Theft is a valid reason for firing an employee, even an employee with a long-term contract. An accusation of theft doesn't strip away an employee's rights, so even if you're certain an employee is guilty, respect their rights to fair treatment. Move carefully if you don't think your proof would convince a jury in a wrongful termination lawsuit.
State laws and court decisions have guaranteed workers a right of privacy in the workplace. If you have a valid reason for suspecting an employee of theft, you have legitimate grounds for searching her locker or desk. Making a random search or searching before trying to verify the accusation is harder to justify if the employee sues. Performing a body search or confining an employee -- for example, refusing to let them leave until they consent to a search -- usually puts you on the wrong side of the law.
An employee, even one suspected of theft, has a right to his good name. If you blacken his name by publicly accusing him of stealing or talk about the case with people who don't need to know, an employee might have grounds for a defamation lawsuit. Truth is a valid defence, but to prove your statements are true, you have to prove the theft. To protect yourself and your employee's rights, you and any staffers investigating the case should avoid talking about it to anyone else.
Employee theft is grounds for immediate dismissal; firing someone based only on a supervisor's suspicions is not. Even if an employee can theoretically be fired at will, you could face and lose a lawsuit if you fire someone for theft without solid evidence. Refusing to take a polygraph test isn't evidence: In most cases, the law forbids firing employees for refusing the test. Employees also retain all their rights against discrimination: You can't treat accusations against a minority employee differently from other workers, for instance.
To avoid violating your employees' rights, write up a policy for theft cases before you have one to deal with. The policy should spell out your rules for employee searches, for verifying facts and for handling investigations discreetly. Make sure you and your supervisors know the rules, and follow them. Check with your business attorney to make sure your guidelines protect your employees' rights, and update them if the law changes.