Whether you own a boutique clothing shop, a large hardware store or a discount furniture depot, one of the biggest threats to your business is employee retail fraud. The 2017 National Retail Security Survey estimated that 30% of inventory loss could be attributed to employee theft. While 36.5% of loss is due to external shoplifting, 21.3% to paperwork errors, 5.4% to vendor fraud and 6.8% to unknown sources, a 30% stake in inventory loss should be enough to make any business owner a little more proactive about internal loss prevention.
Laws against retail fraud
Retail fraud laws – and the consequences for breaking them – exist to deter people from defrauding retailers. Whether a retail fraud is a misdemeanor or a felony offense varies by state, as do the nature of retail fraud laws themselves. Here are a few examples:
Second and third-degree retail fraud
Second and third-degree retail fraud involve someone mislabeling the price of an item for sale. The intent of this mislabeling is either to illegitimately reduce the item’s price or make it free.
Often, second-degree retail fraud describes mislabeling that changes an item’s price by between $200 and $1,000 (Michigan, for example, follows this rule). Third-degree retail fraud usually describes changes below this price range.
Looking at Michigan’s retail fraud laws can also explain the consequences of this misdemeanor. There, a second-degree retail fraud conviction is punishable by up to a year in jail. There may also be (or only be) a $2,000 fine, or the fine will be three times as much as the difference between the marked price and the actual price – whichever amount is larger.
First-degree retail fraud
Unlike second and third-degree retail fraud, first-degree retail fraud is a felony offense. It often describes mislabeling efforts that involve price changes of more than $1,000. To again use Michigan as an example, a first-degree retail fraud conviction could result in five years of jail time or a $10,000 fine. If three times the difference between the marked price and the actual price is greater than $10,000, then that will be the fine amount instead.
To understand shoplifting laws, we’ll first look at Washington State. There, second and third-degree shoplifting is defined as the theft of goods that cost no more than $750 in total. It is a misdemeanor with the potential for jail time of up to one year or a fine of up to $5,000.
However, shoplifting laws look entirely different in New Jersey. There, shoplifting in the fourth, third, and second degree are all felonies, and even fourth-degree shoplifting can lead to 18 months of jail time. New Jersey also differs from Washington State in another major way: In the Garden State, all shoplifting of more than $750 is a second or first-degree theft charge.
It goes without saying that these consequences are severe. If you've ever seen an anti-shoplifting poster detailing the punishments for shoplifting, you've seen how powerful these consequences can be for loss prevention.
What is the difference between retail theft and shoplifting?
As with all retail fraud and shoplifting concerns, the answer to this question may vary by state. Let's use California as an example: There, retail fraud describes intent to deprive an item's owner – you or your business – of the item for a temporary but often long period. Shoplifting, on the other hand, describes theft in a commercial setting. Put more simply: Your employees cannot shoplift from you, but your customers can.
This is by no means a comprehensive list of every scam out there, but it does shed light on the signs of some of the most common retail employee scams and what you can do to stop them from happening.
1. Gift card fraud
Thanks to improved technology and pricing, even small retail establishments can create and sell branded gift cards. Of course, every technological step forward brings new challenges with it, and gift card fraud is one of them. Here are a few ways employees can make money from gift card scams:
Swapping out gift cards
The method of swapping out gift cards works best (for employees) in high-traffic stores that don't depend on return customers. Stores that cater to tourists or have heavy one-off traffic during certain seasons are more likely to experience this type of scam.
In a gift card swap, an employee will ring up and activate a gift card for a legitimate paying customer and then hand the customer a gift card that hasn't been activated and cannot be used. The employee will then run the cost of the gift card through the system, so when the register is closed out, everything looks fine. However, they'll pocket the activated gift card and resell it or use it.
Running a false return on merchandise and then creating a "store credit" on a gift card is another common way employees can use gift cards to steal. While many retail owners don't worry much about gift card fraud, they should. Large sums of money can be stolen using a diversion tactic like this one. In 2009, the New York Times published an article about the frequency and severity of retail fraud involving gift cards, mentioning an extreme example of a 23-year-old sales clerk who was arrested for stealing more than $130,000 from Saks Fifth Avenue by ringing up false refunds on gift cards.
Of course, most small businesses couldn't lose such a large sum without noticing, but the fact that even highly structured chains can let these types of thefts happen shows how easy they are to attempt.
If your store has gift cards, you should have an inventory system for them. Consider numbering the gift cards or routinely checking the stock of available gift cards. If you notice an unusual number of returns issued in the form of store credit, audit the staff schedule. If one member of your staff is issuing a disproportionate number of store credits, fraud may be taking place.
2. Collaborative theft
There are two primary types of collaborative theft between employees and nonemployees – sweethearting and shoplifting.
The most common type of employee theft in a retail setting is called sweethearting. In this type of scam, an employee uses their position as a retail worker to give things to friends and family either for free or at a deep discount.
In some instances of sweethearting, a register clerk will only ring up a few of the items their friend is purchasing and not scan the others, thereby giving their friends permission to steal without the risk of getting chased or caught. The most sophisticated employees, particularly those at the management level, may even change the inventory numbers in the system to make it look as though the item they gave away was never stocked. So, even if the owner is regularly pulling POS information on inventory and sales, everything will look like it's aboveboard.
In less sophisticated cases, sweethearting involves sharing employee discounts, issuing false returns or giving free gift cards to friends and family.
While many instances of shoplifting are legitimate outside crimes (with an external person stealing from your store without the knowledge of your employees), there are also shoplifting scams that involve both an outside thief and an employee. An employee may make a deal with a friend that they get a certain percentage of a take or job.
