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Discounting Violations of Employee Discounts

Posted on 7/15/14 11:30 AM

Should We Discount Violations of Employee Discounts?

If we were to shade a big gray area between "crime" and "policy violation," most assuredly we could name that swatch "the land of discount abuse." For retailers, especially loss prevention associates, discount abuse is at best a severe policy violation, and at worst a crime. However, that distinction is critical as it determines the outcome for the violator and represents the area where retailers are most likely to make inconsistent decisions.

If a retailer provides the benefit of employee discounts, then it is inevitable that investigations will arise on the abuse of that discount. Ultimately, corporate management will be looked to for guidance as to whether discount abuse is a policy violation or a crime. Knowing the answer in advance is critical to both the consistent resolution of these cases and in deterring associates from engaging in abuses of the company discount.

Not all crimes are treated the same way in our legal system. Infractions, misdemeanors, and felonies are the most common categories of crime; however, states have varying degrees for each infraction. While all states provide for larceny, embezzlement, and fraud, nowhere will you see the crime of discount abuse. Consequently, to classify the act for the purpose of prosecution, we must be prepared to define it as either a larceny (the direct theft of money or merchandise) or as fraud (wrongful or criminal deception intended to result in financial or personal gain(1).


If the dollar amount of the discount abuse is large enough (say thousands of dollars(2)) and it can all be proven through evidence, such as media tapes, electronic journals, exception based reports, and so on, we may in fact have a case for the police and district attorney's office. Chances are that we will not.

The problem with discount abuse is that it is more an erosion of profit than an actual crime. Unlike the practice of "under ringing," where an associate sells an item at a new price, discount abuse involves using an actual and legitimate function on the POS system.

Additionally, the amount of the discount may also be an amount commonly provided to customers through promotions and coupons, or through subsequent markdowns. It makes for a difficult argument in court and an even more difficult argument trying to convince the local police to arrest the associate when the merchandise was paid for - be it for a lower price.

Clearly discount abuse is as much a crime as it is fraud; however, as stated, in the criminal justice system not all crimes are treated the same. Retailers can press for prosecution, but it is the police and courts who ultimately decide the charges and merits of the case. It is difficult enough for retailers to get the attention of an overburdened(3) criminal justice system for actual cash and merchandise theft, let alone the less understandable "discount abuse." So we are left with an action that is criminal by definition, but mostly difficult to punish under the legal system.

Fortunately, when it comes to crimes against retailers, labor and employment laws are not as forgiving as the criminal justice system. Knowing and willful misconduct, especially those that result in a loss to the company, is grounds in most states for termination(4). This fact makes treating discount abuse as a policy violation the far better choice, and the path of least resistance.

Of course, it is not as cut and dry as to say "discount abuse is against policy, so if an employee is caught, we fire them." Although less forgiving then the criminal courts, labor re­view boards and civil courts can still be highly critical of an employer's actions with regards to employee terminations. This underscores the importance of knowing how you will handle discount abuse in advance. To ensure an effective approach to discount abuse, retailers should employ the use of seven considerations.


Consider the Definition

If your organization hasn't already done so, the decision makers should discuss discount abuse and devise and define a clear, simple and straightforward employee discount policy. In order to make violations clear, meaning knowing and willful, the discount policy must leave no room for interpretation. In the dynamics of today's society, terms such as "immediate family members" can be very vague.

In addition, statements such as "may be used to purchase gifts" can also leave the door open to interpretation. When crafting the policy, it should be written in terms that a common and reasonable person can understand. If members of the corporate team are not clear or in agreement as to the exact definition and terms of the policy, then it will be far more difficult to take action against alleged abusers or to remain consistent in that decision making.


Consider the Implications

When we write policy, we often do so with a specific scenario in mind. Our discount policy may be written with a newly-hired part-time teenager who is letting their friends come in and get merchandise with their employee discount. However, we should factor in the potential that a top performing regional manager, responsible for a significant percentage of the company's overall revenue, could also fall into the trap of providing a discount to a friend. Inconsistencies in policy enforcement due to the level of the employee could invite legal liability.


