Employee theft and criminal restitution

An employer who discovers an employee theft is forced to deal not only with loss and betrayal, but is confronted almost immediately with questions of employee discipline, insurance reimbursement, significant tax implications, and possible criminal prosecution.

Criminal prosecution is perhaps the most personally difficult issue since the employee will face penalties and possible jail time. When the theft is by a long-time, trusted employee and the motivation is desperation or compulsive behavior, an employer can often lose the stomach for the rigors and results of criminal prosecution. Also, prosecutions bring publicity.

But even if you are satisfied with terminating the employee and seeking insurance reimbursement, reporting the crime to public authorities may be forced upon you because:

• The insurer will often expect that the employee will be prosecuted. Due to subrogation rights, the insurer can usually obtain some restitution. A promise not to prosecute can potentially endanger insurance coverage.
• Criminal restitution will cover insurance deductibles.
• Shareholders and managers will usually expect to preserve company resources by using the “power of the state” to obtain restitution rather than the costs and delays of a civil suit for restitution.
• A restitution order is backed up by possible jail time, which is a much more effective tool of enforcement than a civil judgment can offer.

Takeaways: It may be that for the reasons above (and others) the employer will need to report a theft to law enforcement and seek restitution. Dealing with the prosecution demands of the insurer, working with criminal prosecutors, and off-setting bad publicity are some of the negatives associated with prosecutions. Legal counsel can certainly help think through and deal with those challenges. Unfortunately, discovering the theft is usually just the beginning.