Yes, this will be considered fraudulent and illegal. The business is not accounting for all the cash receipts and payments and paying tax on the net income from the activity.
Hence this would be tax evasion from income tax point of view.
If the customers paid sales tax on the services to the business and if the business does not report and remit the taxes than this will also be tax evasion from sales tax point of view.
if not only one employee, but two of them know that this is going on, and both have been taking notes of all the customers who have paid cash, how should it be reported?
Here is a link to the award that you may get by doing this and also the form that you need to file to report this