor your employees. Of course, the best advice is to always have more than one person keeping an eye on the books.

You may also conduct surveillance on your employees. For example, it is sometimes lawful to install video cameras in work areas, or monitor telephone conversations made on Company equipment. However, there are privacy concerns. The Company should clearly disclose the existence of monitoring through written policies and posted signs. Also, avoid listening to the details or private conversations, even if made during working time. As there are a wide variety of privacy issues and State and Federal Laws that apply, it is best to consult an attorney before implementing any monitoring program.

One of the best ways to minimize the hardship of a large embezzlement is to obtain a fidelity bond insuring against employee theft. We strongly recommend that you consult with your business insurance broker about the costs and types of bonds available. However, the insurance company will require that you file a police report. You will also need to prove the amount of money stolen, even though the paper trail may be difficult to follow.

INVESTIGATIONS & DISCIPLINARY ACTION

Investigating suspected embezzlement is similar to investigating other employee misconduct. If your decision is challenged, think about the documents and testimony you will need to prove your case. For example, you may want to obtain witness statements, review and retain financial records, and conduct video surveillance. As with any employee investigation, keep your inquiries confidential to the extent possible, and disclose information only on a “need to know” basis.

To terminate an employee, you do not need to be 100% sure of guilt. However, you do need to do a thorough investigation and make an informed decision based on all of the evidence. As with any termination, it is helpful to obtain legal advice as to any issues and risks that may affect your decision.

If you terminate the employee, be very careful about what you say. For example, other employees do not need to know why the employee was terminated. Don’t discuss this information with prospective employers either. It’s better not to say anything to prospective employers, good or bad. If your former employee steals from the new employer, a reference that told “half the story” could result in a lawsuit against you for misrepresentation.

When terminating the employee, do not deduct any of the amounts stolen from the employee’s paycheck. Although you may file a civil action to collect from the employee, or seek criminal sanctions, in reality, it will be difficult to recover more than a fraction of what was taken. Recovery is especially difficult when the employee worked autonomously, because it will be very difficult to determine how much money is really missing.

Although it is impossible to eliminate the threat of employee theft, through careful hiring practices, good controls, business insurance, and a prompt investigation of misconduct, you can considerably minimize your risk of loss.