In a scenario like this, the employee will agree to look the other way while the co-conspirator looks and acts like a typical shoplifter. Retail employees tend to do this in small stores that are only staffed by one or two people at a time and often use this method when there are security cameras around. The employee may even pretend to chase the "suspect" from the scene to appear uninvolved.
One major solution to collaborative theft is never having only one person in the store at a time and increasing surveillance. While an unusually bold employee may attempt a collaborative shoplifting scam, they will have trouble doing so repeatedly if there are cameras watching.
To combat sweethearting, retail owners should outline policies for their employees in a clear manner. Many retail workers may not consider giving out discounts to friends stealing and having a policy on the books may deter them from doing it in the first place. For the sweethearting scams that involve outright theft of merchandise, the best antidote is careful inventory management. If an employee can successfully give away merchandise for months on end without you noticing, that is a failing not only of the employee's character but of your inventory system as well.
3. Merchandise theft
Merchandise theft is a very common practice in independently owned retail establishments for a few reasons.
Most chain retail stores have extensive inventory systems that are challenging to cheat, and at large stores, it's not uncommon to have different employees working at the same time in different departments. A floor salesperson in a big-box store may not even know how the inventory system in their store works. However, at mom-and-pop shops, the employee who is responsible for checking out customers is often the same person responsible for pricing items, opening new packages and inventorying stock in the first place. This creates an opportunity for merchandise theft that rarely occurs at larger stores.
Savvy staff members may be deceptive about deliveries to make it seem like a vendor hasn't delivered in full, and then steal the difference. For example, if 50 dresses were meant to be delivered to a clothing store, the manager on duty might tag, price and inventory just 48 dresses. When doing a big inventory, it's easy to miss two dresses. When questioned, the manager could shrug and say they tagged all the dresses in the box.
Taking inventory outright
Most merchandise thefts don't require any inventory manipulation because many stores have poor inventory systems to begin with. Many retail establishments don't input items individually, and many more use the same SKUs for multiple items that are similar in nature or price. Such shortcuts open the door for employees to steal freely, taking what they want from the stockroom without fear of recrimination. Employees will also do this if they know the stockroom is never checked, and, unfortunately, many business owners spend time at the front, greeting customers and saying hello, but not in the basements or stockrooms counting items.
Again, maintaining a rock-solid inventory system will go a long way toward preventing merchandise theft. Installation of cameras in stockroom areas, while relatively uncommon in independent retail shops, is smart for retailers that have had a problem with merchandise walking away in the past.
Another way to deter merchandise theft is by dropping in often and without announcement. Business owners are busy people, so they develop routines and schedules. Employees looking to steal will notice if you only come by the store on Tuesdays and Thursdays before noon, and they'll shift their habits accordingly. An unpredictable and highly involved business owner makes it tough for employees to get away with theft.
4. False cash returns
Scams involving fake cash returns are the oldest trick in the retail thief's book, because they're easy to run and difficult to prove. Basically, the employee looks through receipts from real customer purchases, sometimes from previous days or weeks, and finds a couple of receipts with high-priced items on them. Then, the employee runs a return on those receipts and pockets the cash amount from the register.
This is one of the most effective ways for retail workers to scam a store, because it bypasses a few common traps stores put in place to catch fraud. For one thing, a customer is unlikely to complain about anything, because things are fine on their end; they weren't overcharged or undercharged, and they still have the item they purchased. Plus, a certain number of returns in a day at a high-volume store isn't an instant red flag.
Auditing returns is a must for all retailers, but especially those that sell high-priced items that may draw this type of scam. One major tell is returns that have been input at the end of the day, first thing in the morning, during lunch hour or at any other time there may be few staff members in the store. Consistency is key – do most returns happen on Wednesdays and Fridays at 4 p.m.? That's a red flag. You can cross-check returns with the employee issuing them. If one employee processes a disproportionate number of returns, you may want to investigate further.
Another way to avoid this process is by having a strict workflow for returns. Requiring a second individual to check and then restock the returned item, for example, may deter a lone scammer from trying to game the system.
5. Credit card fraud
Less common than other schemes on this list, credit card fraud is nonetheless something store owners should be aware of, because it can severely (and permanently) damage your business's reputation within the community. Here's how it works.
In a credit card fraud scenario, two basic things happen. First, the employee gradually collects the credit card information of the customers at the store, then they either use that information to process false sales (followed by false cash returns, pocketing the cash) or use the credit cards to fill gift cards for themselves.
You may be wondering how this is possible – surely the card holder would notice false charges, right? Not necessarily. These scams work best in high-volume stores with mostly repeat customers, like gas stations, pharmacies and supermarkets. Consider your local grocery store. If you go every week, often multiple times a week, would you really notice an extra $15 charge twice a month? If you're a business owner, you probably answered yes, but for a typical consumer, the likely answer is no. Most consumers do not go through itemized charges and analyze them at the end of the month. Plus, in this scenario, the employee will often farm money from many different customers in the rotation so as not to arouse suspicion.
A locked system that makes it impossible or difficult for employees to access credit card information is an obvious way to cut down on credit card fraud. A camera behind the register can also reduce this behavior since schemes like this are typically done when there aren't any customers in line. If an employee is fiddling with the system a lot when there are no customers, you can always pull a report of sales for the day and cross-check the sales with the times that the store was empty. If sales were run when no customers were in the store, that's a dead giveaway.
It's important to point out, after all this, that most retail employees do not steal, and in many cases, thefts are simply performed by random shoplifters. If you have a shoplifting problem that is not internal, beefing up security at your store with alarm systems, surveillance and even security personnel can help. However, the burden of policing the store should not be placed on the shoulders of your employees for internal or external thefts. Docking employee pay for stolen goods or scammed cash will likely result in resentment.
Additional reporting by Max Freedman.