1) First, the employee could file a police report, and probably should, in case there is any later attempt to blame him/her for theft; the employee will want to create a "paper trail" or record of what's going on, and also let the police know about the security camera footage, in case they want to request it.2) There is unfortunately no right to make the employer fire the supervisor or change the employee's reporting: employers have the right to make very stupid decisions, and this is one.3) If the employee suffers any retaliation (like being fired) or other loss (like having money withheld from a paycheck to repay an alleged "shortage"), or if employee is falsely reported to the police, then the employee will likely have a lawsuit and should speak with an attorney. However, there is no lawsuit until there is some injury, damage, consequence, etc. to the employee, since the law only provides compensation for actual losses, not for what could happen or for unpleasant situations not involving a loss.4) It would be a good idea for the employee to look for another job: there is no reason to think this was a one-time event; rather, this may be a toxic or criminal place to work.