I terminated an employee and mailed them their final paycheck. They contacted me a week later saying they did not receive it. I issued a stop payment on the check and reissued them a new check. Both checks were for under $200.



The employee had, in fact, received both checks and took them to a check cashing service. The check cashing service accepted both checks and cashed them. My bank declined payment on the first check (that had a stop payment on it).



When the payment was denied, the check cashing service contacted me, we explained the situation and they said they would pursue the terminated employee. They were unsuccessful and have filed a small claims court case against me. Am I liable for the first check?

I can't see any way in which you would be liable for the stopped check.

Your former employee is liable to the check cashing place. Sounds like the former employee's actions validated your decision to make him/her a former employee.

I don't think you are responsible (I hope you have a copy of the stop order, which is dated prior to the item be cashed), and I would tell the check casher that their issue is with your ex-employee, who, it appears, intentionally tried to defraud you, the check casher, or both of you.
Check cashing is a risky business, and they realize this is one way of many that they can have a loss.

Sorry, but the fact that you stopped payment on the first check does not get you "off the hook" with an innocent holder in due course.

You may have your own opinion of check cashing outlets, but this one apparently cashed the first check in good faith, gave value for it, and was not aware of any claim you had against payment. That makes them holders in due course and able to enforce payment of the original check against you.

Your bank cannot pay the stopped check. But you may have to, and then your only recourse will be against the discharged, dishonest employee.

Only if you can prove that the check cashers knew the first check had been stopped can you prevent them from collecting from you.

But John, the employee knew that payment was stopped on that check. Doesn't that make him a fraudster?

But Fraud Dawg, the obligee defrauded the company, why should a party that was not a party to the underlying transaction and had no notice of the fraud take the loss just because they are providing a service? If it were stamped on the check, they might be considered "on notice." I am not sure how the courts would treat that.

I guess it just burns me that these little creeps can get away with that sort of stuff. And I understand what everyone is saying, however, check cashers know that there are these types of risks involved.

Just another thought here. Was this a cashier's check? The bank will often cut the employee a cashier's check which adds a new dimension to the event.

The check is actually made payabe to "John Doe". Can he sign over his rights as HDC to a third party? Or is he the only legal HDC? I'm guessing that a legal reassignment would transfer the rights of HDC to the check cashing company, but I hadn't thought of it that way.

Something's not real clear to me...Is the general consensus that the employer would be liable to the check cashing place because 1. he issued the check and 2. the check cashing place took it in good faith? So the check cashing place sues the employer for the amount and the employer sues the ex-employee for the same amount?

It would almost seem that the check casher would go straight to the source, the ex-employee.

The stop payment doesn't protect the employer against this liability to the check casher? Wouldn't the check casher have some agreement that the ex-employee would have to sign that warrants the validity of the check to their knowledge?

Just thinking out loud.

I'm confused, too. If the employee had cashed both checks at another bank, couldn't the stopped item be returned to that bank? Why can it not be returned to the check cashing place?

I agree with you, the "fraudster" here is the ex-employee.

just thinking out loud here... could you make an arguement that the check casher was somehow put on notice IF the checks were cashed at the same time, for the same amount, with both checks marked "final paycheck" or something of that nature?

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It would almost seem that the check casher would go straight to the source, the ex-employee.

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it seems to me they tried and failed, if I read the first post right. but the employer is the maker of the check and is ultimately responsible. his remedy is to go after the ex-employee for the value of the 2nd check, which was issued only on the condition that the first was "un-cash-able."

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I'm confused, too. If the employee had cashed both checks at another bank, couldn't the stopped item be returned to that bank? Why can it not be returned to the check cashing place?

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it can be. and apparently it was. but the innocent HDC can sue for the value it paid for the instrument.

imagine a scenario where your friend asks you to deposit a check into your account and you give him the equivalent in cash. your friend moves to Zimbabwe. the check gets charged back to your account (NSF, closed acct, stop pay, whatever). you would want the ability to go after the maker of the check, wouldn't you? and you would want to be able to do it without trying to sort through the "he said she said" that your friend and the maker are going to subject you to. you just want to get what's yours and let those two fight it out.

But how does the employer keep this from happening again? The only solutions I see are (I am talking about the first check issued, not the second):

1) Give them cash and get a receipt (I don't like this. They might sue you if they get mugged in the parking lot.);

2) Wire or direct deposit the money into their account. Or the employer could get a deposit slip from the employee and make the deposit. (I like this. A wire may cost some money, but it protects the employer.);

3) Meet the employee at the bank and "help" him deposit it in his account or cash it;

4) Give the employee the check with a form for the employee to sign stating that they received the check and it is their responsibility and you will not replace it. (Of course, if you are a kind, gentle sole, if they lose the check, you could wait 6 months and then tell your bank that you do not want this stale item paid. I am not sure if they would effect a check casher's holder in due course status if they cashed the check after 6 months.)

BTW: Have you filed criminal charges against the ex-employee?

Hi Everyone- Thank you so much for your help. To answer a few of the questions posted:

1- The check was a regular (not cashiers) check.
2- The first check was not marked Stop Payment until the check cashing service sent it to my bank.
3- I have not filed charges yet but plan to if I loose the mall claims court case against me (that the check cashing service filed).
4- The check cashing service initally said they would pursue it through the x employee but had no luck and filed suit against me.

