True Cost of Firing an Employee: Saying ‘You’re Fired!’ Could Cost You

Employee theft costs U.S. businesses $50 billion a year. Is any of this missing from your business bank account?

If you’ve ever caught an episode of Restaurant Stakeout you’ll know that employee theft happens quite frequently (or at least more than you may have previously thought) and is emotionally taxing for the employer. When you hire an employee and you bring them on board you’re both excited. You want to see what they’re capable of and they’re eager to get their foot in the door. Unfortunately, what they’re capable of can include stealing merchandise, small amounts of cash from the register, or they could even use a business account for personal expenses.

Can You Spot a Thief?

Do you suspect employee theft in your business? The employee you suspect might not be the guilty party. While anyone can be an embezzler, here’s what to look out for.

  • The average age of a thieving employee is 48
  • In 37% of theft cases, the employee worked in accounting or finance
  • Women are more often embezzlers, but men tend to take more money

There are also personality traits to look out for, such as employees who:

  • Want to learn how everything works at the company, even processes that aren’t part of their job description
  • Live an extravagant lifestyle that doesn’t match up with their salary
  • Can be described as risk takers
  • Are overly ambitious, coming in early and leaving late or skipping vacations

Finally, according to the 2017 Hiscox Embezzlement Study, the majority of employee theft cases occurred at small companies, or those with less than 500 employees.

 

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NYC Employee Theft

If you can’t prevent theft, the consequences can be serious. Take Tishman Construction for example, a New York City based construction company that lost $2.8 million at the hands of one employee, John Hoeffner. Mr. Hoeffner was an accountant for the company and forged invoices, checks, contracts, and other documentation to slowly but surely embezzle the money.

In another situation, Matt Ham learned about employee theft the hard way. A New York City store, LaptopMD, was run by his firm. It was eventually discovered that an employee had misused the company’s Amazon Services account. He had changed it to his personal account, so funds charged to customers were being redirected into his personal account.

Luckily, the employee was caught in less than two weeks and the damages were minimal. But data provided by Hiscox shows that for cases that go on undetected, amounts can quickly add up. Cases undetected for five years cost companies $2.2 million on average. Cases that went undetected for 10 years or more cost $5.4 million.

Prevention Is Key

With most businesses losing up to 5% of their revenue to employee theft (according to a CBS investigative report) we urge you to consider some safety precautions that could protect your revenue and keep your business afloat. Listed below are a few precautions you can take to prevent employee theft.

Be Thorough in Your Research

Before you hire any new employee be sure that you know who you’re hiring. That means running a background check, having them take a drug test and potentially scanning their social media pages for suspicious activity before they interview. If anything unusual pops up, you’ll be prepared and can ask them about it. It’s all about making sure you’re completely comfortable with who you’re hiring.

Give Them a Copy of Your Theft Policy

Every employee you hire should get a copy of the policy and sign that policy as soon as they start. In it you should define what you consider to be employee theft as well as your expectations for employee conduct. If they violate those expectations be clear about what the consequences will be (so no employee can claim discrimination). By distributing your theft policy amongst your employees you will protect yourself from future litigation.

Have Eyes on Your Employees

This goes for your recently hired employees and those employees who have been around for a while. There are a few ways to go about installing your business’s security. You could put cameras all around your facility, implement a buddy system so no employee is working alone, and you could establish an employee tip line (as long as it is incentive based). It all depends on the kind of culture you want to establish and to what degree you believe your employees require supervision. Just remember that sometimes it pays to prepare for the worst and hope for the best.

Build Relationships.

This is the greatest failsafe you can implement in your business because it’s much more difficult to steal from someone you care about than someone who you barely know. Being friendly with your employees (to a degree) could greatly reduce the issue of theft at your business. Plus, it gives you the opportunity to directly oversee your employees.

Cost of Firing an Employee

So, let’s say you followed steps one through four. You took every safety precaution available and you’re still dealing with employee theft, but you think you know who it is. What do you do now? Unless you have a significant amount of evidence incriminating that employee it could be risky to terminate their contract. If an employee feels as though they were treated unfairly (especially if they were previously entitled, ill, etc.) at the time of their firing they could potentially sue your business and win.

 

The exception to this is at-will employee policies. Most businesses operate under an at-will policy. If yours is one, you may be able to terminate without the risk of backlash. As long as the underlying reason isn’t prohibited by state or federal law, you are within your rights as an employer to terminate. But this doesn’t mean there won’t be financial consequences.

There are both direct and indirect costs of terminating an employee. Direct costs include:

  • Terminating benefits
  • Paying out severance or accrued time off
  • Paying for temporary employees
  • Paying overtime for remaining staff to make up the difference
  • Time spend interviewing and searching for new candidates
  • Training costs for new employees

Indirect costs are harder to pinpoint and affect every business differently. High turnover or the termination of a favorite employee of the staff can hurt morale. This can slow down productivity and affect all aspects of your business, from work environment to customer service to problem solving. If the firing becomes public knowledge, relationships with clients can be hurt and the reputation of your business can take a hit.

Need some cold, hard numbers? Here’s the cost of firing an employee, according to a CAP study.

  • An employee earning less than $30,000 a year will cost 16% of their annual salary to replace. The cost or replacing a $11/hour assistant will cost $3,660.
  • An employee earning between $30,000 and $50,000 will cost 20% of their annual salary to replace. A manager earning $45,000 a year will cost $9,000 to replace.
  • When thinking of replacing high executive positions, consider it costs up to 213% of an annual salary to replace the individual. A CEO making $110,000 a year could end up costing a company an astonishing $234,300 to replace.

Since you may not be able to fire the suspected employee your next course of action goes down the road of insurance. Policies such as ‘Employee Dishonesty Insurance’ or ‘Employment Practices Liability Insurance’ should give you the protection you need when your business is the victim of employee theft.