Mark Conlon, 46, is alleged to have robbed tons of clothing from a recycling centre at Penicuik, the proceeds of which are donated to charity.
Mr Conlon, of Lady Road Place, Newtongrange, has not returned to work since the allegations came to light in June.
It is understood he has denied the thefts, claiming he was removing discarded rubbish from the clothes banks and ferrying them to another site.
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Bosses at Midlothian Council were alerted to Mr Conlon’s activities after a member of the public called the police hotline Crimestoppers.
The complaint was then passed to the council, and officials are understood to be reviewing CCTV footage of Mr Conlon at Penicuik and Stobhill household waste recycling centres.
An internal investigation has been launched by council bosses but no police probe has yet begun.
A source, who asked not to be named, said the father-of-three had been caught using keys to remove items of clothing from Nathan’s Wastesavers clothes bank at the Penicuik depot.
Money is donated to charity for every kilogram of textiles collected.
Mr Conlon is alleged to have sold the clothes to a “cash for clothing” business, which offers around 40p per kilo.
Mr Conlon declined to comment when approached by the Edinburgh Evening News.
But a source close to the council employee, who is believed to be on a £13,500-a-year contract, said he strongly denied the allegations.
The friend said Mr Conlon had been suffering from depression and stress since his suspension.
When Mr Conlon was accused of stealing from the clothing banks, he claimed he had been given keys to the containers to remove rubbish that was being dumped there.
“Members of the public come in and put rubbish into the clothes bank,” the source said. “Mark was told, if he was given a key, would he take the rubbish out.”
The source said Mr Conlon had moved the rubbish from Penicuik to the Stobhill depot “out of the goodness of his heart” when there was no supervisor to ask where he should dump the refuse.
He added: “Once the banks are full, they are full.
“There is a lack of council vehicles to move rubbish from one place to the other. Now he’s being punished for it.”
A spokeswoman for Midlothian Council said: “We can confirm that an allegation of theft is currently being investigated by the council.
“Accordingly it would be inappropriate to comment any further at this stage.”
A police spokeswoman said: “At present we have not been asked to investigate this matter and it is an internal matter for Midlothian Council.”