Theft is Rampant in the Workplace - Yes, Yours Too!

August 21, 2017 was a day 99 years in the making – the first time that a total solar eclipse had been visible across the entire contiguous United States since 1918.  If you were one of the estimated 87 million employees who were working that day, chances are you walked outside to witness this once-in-a-lifetime event.  When the moon passed in front of the sun and the cheering began, what you may not know is that this event cost US employers nearly $700 million dollars in lost productivity!

That seems like a monster number, until you read statistics that show US employers lost over $6 billion dollars during the 2017 NCAA “March Madness” basketball tournament.  How about the $10 billion lost on Amazon Prime Day?  Even those numbers are trivial when you realize that US retailers lose up to $60 billion a year in shrinkage by some estimates – with employee theft rating as the top concern.

Employee theft is defined as any stealing, use or misuse of an employer’s assets without permission.  Everyone has stories of someone cleaning out the petty cash drawer, or the embezzling payroll manager who creates a fake employee and issues that employee a weekly check which conveniently ends up in that payroll manager’s bank account.  However, money isn’t the only asset that employees steal, and many times, it is not the most valuable asset that a company possesses.  Practical Business Knowledge shares some of the different assets that employees normally steal from their employers:

• Money – the most common asset stolen, and the easiest to quantify;
• Time – occurs when an employee is paid for time that he/she didn’t work, or when employees are not working while on the job;
• Supplies – every employee has probably walked out of the office with a pen in his or her pocket, but over time, those costs can add up quickly;
• Merchandise/Company Property – theft of products that are to be sold;
• Information – the fastest growing theft occurring in workplaces today, and often the most profitable if sold.

The US Chamber of Commerce estimates that 75 percent of all employees steal from their employers at least once, and half of those steal repeatedly.  The Chamber also reports that one of every three business failures is the direct result of employee theft.  The American Society of Employers adds:

• Businesses lose 20% of every dollar to employee theft;
• 20% of employees are aware of fraud at their companies;
• The average time it takes for an employer to catch a fraud scheme is 18 months;
• 55% of perpetrators are managers;
• 75% of employee-related crimes go unnoticed.

​Small to medium-sized businesses are extremely vulnerable to employee theft, as they often don’t have the resources or workforce expertise to adequately protect themselves.  However, even the largest employers and government agencies face similar challenges, as the hacks and thefts against Target, Sony, Yahoo, and even the NSA and CIA can attest. 

The particular challenge facing the small to medium-sized business is the necessity for individuals to wear many hats within the organization, and those individuals holding the keys to the castle in many instances such as these common theft or fraud scenarios:

• A payroll employee is responsible for the front and back-end payroll activities, meaning that they have total control of the process.  Creating “ghost” employees on the payroll who are processed a payroll check that is then collected by the creator of the “ghost”, adjusting or “inflating” the hours or amount of pay on checks or adding extra income such as bonuses or vacation time are just a few ways in which this person can steal money from a company.  There are companies that have lost hundreds of thousands of dollars and gone bankrupt in these schemes.
•  A cashier accepts money for a product or service, but fails to enter that sale into the system and pockets the money.  For companies without video surveillance or extremely accurate inventory systems, this theft can go undetected for a long time.
• A logistics employee who creates a false vendor account, then bills the company for nonexistent parts or services.
• A sales person with access to high-level company trade secrets, customer lists or pricing information leaves the company and takes this information to a competitor.
• A health care worker with access to patient medical information downloads all of a practice’s confidential client records, then sells each full record for up to $1000 per record to hackers on the dark web or black market.
• An employee who “swipes in” another employee who is not at work, allowing that absent employee to be paid without working.

All of these situations and many more have occurred in businesses all across the US, and may be occurring within your company right now.  However, according to the Economic Policy Institute, this is not the only theft that is occurring in the US. Wage theft, which is the failure to pay workers the full wages to which they are legally entitled, costs the lowest-paid of the country’s workers approximately $15 billion dollars per year.  Wage theft occurs in a number of ways:

• Minimum wage violations: Paying workers less than the legal minimum wage.
• Overtime violations:  Asking employees to work off-the-clock before, after or during their shifts.
• Meal break violations:  Denying workers their legal meal breaks in applicable states.
• Pay stub and illegal deductions:  Taking illegal deductions from wages or not distributing pay stubs.
• Tipped minimum wage violations:  Confiscating tips from workers or failing to pay tipped workers the difference between their tips and the legal minimum wage.
• Employee misclassification violations:  Misclassifying employees as independent contractors to pay a wage lower than the legal minimum, or misclassifying employees who should be eligible for overtime pay (non-exempt, or hourly employees) as exempt (salary) employees who are exempt from the requirements of overtime pay.  

Many businesses that may not have human resources, payroll, tax or labor law expertise unknowingly violate federal and state laws, including the Fair Labor Standards Act and wage and hour laws.  Penalties for breaking these laws are severe, and the most common errors are companies failing to pay minimum wage, employee misclassifications and overtime violations. 

