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How Employee Theft Works and How to Prevent It
While external theft like shoplifting is often the focus of theft prevention, it’s not the only source of retail theft. A shoplifter can only work while the store is open, but an employee can steal before the store opens and after it closes.
Internal shrink, or employee theft, is another major part of retail loss. A study from the National Retail Federation (NRF) reported that employee theft made up 33.2 percent of inventory shrinkage in 2018. Internal shrink happens when employees steal or misappropriate money from the company. In my experience, employees’ knowledge of the organization gives them more opportunities to cause loss. For example, rather than taking merchandise from the store floor, an employee can steal from stock rooms that have less visibility and supervision.
Employee theft has more consistent high-loss cases than external shrink. The highest employee theft case I’ve worked had over $2.5 million in losses. In this case, a group of employees was working with external thieves to create a highly efficient collaboration using both internal resources and the expertise of organized retail crime (ORC).
Why Do Employees Steal?
It’s important to know that most employees don’t enter your organization with the intent to steal. When employees turn to theft, it’s often out of need or circumstance. For example, their paycheck isn’t coming until next week, so they take a little cash out of the register to buy lunch.
Sometimes their reasons can be more serious. I truly believe in most circumstances, it’s often not the employee’s nature to steal but rather the circumstances they found themselves in. For example, I’ve often seen cases of employees stealing due to issues with drug use, something that the opioid crisis in the United States has exacerbated.
In one interview I had with an employee, we had discovered they were responsible for almost $10,000 worth of loss. They started off just taking a couple of dollars here and there, but within a few months, it had snowballed into more than they imagined. They broke down crying during the conversation, having realized they had made some serious mistakes due to their drug issues.
Many times, we can understand why an employee stole from the company, which makes it challenging to confront them. This is why it is important to understand the risks of internal shrink within your organization so you can identify and prevent it from happening.
Common Forms of Employee Theft
Like I mentioned earlier, internal shrink can lead to more consistent and high-value losses for your organization because employees have a relationship with the retailer. Employees who are thieves leverage the trust they have from their employer to steal without getting caught.
For example, many internal thieves also take cash from the register because it’s quick and easy to hide. However, this type of internal theft is the easiest loss to identify. Retailers can use the reports from their point-of-sale (POS) systems to track the amount of cash in the register and narrow down potential thieves.
One of the most common forms of employee theft is sweethearting or pass-offs, which is when an employee does not ring up every item in a purchase for a friend or family member. Oftentimes, employees do not even realize the crime they are committing, simply thinking of it as helping out a friend.
Return fraud is a more subtle way that employees can steal from an organization. In this case, an employee will “return” a product that was never purchased and then credit the amount to a customer account that belongs to them or a friend or put the refund on a gift card to be used later. This type of internal shrink can be even harder to detect because an employee can do everything without involving someone else or even leaving the register.
Another form of employee theft is working in teams, either with other employees or with ORC groups. Employees working in groups will help each other to hide merchandise to take later or will turn a blind eye when they see their coworkers steal. Employees working with ORC groups can be especially dangerous to your organization. In this type of collaboration, the employee will not notify anyone when they see the thieves are stealing merchandise, allowing the thieves to steal hundreds or even thousands of dollars of merchandise from under your nose.
I recall once working with a retailer an organized retail crime investigation that started on the employee side. The retailer had massive losses in their fragrance department, and we eventually discovered there were multiple people across different locations who were taking merchandise. We thought we had resolved the issue, only to discover these losses were still a consistent problem after receiving the latest inventory results.
Eventually, we narrowed the losses down to a location that had called to inform the company about finding a truck seal had been tampered with. A truck seal is a band that goes through a lock on the back of a truck to further secure the truck and to deter thieves from tampering with the lock. By discovering that a truck seal had been altered, we were able to focus our efforts on that distribution process and work with law enforcement to identify the employee who was working with an ORC group.
Spotting the Signs of Employee Theft
When approaching the issue of internal shrink, you should first ask yourself: Do you want to focus on catching internal thieves or preventing future internal theft? Of course, many retailers would like to do both. For an organization just getting started on resolving the issue, it’s often helpful to learn how to detect employee theft first. This way, you can identify the types of internal theft you could face and focus your prevention efforts.
