Employee Theft: Small Business Guide (+ Policy Template)

This article is part of a larger series on How to Do Payroll.

1. 1 Types of Employee Theft
2. 2 How To Prevent It
3. 3 How to Handle Suspected Theft
4. 4 Warning Signs
5. 5 Bottom Line

Employee theft is stealing 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).

Even small businesses are at risk of this, so learning how to prevent employee theft—or reduce it at least—is essential for all business owners. This includes implementing a company-wide policy, training your management team, and conducting audits.

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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Employee Theft Policy

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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.

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 the store, or when a customer returns an item. The employee may steal company inventory for personal use or to sell to others. Examples of stolen inventory include office supplies, retail merchandise, medical devices, and computer software. This can also be a restaurant worker giving free food to friends or family without permission.

Case in Point: The assistant manager of a Canadian gas station was ordered to pay damages of more than $425,000 in 2023 for stealing scratch-off lottery tickets. She was caught removing and activating securely stored tickets by a hidden camera installed by her employer. On top of the ticket theft, she also took money from the cash register when one of her tickets was a “winner.”

Service theft is when an employee uses a service for personal gain without permission from their company. Many companies offer employee discounts for their services, 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 an exclusive company discount online to earn additional money.

Case in Point: In early 2023, Iowa-based grocery chain Hy-Vee ended its 10% employee discount program, which was offered to employees and one member of their household, when it discovered the service was being used by non-household friends and family and even users living in other cities.

Data theft is when employees steal company information contained on computers, servers, and other electronic devices. Depending on the employee’s motive, the information may then be deleted, altered, or restricted. This information is typically confidential or proprietary and can be used for financial gain or to tarnish the reputation of the company, other employees, or partners.

Examples of data theft 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 be particularly damaging because of the reputational harm it can cause.

Case in Point: An engineer working for California tech firm Ubiquiti stole gigabytes of confidential data from the company and published it when Ubiquiti refused to pay $1.9 million in ransom. He was sentenced to six years in prison in 2023.

Money theft, of course, involves an employee physically stealing money from the company. 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 accounting or finance team members stealing checks or cash before it’s recorded.

Case in Point: A former employee of Haymaker Golf Course in Colorado has been accused of stealing just over $2,000 from the cash register between May and September of 2022. He was caught on a security camera stealing just $45, but a review of previous months’ recordings uncovered many other theft instances.

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: A long-time HR director for Star Nursery in Las Vegas redirected employee paychecks to her accounts and made up fake accounts for more than a dozen years to the tune of $560,000. She began serving time in federal prison for the crime in early 2023.

For an overview of the payroll process, check out our how to do payroll guide. We also have an article on payroll security if you need assistance preventing payroll theft.

Time theft—or stealing company time—occurs when employees record more time than they actually worked. This can be done by adjusting their own or a co-worker’s time records. This type of time fraud is typically done by hourly employees trying to inflate their paychecks or salaried employees trying to cover for missed time. Time theft also includes employees being at work but using the time for personal tasks instead of work tasks. Payroll theft and time theft are similar.

Case in Point: A New Haven, CT, city employee was arrested in 2023 for falsifying time sheets to claim more than $11,000 in unearned overtime in just the first four months of the city’s fiscal year. New Haven’s budget department initiated an investigation when it determined this single worker was receiving a ​“disproportionate” amount of overtime pay.

Time theft is fraudulent and can be a crime; however, it is often difficult to prove. You must have 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.

Note that without substantial evidence, you should not simply deduct from an employee’s pay if you suspect they are not working their full shift or claiming unworked overtime. Otherwise, you may find your business subject to a costly wage and hour lawsuit, as the Fair Labor Standards Act (FLSA) requires employees to be paid for any hours they work.

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 the store, or when a customer returns an item. The employee may steal company inventory for personal use or to sell to others. Examples of stolen inventory include office supplies, retail merchandise, medical devices, and computer software. This can also be a restaurant worker giving free food to friends or family without permission.

Case in Point: The assistant manager of a Canadian gas station was ordered to pay damages of more than $425,000 in 2023 for stealing scratch-off lottery tickets. She was caught removing and activating securely stored tickets by a hidden camera installed by her employer. On top of the ticket theft, she also took money from the cash register when one of her tickets was a “winner.”

Service theft is when an employee uses a service for personal gain without permission from their company. Many companies offer employee discounts for their services, 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 an exclusive company discount online to earn additional money.

Case in Point: In early 2023, Iowa-based grocery chain Hy-Vee ended its 10% employee discount program, which was offered to employees and one member of their household, when it discovered the service was being used by non-household friends and family and even users living in other cities.

Data theft is when employees steal company information contained on computers, servers, and other electronic devices. Depending on the employee’s motive, the information may then be deleted, altered, or restricted. This information is typically confidential or proprietary and can be used for financial gain or to tarnish the reputation of the company, other employees, or partners.

Examples of data theft 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 be particularly damaging because of the reputational harm it can cause.

Case in Point: An engineer working for California tech firm Ubiquiti stole gigabytes of confidential data from the company and published it when Ubiquiti refused to pay $1.9 million in ransom. He was sentenced to six years in prison in 2023.

