Suspected Employee Dishonesty

One of the most difficult and serious legal problems for a small business arises when the business is subjected to systematic employee dishonesty, such as embezzlement. Personal computer-based accounting systems, such as the popular Quickbooks, are designed to be user-friendly and forgiving. The problem is that such systems are just as user-friendly for embezzlers as they are for honest employees. Changing the names of payees after-the-fact, obscuring transactions, failing to note deposits which leave undocumented excess funds in a bank account (all things that you may do inadvertently and get around to fixing later) are simple and effective ways to drain money out of a business without detection for a long time.

The first and best line of defense is to not delegate bank statement reconciliation – take the time to do it yourself. At the very least, don’t have the same employee who receives the mail and writes the business checks and takes the phone calls from creditors also be the same employee who is responsible for bank statement reconciliation.

If you suspect that there may be employee dishonesty or deliberate wrong-doing, your first obligation is to conduct a reasonable, initial investigation. When things go wrong, it is easy to see deliberate conduct or bad intentions under every corner. In my experience there are ten false accusations against employees for deliberate wrongdoing, for every founded accusation of conduct which was intentionally dishonest. Your reasonable investigation is intended to separate confusion, crossed-signals, missed messages, misunderstanding, negligence, incompetence, laziness, disloyal gossip, even stupidity (none of which are illegal) from real dishonesty. The reasonable investigation is also intended to make a complete count of every person who had some access somewhere to the ‘bad act.’ The closest person to a bad act is not necessarily the perpetrator. I once defended an employee who was deemed responsible for a dangerous practical joke in a commercial kitchen because the employer claimed he “was the only one it could have been.” When we went to the unemployment compensation hearing and compelled a ‘nose count’ of all the people who could have had access, we stopped counting at about fifteen. Intuition and ‘gut feeling’ are not substitutes for a reasonable investigation and you may want to employ an outside professional if your own feelings about a situation are too strong for you to be impartial.

You may need to suspend one or more employees while the investigation continues. Suspending an employee with pay is your right, for almost any reason; suspending an employee without pay is equivalent to making an accusation. Under Pennsylvania’s Wage Payment and Collection Law, you owe an employee back wages up until the time you discharge them. I advise clients to pay every penny of back wages; if you are confronted with a real ‘bad act’, don’t give the bad actor a good reason to sue you. Do not make general announcements to your other employees about the bad conduct of employee ‘X,’ now discharged – personnel matters are confidential. There is a well known case in which the employer made a general announcement to the whole staff that it had fired dishonest person ‘Y’ for stealing – only to be embroiled in litigation later when it turned out the accusation could not be proved in an unemployment compensation hearing.

Once you discharge an employee your investigation discloses has been dishonest, you may be in an unemployment compensation hearing. Consult with an experienced attorney when you fill out forms sent by the Unemployment Compensation office and for the hearing. Testimony at a hearing is going to be taken under oath and a recording will be made, there will be cross-examination, and the unemployment compensation hearing may be a ‘front end’ for larger legal issues. Legal rules concerning the admissibility of hearsay (hearsay can be oral or written), which is often a part of any dishonesty case, are complex. Plus, confronting an employee who stole from you may make you too angry to express yourself clearly, and evidence rulings that aren’t clear to a layperson can be frustrating.

Don’t defame (orally or in writing) the former employee. What this means in practice is that you only disclose facts about the investigation and firing to people who need to know. That includes your corporate officers and direct managers, the police investigators if the act is criminal, your attorney, your accountant, insurance investigators if they are involved, etc. – but no general announcements to uninvolved employees, clients, customers, suppliers, etc. What really happened, and what is provable, are often two different things. However, it is not your job to prove the commission of a crime – there are a number of good reasons to make a police complaint if a crime has been committed. If a request for a reference check comes in from a potential new employer for the employee, confirm the dates of employment and nothing more. Potential new employers are not likely to miss the point of a tight-lipped, ‘no comment’ response when asked for more information.

One set of people who may need to know are your creditors, if the embezzlement or theft is so substantial it impacts your ability to pay obligations or perform your contracts. One advantage of making a police report is you can report factually to creditors that you made a criminal complaint on such-and-such a date, the police are investigating and the disposition or progress of the criminal case is ‘xyz’ or whatever at the time. The police investigators may need considerable assistance from you in proving the fraudulent conduct of your former employer, and keeping in touch with the police investigator is a good idea just to ‘keep the ball rolling.’ Any plea deal made by the district attorney with the former employee, however unsatisfactory it may be to you by way of punishment, has considerable legal benefit because it will involve an admission of wrongdoing and some explanation of what was done and how.

Working things out with creditors is generally do-able, as long as you communicate candidly with them about what your current financial status is. If embezzlement caused non-payment of employee withholding taxes, make your first ‘catch-up’ payments to the IRS – the penalty interest rates the federal government applies can be exorbitant and as destructive to your business as the original thefts, plus they can be much harder to deal with individually than with a commercial creditor.

Many business insurance policies provide coverage up to defined policy limits for employee dishonesty. If there is any coverage or possibility of coverage, make a claim – it’s what you have insurance for. Insurance adjusters will also quickly ask whether or not you made a criminal complaint with the police. They are likely to be alert to the possibility of collusion between an employee and employer – so don’t be offended if there are some questions along those lines.

You may be asked to give an Examination Under Oath about your loss, like a deposition with a court reporter present, which will include questions about how much of a loss you suffered. Consult with an accountant and an attorney, since you want to be as careful and detailed in your statement as you can, but may not have all the facts yet (e.g., unscrambling a Quickbooks file which has been deliberately scrambled is no trivial task). As in any insurance claim, the sooner you cooperate, the sooner you can be paid.

If there have been forged checks or other financial instruments presented for payment to a bank without authority, you may have a claim or potential lawsuit against the bank or financial institution. Of course you may also have a civil lawsuit available to you against the employee; but an employee whose conduct is substantially criminal may have no assets by the time you could obtain a civil judgment. A court Order of Restitution in a criminal case operates differently than a civil judgment (and criminal cases move much faster), but you will need private attorney involvement either way. Recovering from a serious employee ‘bad act’ takes perseverance, but with help it is a bump you can overcome.