When the Department of Labor comes knocking to conduct an audit, companies that make these errors face fines and penalties that are sometimes large enough to force the closure of the business.  This is especially true if the Department of Labor finds that an employer willfully broke the law, or was aware (or should have been aware) that the employer had failed to pay workers the full wages to which they were legally entitled.  Surprisingly, many business don’t know that repeat willful violations can result in imprisonment for the guilty party.

So, employees are stealing from businesses, and businesses are stealing from employees.  What should a business do to stop employee theft?  How can a business ensure that it is paying its employees properly?

To address employee theft risks, the first thing that any business can do is to create an employee theft policy that provides a clear scope of whom the policy applies, definitions and examples of theft or fraud violations and the company’s commitment to investigating all reported or suspected violations.    It should also outline the consequences of employee theft, including disciplinary action up to and including termination of employment and the potential to face criminal charges.  The FBI reports that employee theft is the fastest growing crime in the United States, so it is vital that businesses create a strong employee theft policy that prevents business losses.

Businesses should also create a culture of accountability, reminding employees that reporting suspicious activity or theft concerns is vital to protecting their company’s physical and intellectual property, its reputation, its financial well-being, its future and the employees’ own jobs.  Many companies will set up an independent hotline where employees can report suspicious activities or theft concerns anonymously, thereby alleviating the fear of reporting that many employees feel.

Next, all businesses must put into place controls to ensure that their data is secure.  In a 2016 Data Breach Study by the Ponemon Institute, the average cost (direct and indirect) of a data breach involving fewer than 10,000 records was nearly $5 million dollars.  That average rises to $13 million with a breach of 50,000 or more records.   

CGI and the Oxford Economics states that publicly traded companies lost a combined $52.7 million dollars in shareholder value between 2013 and the first half of 2016 because of publicized cybersecurity breaches.  That same study shares that a company’s share price on seven global stock exchanges was reduced by an average of 1.8 percent on a permanent basis immediately following a breach.

Data theft is a growing, worldwide crime, and companies must ensure that they have adequate controls in place to protect their most valuable and sensitive information.  For small to medium-sized businesses, that most often means outsourcing to experts in professional firms if they do not have the resources in place to accomplish this key business responsibility.

The most important step that any company can take is making sure to hire great employees.  This can be accomplished by following a few key rules:

• Understand the functions of a job before searching for great candidates for that position.  Make sure that no position has broad power or responsibility over an entire process without checks and balances in place.
• Screen resumes carefully and always have a group of people interview candidates.  It can be easy for a skilled interviewer to pass one interview – it becomes much harder to pass a group of people.
• Conduct background and reference checks for every employee as a condition of employment.  Of course, you will need to ensure that you are following state-specific laws on what you can ask because the laws in this area vary state-by-state.
• Do not settle.  If you have serious concerns about a candidate, keep searching.

Finally, conduct regular audits and review management reports often.  Look for discrepancies or odd patterns, such as decreasing profit with increasing sales.  Small to medium-sized businesses often lack the large staffs and controls to complete detailed audits and reviews, which leave them particularly vulnerable to employee theft and fraud.  The Association of Certified Fraud Examiners estimates that 7 percent of a business’ gross revenue is lost to internal theft and/or shrinkage, and the median amount stolen is $175,000 dollars.  For many businesses, these types of losses might mean bankruptcy.

Although employee theft is a continuing threat to all businesses, the biggest mistake that an employer can make is failing to follow state and federal laws regarding employee pay.  While some of these mistakes are made by employers who simply don’t know or understand the laws, others are made willfully by companies willing to take the risk of not being caught.

Wage theft is a serious issue with serious consequences, but businesses can take the following steps to meet state and federal requirements for these common errors:

• Make sure that you pay all employees at least minimum wage for every hour that they work.  The federal minimum wage is $7.25 per hour, but many states and communities have higher minimum wages that the federal minimum, and employees must be paid to the higher standard of compensation.  Special minimum wage guidelines exist for tipped employees in many states, but on a federal level, the employer is only required to compensate the employee $2.13 an hour as long as the fixed wage and the tips add up to be at or above the federal minimum wage.
• All employees, unless exempt, are entitled to receive overtime pay calculated at least time and one-half times pay for all time worked over forty hours in a week.  This includes all non-exempt (hourly) employees unless specifically exempted under the FLSA’s salary basis and duties basis tests.   If you don’t know what the salary basis and duties basis tests are, now is the time to look it up or call a human resources professional.
• Create detailed job descriptions to ensure that you don’t misclassify employees.  One of the most common mistakes that businesses make is misclassifying an employee as exempt when they should really be classified as non-exempt and eligible for overtime. 
• Be very cautious regarding independent contractors (1099), as there are distinct practices that businesses must follow to properly classify an independent contractor vs. an employee.
• If an employee has authorized a deduction to come out of his or her check, companies must ensure that deductions do not cause an employee’s compensation to fall below the applicable minimum wage.

Any of these common mistakes can cost employers hundreds of thousands of dollars, and if an employer is found to have willfully broken these laws, jail time.  If you are unsure if you are paying employees correctly, call a human resources professional before you find yourself neck-deep in an audit that could land your company, and you, in serious jeopardy.

The facts are there – employees are stealing from companies, and companies are underpaying their employees.  There are actions that you could (and should) take to protect your business, so that you don’t one day become another statistical point in a database somewhere.