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Profiting Personally on the Company's Dime

We have an employee who travels from out of state to work in our corporate office.  We've cosigned, paid for and furninshed an apartment for him.  We've just recently discovered that he is renting it out on a well known website for a profit.  Is this behavior ethical?  Is it fraud?  What should be the outcome of this discovery?

 

 

Answers

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

Review any employee signed documents or leases to understand if he/she is breaking any commitments/requirements. If they do not exist or they do not cover this situation, I would recommend you have an attorney draft a broad statement that defines what is not permitted, with respect to company paid resources. If no policy exists, how can you say it is wrong?

Personally, I don't disagree with your reservations. But tread carefully to avoid a wrongful termination case.

DANIEL POIRIER
Title: Chief Financial Officer
Company: Pro Tech International
(Chief Financial Officer, Pro Tech International) |

Are you reporting the rental expense on the employee's W-2 as non-cash compensation? If so, then I would suggest the employee can do what he wishes with it. If not, then you may have some issues with how you are reporting your employee's income at the end of the year. My history with company provided apartments has always involved having to justify the decision, from a tax perspective, on the apartment being necessary for the conduct of company business. Based on your employee's actions, it sounds like there is a personal use component of the apartment that should be calculated and reported on his W-2. It is possible that you may have to go back to prior years as well. I would recommend you discuss that matter with your tax accountant/attorney.

Outside of the tax reporting issues, the situation you describe also lends itself to a discussion on trust with this individual. If you feel this person has broken your trust by not disclosing activity that he should have disclosed, then you may have a larger issue that needs to be addressed. A discussion on acceptable behavior versus actual behavior might be a good first step. If this is considered purely a company asset, then make sure your employee has a complete and written understanding of acceptable uses of the apartment. Otherwise, you may not have much room for maneuverability when it comes to discipline.

Overall, however, based on your description and the limited information available, I would be suspicious of this person's motives and would be hard pressed to continue trusting him in areas where ethical decisions are required.

Topic Expert
Malak Kazan
Title: VP, Special Projects
Company: ERI Economic Research Institute
(VP, Special Projects, ERI Economic Research Institute) |

I'm going to refer to the "co-signed" term you included in your original post and suggest that the company is also liable / responsible and should be apprised of any transactions related to the property. The fact the employee was not transparent with you in this matter, I concur with my colleagues posts that further investigation is required.

Topic Expert
Linda Wright
Title: Consultant
Company: Wright Consulting
(Consultant, Wright Consulting) |

I had a situation like this, during my time handling corporate real estate. As there had been no written policy when I inherited the role, I first spoke to General Counsel and we, jointly, spoke to the employee. We then clarified roles and responsibilities, but ultimately sold the apartment, at a FMV price to the employee.

Topic Expert
Dana Price
Title: Vice President, M&A
Company: McGraw Hill Education
(Vice President, M&A, McGraw Hill Education) |

While the above comments are good comments and probably the most sound advice, I personally would fire the employee. It's not what the spirit of the agreement was, and what kind of message does that send to the rest of the employees in the company- it's ok to be unethical, nothing really happens?

Robert Honeyman
Title: CFO
Company: Advanced Predictive Analytics
(CFO, Advanced Predictive Analytics) |

What a mess. Let the employee understand he created the mess. If he's a sales guy (eyes rolling!), ok. I won't go there. :7)

The guy is exhibiting ethically-challenged behavior. I would let him know that he's been caught, that he must cease the behavior, and that any future indication of questionable behavior will result in termination.

You know what? That's what I did 10 years ago with a guy that everyone knew was slightly bent. If you know the guy's a stand-up guy, work it out. Maybe he's really just young and stupid. But if you know the guy loves grey, get rid of him. Warnings won't mean anything. But I've become old and jaded. :7)

Mark Shornick
Title: CFO
Company: Numerix
(CFO, Numerix) |

Ethically this profit belongs to the company.

Gerard van Stijn
Title: Head of Finance
Company: Simon Lévelt B.V.
(Head of Finance, Simon Lévelt B.V.) |

For me personally, I would see that as a fireable offense what the employee is doing. However, I do not know the legal implications, so I would advise to consult with a lawyer first.

You may not be able to fire him, but it would certainly be a career breaker, and he should not advance further in the organization if he commits such acts.

Also, he apparently does not need the apartment, which would be a reason to cancel the lease. But here again, I do not know the legal implications of this, so consult with a lawyer.