Consider the Consequences

Once defined, it is equally important to have agreement on the actions taken against violators. The consequences should be tied directly to the level of violation the company assigns to discount abuse. If this is a "small infraction," comparable to making a paperwork mistake, then first time offenders may only receive a written warning. If the company views the violation as an act closer to theft, then the obvious outcome should be termination. When making these considerations, it is best not to use a dollar amount threshold. It is the act of misusing the discount that we react to, not the amount of loss to the company. In focusing on the act, we avoid the need to justify inconsistent decisions for discount abuse terminations.


Consider Communication

Discount Policy "myth" occurs when we either have a vague policy or when store teams begin to make exceptions to the use of the benefit. To ensure a firm and actionable plan for abusers, we must have a clear and communicated policy on our discount policy and the consequences for violation. Communication should occur regularly for both new and existing associates. The benefit of clear and regular communication is that it negates the "I didn't know" defense, as well as makes disciplinary action less emotional as we don't question whether the associate was acting out of ignorance or willfully violating the policy.


Consider the Alternatives

If your company is weary about dealing with discount abuse or there isn't any definitive agreement among decision makers, the best course of action may be to consider alternative solutions. There are practices that can reduce discount abuse exposure, such as:

  • Reduce the discount percent to a value that makes it inconsequential or equal to monthly promotions. Some companies have opted for 10%, and then spend no time investigating allegations of abuse.
  • Place a cap on the total dollar discount an associate can receive in a year. By tracking this number, the organization only needs to respond to those who exceed their limit. This method eliminates the need to question who the purchases were for and additionally helps the organization forecast the maximum amount of employee discount dollars in a fiscal year.
  • Consolidate the benefit so that is for the "associate use only." This will eliminate the defense that it was a "gift," or in trying to determine the relationship of the purchaser to the employee.

Consider the Cost

Few people in the organization other than the CFO or Finance team probably know the true cost of this employee benefit. Depending on the POS software and back office accounting, the amount of discounts and the percent of employee sales to customer sales may not be clear.

When choosing a policy, it is helpful to understand how much this benefit and the potential abuse of the benefit are costing your organization. Retailers understand the cost of shrink in terms of losses as a percent to sales or to cost. The same application should apply to understanding the impact of employee discounts.

For example, it is imperative to know what the total sales represented by employee purchases, total discounts in a year, and potential cost represented by the abuse of the benefit(5). If the dollar amount or number of employee purchases is inconsequential, then changes or enforcement of the policy will have little impact on the majority of associates enjoying the benefit.

If the dollar amount or number of employee purchases are significant, then policy changes must be approached with caution as to not affect sales or associate morale.


Consider the Response

While it is true that discount abuse is not a violation that anyone is going to jail over, we still need to consider the bigger implications before we discount the entire issue as insignificant. Discount abuse, like any major policy violation, is about more than the money it may cost the company. The act speaks to the mindset of the associate towards "acceptable" behavior. In short, discount abuse may be just a disregard for company policy, which is an attitude detrimental to loss control.

It may also be just the tip of the dishonesty iceberg. Most dishonest employees do not make their first act of theft their largest act of theft. They start out "testing the water" with smaller violations and then gauge the company's identification and reaction to those violations. Discount abuse is a good place for many to start. If the company cannot spot that, then maybe they will not spot under ringing or refund fraud.

Most loss prevention experts warn that taking a laissez-faire attitude towards "petty" dishonesty can lead to more damaging actions and behaviors down the road. A company's best defense against shrink is to create a culture of integrity, and in doing so they must react and correct any action that detracts from that culture, regardless of size or magnitude. Discount abuse may not be worthy of front page news, but it does chip away at the fabric of integrity every company seeks to defend and in that regard is worthy of our attention



  1. Definition provide by The Oxford American College Dictionary
  2. FBI Statistics from 2006 state that there were over 22 million arrests related to theft of cash or property, these figures only represents those counties that reported.
  3. FBI Statistics from 2006 state that there were over 22 million arrests related to theft of cash or property, these figures only represents those counties that reported.
  4. Most states have an "employment at will" clause
  5. Industry experts agree that about 1in 10 employees act dishonestly and that their actions result in approximately 48% of the total company losses. These losses do not include profit erosion caused by discount abuse but based on these figures we could estimate that 10% to 20% of the total discount dollars were given in violation of the policy.

Topics: loss prevention

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