Section Review

An ounce of prevention is worth a pound of cure: Preventing employee theft and fraud

Keating
Gregory C. Keating, partner, is a member of Choate, Hall & Stewart's Labor, Employment & Benefits Practice. Keating has a broad range of experience litigating employment disputes in federal and state court and before the Massachusetts Commission Against Discrimination.
Reif
Alison C. Reif, associate, is a member of Choate, Hall & Stewart's Labor, Employment & Benefits Group. Reif has a broad range of experience in litigation of employment disputes both in federal and state court and before the Massachusetts Commission Against Discrimination.
The authors wish to thank Erin M. Reid for her able assistance and efforts in bringing this article to fruition.

With Enron, Worldcom and ImClone fast becoming household names, the spectre of employee theft and fraud has spread like a plague to employers of all sizes in every industry. Companies lose billions of dollars each year from employee dishonesty.1 Sadly, employee theft and fraud is on the rise in Massachusetts. Some more extreme recent examples include:

•  Simon Worldwide, Inc., with headquarters in Wakefield, Mass., and previously responsible for running McDonald's prize promotions, was the victim of an alleged $13 million scam that came to light in 2001. Over a six-year period, a Simon employee diverted the winning tickets to friends and acquaintances who then cheerfully kicked back a portion of the proceeds to him. Without a strong internal system of checks and balances, the employee could guarantee both that a particular person was going to win the various promotions and that the rewards would eventually return to him.2

•  In September 2002, the Massachusetts Teachers Association first learned it was the target of an embezzlement scheme spearheaded by its former finance director. Over seven years, the director had embezzled a whopping $802,000 from the labor union. Because of his position, the director allegedly was able to conceal his illegal actions by employing intricate accounting procedures involving numerous accounts.3

•  Several valuable pieces of artwork, including an 18th century painting previously on loan to Harvard University's Fogg Museum, were found hanging on the apartment walls of a United Parcel Service (UPS) employee in January 2003. The employee, also a custodian for Boston College, allegedly stole more than 150 items, with a total estimated value of $300,000. The missing artwork, along with oriental rugs, antique paintings, sports memorabilia, electronic equipment and jewelry were confiscated from the employee's home.4

Employers seeking to prevent employee theft must strike a difficult balance. On one hand, there is clearly an interest in protecting businesses from fraud and theft by monitoring the workplace. At the same time, employers must avoid infringing on employees' privacy rights or defaming employees with overreaching investigations and false accusations. These dueling concerns warrant careful consideration when a company considers implementing measures to prevent employee fraud and theft.

So what exactly can an employer do? The following are some examples of measures companies can take to reduce the likelihood that they will become unsuspecting targets:

Pre-employment screening

Perhaps the easiest time to spot potential problems is at the hiring stage, when employers have greater latitude to inquire into prospective employees' backgrounds and qualifications.

Reference checks. Employers should check the references provided by prospective employees. Although many companies are reluctant to provide detailed information, employers can ask applicants to sign a written release of claims that protects the applicant's former employers in the event that they disclose negative information.

Background Checks. Subject to the procedural requirements of the Fair Credit Reporting Act, companies may obtain reports on their employees' history, ranging from a simple credit history to a more thorough investigative report.

Criminal records. While Massachusetts law prohibits employers from asking certain questions regarding applicants' criminal records, they may ask whether applicants have ever been convicted of a felony and whether they have been convicted of certain misdemeanors in the last five years.5 Additionally, employers who apply to and are approved by the Massachusetts Criminal History Systems Board may obtain more extensive criminal background reports (known as CORI reports) from the state. Certain employers (generally those responsible for the care of vulnerable populations) are required by law to obtain CORI reports on prospective employees.

Monitoring and surveillance of employee activity

Employee monitoring, conducted within reason, can help to keep employees on track without unnecessarily infringing on their privacy.

Random reviews of e-mail and computer systems. Companies can conduct random reviews of employees' e-mail and other computer usages. To protect themselves against actions for invasion of privacy, employers should be sure to disseminate written policies advising employees of the company's intent and right to monitor computer communications prior to conducting these reviews. The policies should state clearly that employees should not have an expectation of privacy in company systems.

Video surveillance. In certain circumstances, video surveillance of work areas may be necessary and helpful to ensure employee honesty. Video equipment should be placed only in areas where employees do not have an expectation of privacy, such as lobbies, hallways, garages, or common workspaces. It should not be placed in locker rooms or restrooms.

Regular audits. Performing frequent audits can help to ensure that suspicious activity is caught before extensive damage occurs. Audits should be tailored to the employer's industry, and may be conducted internally or by outside consultants. Employers may also choose to conduct regular inspections of time cards or regulate the disbursement of company supplies.

Checks and balances

A strong internal control system not only sends a strong "zero tolerance" message for theft or fraud, but may also assist in creating a culture of compliance for company employees.

Decentralize power where feasible. Employers should avoid having a single employee solely responsible for financial and other meaningful assets of the company. Employers might also consider dispersing power when staffing major projects, allowing for some outside control. Close supervision, job sharing and job rotation are effective ways to accomplish this objective.

Employee hotline. Employers can utilize one of their best lines of defense - the company's own employees - by establishing an anonymous hotline. The hotline would allow employees to report suspicious or illegal activity in the workplace without fear of retaliation.

Have a strict policy against fraud and theft … and enforce it. In order to create a culture of compliance, employees should always have fair warning of company rules and understand the consequences of their violation. Employers may post such policies on company bulletin boards and/or include them in employee handbooks.

If a company suspects illegal activity by an employee, it should conduct an investigation. In light of liability concerns implicated by investigations (e.g., invasion of privacy, defamation), companies are strongly advised to consult with outside professionals prior to commencing an investigation. The methodology of the investigation will be critical to any subsequent prosecution of illegal activity. Additionally, because the results of an investigation may trigger disciplinary action or termination of employment, the investigation should be conducted fairly and objectively.

Employers suffer significant financial and reputational costs when employee theft or dishonesty is unearthed. More so than in any other area of employment law today, preventative measures that are narrowly tailored to the individual employer are critically important. An ounce of these types of preventions truly is worth a pound of cure.

End notes

1. See, e.g., Rochelle B. Ecker, To Catch a Thief: The Private Employer's Guide to Getting and Keeping an Honest Employee, 63 UMKC L. Rev. 251 (1994).

2. See Shirley Leung, Simon Should Have Known Better: Critics Say Game Company Could Have Detected McDonald's Scam, Asian Wall St. J., Sept. 10, 2001, at N6, available at 2001 WL-WSJA 22056577; see also Jennifer Bayot, Winning Pieces Truly Hard to Get: FBI Says 8 Stole Prize Winners in McDonald's Game, Boston Globe, Aug. 22, 2001, at A.2, available at 2001 WL 3947747.

3. See Anand Vaishnav, Union Reveals Major Theft: Teachers' Official Under Investigation, Boston Globe, Mar. 27, 2003, at B.1, available at 2003 WL 3387609.

4. See Stefany Moore, UPS-BC Employee Accused of Theft, Boston Globe, Jan. 15, 2003, at B.3, available at 2003 WL 3375066.

5. Mass. Gen. Laws ch. 151B(4).

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