Gregg Kimmer
Title: Director of Finance
Company: Humana
(Director of Finance, Humana) |

Did you tell this person this type of behavior wasn't allowed -or- was it just implied?

Mark Matheny
Title: VP - FInancial Planning and Analysis
Company: Novolex (formerly Hilex Poly)
(VP - FInancial Planning and Analysis, Novolex (formerly Hilex Poly)) |

Just curious. Is there a legal reason for the company having co-signed versus renting in the company's name for the employees use?

Anonymous
(Chief Accounting Officer) |

I am just curious: If the out-of-town employee is renting the apartment OUT, then where the heck is he living? In his car? Or some cheaper place, perhaps farther from work?

Anonymous
(Principal) |

My guess is he did a quick profit and loss calc, i.e., he figured out he could pay to stay in a hotel when in town, yet still come out ahead financially due to the cash inflow from "his" rental. Since the company co-signed, they should call him into a conference room and let him know that other people will be using this company-paid apartment when he is not there, just to watch his reaction.

Anonymous
(CFO) |

In order to have arranged and paid for a furnished apartment, this employee must have been deemed a high producer that was worth going to extraordinary means to hire and retain him. The ethical thing to do would be to have him refund the company the rental receipts he collected, issue him a written warning that actions such as these will not be tolerated if this is his first offense, and try to move on from there.

Anonymous
(Supervising Accountant) |

I'm curious if the other commenters on this thread see any difference between subleasing the apartment to somebody else outright vs taking on a roommate by leasing a portion of the apartment?

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

No.

When I'm not using my office, can I invite people in to use it?

If the person had said "great apt, and I defer the cost to the company by taking a roommate" and gave the money back, that would be fine.

As presented...not fine.

Fair question, tho.

Anonymous
(VP, Operations) |

Wow. Thank you all for the responses! We wanted to sign the lease on behalf of the company but the leasing company wouldn't allow it. It ultimately became a lease with both names on it.

We're still digging in to all of the facts and determining our position.

I am not the ultimate decision maker, but it is very helpful to hear from all of you as I draft my position on the issue.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

That sounds strange. I've rented many an apartment for the Company I was working at the time, in the name of the Corporation.

Prior to my arrival, they use to co-sign on appartments. I put a stop to that because if the lessee left the apartment before the end of the lease or the Company, the Company was still on the hook.

In the final analysis it would have been easier to find another apartment.

Roger Whitham
Title: Managing Director
Company: Bassett Bridge Associates
(Managing Director, Bassett Bridge Associates) |

Anonymous - What does the lease say about subleasing? As a consigner you may have leverage if the lease has specific language about subleasing.

But as for your prior questions, sure it's unethical and blatant abuse of the company's trust. Seriously how would any normal person think it would be okay to profit from the arrangement.

As for what ultimately comes of this will depend upon a) the value of this employee and b) the strength of management's spine. Company trust and unethical behavior would lead to termination, but a reset on expectations and cleaning up the rental might just be the least costly approach.

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Makes sense that they want the actual tenant's signature; but *that* doesn't determine the relationship between you and the employee.

If they didn't need it, they should have told you.

Lyle Newkirk
Title: CFO
Company: Corrigo Incorporated
(CFO, Corrigo Incorporated) |

I would terminate the guy. He either is deliberately misusing a corporate resource or does not have the sense to know that what he is doing is wrong (it is probably the former).

Anonymous
(Manager, Internal Audit) |

The apartment was provided for his use to facilitate his work at the company. If he did not need it and wanted to profit from it he should have seek approval first and/or ask for certain compensation for his interstate travel instead of the apartment.

Depending on the position of the employee and his access to valuable assets and/or information, my concern would be "In which other situations is he also walking the line between the ethical and unethical for his own benefit? Is he willing to also manipulate some other situations for his own benefit, creating more risk for the company?"

I would talk to legal counseling and if possible fire him. If this is not grounds for firing him I would limit his access to any relevant information or assets. To me he has shown his is capable and willing of cheating the company for his own benefit.

Anonymous User
Title: CFO
Company: Local Government Agency
(CFO, Local Government Agency) |

I love all the responses here about seeking legal counsel and avoiding potential termination provoked lawsuits. I love the "kid glove" treatment of an employee who obviously puts him/herself in front of the corporate good.