Once you understand the different ways employee steal and cause losses, it becomes easy to spot the warning signs. For example, if you see an employee ringing up products alone at a register or bringing something to an empty register, that could be an indicator of theft. Another possible sign of internal theft is if an employee always has friends visiting them at work. This could be an indicator of smaller scale employee theft like sweethearting, or it could be a sign that your employee is working with an ORC group.
However, you should remember that these are all just potential indicators. There’s no guarantee that internal shrink is even happening until you conduct and investigation. If you think something is wrong, trust your instincts, but you should also verify your information before taking action.
One of the most essential tools in detecting internal shrink is inventory control. Many retailers might not even know they have an internal theft problem because they don’t have a strict inventory control procedures. Most organizations only check their storewide inventory once, maybe twice, a year. By the time the store does an inventory check of this scale, the internal thieves might not even be working for the organization anymore. Implementing an inventory control software can streamline your inventory process, making it easier to do storewide inventory more often and catch internal shrink sooner rather than later.
How to Prevent Internal Shrink
Once you understand the patterns of internal shrink, you can use this knowledge to prevent it from happening in your stores. Here are a few suggestions:
1. Cultivate a good relationship with your employees.
Having a good working relationship and good environment for your employees makes it difficult for them to steal. If an employee respects their manager and the company they work for, they often will think twice before stealing. If the work environment changes and makes an employee unhappy, they no longer care about what is good for the organization. I’ve seen this issue many times in commission-based employment, as an example. If an employee makes less than they expect, they might believe that their employer lied to them and lose faith in the organization. This could eventually lead the employee to skim off the top of the register or take merchandise because they feel it is owed to them.
When it comes to seasonal part-time hires, building a good employer-employee relationship can be an even greater challenge. The holiday season brings in more sales but also more employees who are simply not invested in the company. Sometimes these seasonal employees may steal from the organization, knowing they will be gone in a couple of months anyway.
With a higher volume of visitors and seasonal employees during the holiday season, many supervisors are unable to dedicate enough time to supporting their regular full-time employees. If these employees become dissatisfied enough with their jobs, they might turn to internal theft, either to supplement their paycheck or even as a form of revenge against their employer. To deter this from happening, I recommend that your management team looks at the long-term nature of their relationship with full-time staff. While seasonal employees are a great help for increasing holiday sales, full-time employees are the people who drive your sales all year long.
2. Focus on employee training.
Consistent loss prevention training for your employees is important not only to teach your employees to detect shoplifters but also to show them that they are being observed. I often recommend that retailers actually show their surveillance room to their employees to make them aware of the tools being used to catch theft. Showing your employees that if they steel, how they will be caught can be an effective way of deterring internal theft.
An effective employee training curriculum should also inform employees about the various loss prevention methods throughout the store, from surveillance cameras and POS system reports to inventory control and stock room maintenance. When employees are regularly reminded that their employer is paying attention to them, they will be far less tempted to risk being caught stealing.
3. Maintain an organized store environment.
As with shoplifters, a clean and well-maintained environment is an effective way to deter employees from stealing too. Part of this requires an effective inventory control system to keep track of where all your merchandise is going. But the physical aspect is just as important. Internal thieves will typically go somewhere they feel secure, such as a stock room, when stealing from their employer. If your store is neat and well-lit but your stock room is disorganized, then that could leave an opening for an employee thief to take advantage and steal product before it ever hits the store floor. By maintaining an organized stock room where it’s easy to see all your merchandise and do inventory checks, an employee will feel too exposed to steal anything.
Retailers must remember there is always a human element in loss, even more so with internal shrink because you know your employees. If you think about it, one of the most effective ways to resolve and prevent retail loss is to focus on how your organization treats its employees. If your employees are happy and dedicated to your organization, they will be less inclined to steal and more inclined to help you protect your product. Incentivize your employees to deter external theft and provide great customer service to increase sales.
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David Cutherell, CFI is senior vice president of business process automation at Prosegur USA. He spent 28 years in retail loss prevention, starting as a store detective and working his way up to senior leadership positions at Macy’s and Burdines. At Prosegur, David leads IT and business automation teams, with a special focus on business intelligence and data security.