Money theft, of course, involves an employee physically stealing money from the company. 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 accounting or finance team members stealing checks or cash before it’s recorded.

Case in Point: A former employee of Haymaker Golf Course in Colorado has been accused of stealing just over $2,000 from the cash register between May and September of 2022. He was caught on a security camera stealing just $45, but a review of previous months’ recordings uncovered many other theft instances.

Time theft—or stealing company time—occurs when employees record more time than they actually worked. This can be done by adjusting their own or a co-worker’s time records. This type of time fraud is typically done by hourly employees trying to inflate their paychecks or salaried employees trying to cover for missed time. Time theft also includes employees being at work but using the time for personal tasks instead of work tasks. Payroll theft and time theft are similar.

Case in Point: A New Haven, CT, city employee was arrested in 2023 for falsifying timesheets to claim more than $11,000 in unearned overtime in just the first four months of the city’s fiscal year. New Haven’s budget department initiated an investigation when it determined this single worker was receiving a ​“disproportionate” amount of overtime pay.

Time theft is fraudulent and can be a crime; however, it is often difficult to prove. You must have 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.

Note that without substantial evidence, you should not simply deduct from an employee’s pay if you suspect they are not working their full shift or claiming unworked overtime. Otherwise, you may find your business subject to a costly wage and hour lawsuit, as the Fair Labor Standards Act (FLSA) requires employees to be paid for any hours they work.

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 greatly reduce the odds of theft.

Did You Know?

Businesses lose 5% of annual revenue to fraud, according to the Association of Certified Fraud Examiners. For more statistics, see our article on employee theft statistics.

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.

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, physical dropbox. You should also provide continuous training on the reporting system.

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.

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.

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.

Check out our guides on HR compliance audits and how to conduct a payroll audit to learn more about how to approach auditing your company.

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.

  For robust business security that can help protect you from employee theft, shoplifting, and other issues, consider one of the providers in our list of the best business security systems.

  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:

  • Applicant Screening Steps
  • Background Check Policy
  • Employment Reference Checks
  • Credit Check for Employment
  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.

  Related:

  • What Is Company Culture?
  • Types of Employee Benefits
  • Best Salary Comparison Tools
  • Best Employee Recognition Ideas
  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, head over to our best free time tracking solutions.

  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.

  If you suspect an employee of theft, you will first want to investigate thoroughly. This includes:

  • Reviewing any video footage you may have
  • Reviewing documentation such as time sheets and communication logs
  • Conducting an audit—internal and perhaps external if the situation warrants
  • Speaking with managers or other colleagues

  Keep in mind that although you may need to speak with others who have direct information related to your investigation, you will want to adhere to privacy guidelines and keep relevant information confidential.

  Once you have confirmed the theft, you must gather all documents and evidence. Maintaining strong documentation throughout the investigation process and as you move forward to address the situation is vital. It will be used to support any disciplinary action you decide to take and as evidence if you report the theft to your insurance company and/or the authorities.

  Speak with your employee about what your investigation has uncovered and ask them to explain. There are instances in which employee theft may be inadvertent. For example, an employee may not be aware that giving family members a free meal or discount is theft, whereas stealing money from the cash register or stealing merchandise to resell on eBay is much more clear-cut.

  As with any other workplace situation, your communication should be respectful. Avoid threats and accusations. Calmly discuss what you have discovered in your investigation and listen to your employee’s side of the story. We recommend that at least two senior officers or managers participate in this meeting or call.

  Compliance note: If the employee denies the theft, you may consider asking them to take a polygraph test. However, there are strict regulations around if, when, and how you can administer such a test to employees. See the US Department of Labor’s employee polygraph guidance for more detailed information.

  You cannot afford to let employee theft slide. If left unaddressed, it only encourages more illegal and fraudulent activity from your employees. Follow the procedures you established in your employee theft policy, whether it involves verbal or written warnings, or heavier disciplinary actions, like restitution, temporary suspension, or termination.

  If you are terminating an employee for theft, we recommend you remove their access to your systems immediately and provide an escort as they exit the building—they have already proven they cannot be trusted. See our guide for more information on employee termination.

  Based on the circumstances, you will then need to decide if you want to press charges and pursue legal action. As we mentioned earlier in this article, sometimes litigation, even when appropriate, is simply not worth the time, effort, and expense.

  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-level
  • Organization-level

  Employee-level warning signs are actions that an individual or group of employees take that should be cause for concern.

  • Unusual Work Behavior: Employees who begin to openly complain about their job or get into frequent arguments with their co-workers are signs that something is going wrong—especially if there is no obvious reason for the behavior change. 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 signal 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: An employee’s refusal or reluctance to give up oversight of a task might be a signal that they are using their autonomy on a project to mask their theft. They may feel it will 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 multiple customers complain 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.

  Bottom Line

  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).

  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.

  About the Author

  Jason Cother

  Jason Cother, managing editor of HR and Retail for Fit Small Business, has more than 20 years of experience in publishing, including roles in quality assurance, project management, and editorial leadership. He’s written and edited business-focused content for small business owners, sales and marketing professionals, and investors, among other audiences. He has a degree in journalism from Mississippi State University.