As someone who has spent a lifetime in financial functions with insight into virtually all events at companies, I've seen this type of behavior many, many times, at ALL levels. Low level employees are terminated virtually upon discovery whereas, higher level employees are granted leeway. But, this never works out well. Once a cheat, always a cheat!

There was no room for misunderstanding in this case. Find me a jury that wouldn't agree this was a terminable offense if the offending employee wants to take it that far.

Companies too often take a "soft" approach where a swift and firm one is called for. Then, top brass wonders why morale is so bad and why so many have an "us" and "them" mentality. People pick up on exceptions being made for higher ups and other "privileged employees", any support of the corporate mission they had goes right out the window. This is also how unions gain support and entry.

I guess, using the logic presented here, I'm free to "rent" one of our company cars out to whomever I deem appropriate when I take it out for my own use....as long as we have no policy against doing so? ;-(

How about if I "loan" my corporate issued cell phone to my wife to use on her upcoming, out of state trip?

Dan Ryan
Title: CFO
Company: Privately held
(CFO, Privately held) |

Sounds like fraud to me. I don't see how this is any different from the company finding out that an employee they had put up in a rent-an-office (e.g. Regus) was renting that out to someone else for personal profit. Do you have an employment document with any details in it that can be used here? At a minimum they should be fired. Clearly you should discuss with counsel, and ask about how your state treats employee use of corporate assets for personal enrichment. There should be abundant case law to prove one way or another. You certainly aren't the first to experience this :).

As a funny aside, I was CFO of a company that had an employee take 10 clients to dinner in NYC at the cost of $3,600. When I dug in to the expense report it smelled fishy - there was no stated business rationale for the dinner, and the guy was dodgy when I asked him for details. So I just called one of the attendees he had listed on the expense report and it turns out he was pitching these folks on a personal investment advisory business he had on the side. Had absolutely nothing to do with our company's business. He was fired immediately and we got our $ back from his ridiculous dinner having threatened a law suit. That experience led me to be far more cautious about corporate credit card programs and the language we use around use of company funds and assets, as well as employee expenses and reimbursement.

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Great example, Dan. Good catch!

Anonymous
(Performance Improvement Consultant and ERP Strategist) |

I endorse Tom's comments. Remember to advise your CEO that the tone at the top (i.e. what he/she displays by way of the decision/action taken here) will be looked at very carefully by the staff as a whole.

Ken Stumder
Title: Finance Director / Controller
Company: Ken Stumder, CPA
(Finance Director / Controller, Ken Stumder, CPA) |

This is a great thread. I'm inclined to agree with the hardliners. Either this person is a) greedy and manipulative or b) clueless. Either scenario makes the individual a detriment to the company and the tone at the top for ethical behavior should not moderate based on the level or perceived value of the employee. Whatever value he or she brings does not exceed the risk the company will assume if this sort of poor judgement is executed elsewhere (and even here I imagine if something were to happen to the subtenant, they could have recourse against all parties to the lease including your company). As others urged, consult the lease, employment agreement, an employment attorney, etc. but all of this is just dotting i's and crossing t's. Companies can find grounds to fire an at-will employee for far less of an infraction.

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Ken,

Nice distinction. I had one mentor (CFO & General Counsel) say, "they're either stupid or evil"...very similar thought there. Given his role, he tended towards being a bit jaded.

What saddens me is when the termination is due to cluelessness. I've had to do that (and have seen it many times). It is the right thing to do but doesn't make me feel good about doing it.

When they're being evil...well, I don't have a big problem with that one!

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Immediate termination. Put it this way, if we had an extra server in the closet, and I started renting out time on it (for my own benefit), I'd expect to be fired. That's certainly what I did when faced with that situation. This isn't even vaguely gray.

Frank Anderson
Title: President
Company: Computer Outfitters
(President, Computer Outfitters) |

I wonder if this person thinks the apartment is part of his compensation package? Did you negotiate a lower billing rate/salary with him in exchange for providing the apartment? Are you showing the apartment rent as taxable income to him? Since the lease is in his name, doesn't he have the right to do what he wants (even if it doesn't pass the stink test?). If the company were to stop paying the rent, would he be liable?

Anonymous
(VP, Operations) |

The employee is not new and it was not discussed that this would be part of their compensation. We have not yet show the rent or furniture purchases as taxable income. The lease is in both names, the individual and the company. If we were to stop paying I am sure the landlord would come after all parties on the contract.

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