I sent a registeed letter to the x employees last known address stating what occured and suggested they contact the check cashing company/collection agency and pay. I also said I woudl sue them if I have a judgement against me for the judgement + my costs.

Thanks for eveyones help. ANy more feedback or suggestion woudl be appreciated.

Don't just sue. File charges and sue. This is a criminal matter first and foremost. However, do not threaten the criminal action while dealing with him in the civil matter. Either do it or don't. Threats of criminal action in a civil matter are not looked apon very kindly by judges and it is a serious violation for an attorney to do this. Contact your local DA today! Yes, I am a lawyer, but this is not legal advice because I do not work for you. Consider it free advice from a knowledgeable friend. Do not hesitate with your DA. It does not help your case one iota.

Two additional points:

The concept of holder-in-due-course (HIDC) is designed to shift liability to the person most able to prevent a loss. It is also designed to encourage the negotiation of instruments by protecting innocent holders. In this case, the check-cashing company is innocent of the stop payment and the fact that the check had been stopped.

One other requirement of HIDC status: the holder must have taken the instrument without notice that it was overdue. For checks, that means the check cashing company had to receive the check within 90 days of its issue date. That, by the way, has nothing to do with the so-called "stale date" of the check. It's just an arbitary time period by which a check ought to have cleared for the purpose of the HIDC definition.

The employer's liability to pay his employee is not satisfied when he tenders the paycheck. So the suggestion somewhere up the string that the employee be made to wait 6 months before receiving a replacement check won't cut it. In this case, however, delaying a couple of days before issuing the stop order and the replacement would have prevented the fraud, since the original check would have been paid by the drawee bank.

Excellent point; the employer was in the best position to prevent the fraud. However, I think posters are sympathizing with the employer b/c it did try to do the right thing and stop payment on it too, and the check cashing places were not even thought of when the HDIC rules were first promulgated. It seems like they should be seen to have some "notice" in almost every case! O.k., that comment isn't fair either, but we all know that the incidence of odd/bad/stolen checks at check cashing places is always on the high side when compared with other financial institutions.

For the "There is Justice" crowd:

You'd see a little different result if the employer had told the employee he'd have to wait a couple of days for a replacement check. Obviously, if the check is paid, the employee is challenged on his claim of loss. Employee backs down, everybody's good.

If the employee insists there had truly been a loss of the check and the indorsement to the check casher had been a forgery, once the check is paid, the employer has control. If the employee signs a forgery affidavit, the check casher ends up holding the bag under his transfer warranty. He gets to chase the person who cashed the check with him, whether it's the real payee or a thief. Everyone's good, except the check casher.

If the employee refuses to sign an affidavit of forgery, employer refuses to replace the check. Once again, everyone's good.

I have not read this entire post again, but is there any chance that the check was indeed lost and the check casher cashed the check for the person who stole it? Or was that refuted in an earlier post and I need to delete this post?

That would make an interesting wrinkle in the case, but, alas, it appears the only villain here is the former (thankfully) employee.

I just wanted to clarify that you are saying I SHOULD contact the DA because it WILL help my case, right?

The following is posted on the web, in the form of a legal brief - it's a settled issue when a check cashing store is involved.

You Stopped the Check - It Got Cashed...
You're Safe, Right?

You issue a paycheck to your employee. A week later he reports that he lost it and would like you to issue another. You want to keep your employee happy so you order your bank not to pay the first check and you issue a replacement to the employee. He is very grateful, and cashes the second check. Six weeks later you get a call from a check cashing store saying that it cashed the first check, payment was refused by your bank, and it demands that you make good on the check. Your employee no longer works for you and cannot be located. Do you have to pay the check again? It is quite possible that you do.

Your stop payment order is an agreement between you and your bank. In this case your bank did exactly what you told it to do, and did not honor the first check. Thus there is no way to hold your bank responsible for the fact that a check cashing store honored that check. Your bank did cash the second check, but again it did exactly what you ordered and incurred no liability through that action.

If the check cashing store can show that it qualifies as a "holder in due course" under the Uniform Commercial Code, then it is entitled to be paid by you. To do that the check cashing store must show that it took a "negotiable instrument;" that at the time it accepted the instrument it did not bear such apparent evidence of forgery or alteration or was not otherwise so irregular or incomplete as to call its authenticity into question; and that, among other things, it took the instrument (i) for value, (ii) in good faith, and (iii) without notice that the instrument was overdue or had been dishonored, contained an unauthorized signature or had been altered.A check is generally a "negotiable instrument." If your first check was presented to the check cashing store in the same condition as when you issued it, then it would not bear apparent evidence of forgery or alteration, or be irregular or incomplete. By cashing the check the store is considered to have taken it "for value." If the person cashing check presented the store with reasonable evidence of his identity and signature, such as by showing his drivers license, and if the check is not very old, then the "good faith" requirement would be satisfied. So would the other requirements listed above. The law would then consider the check cashing store a "holder in due course," that is, an innocent third party entitled to be paid. If the check really was cashed by your ex-employee with the intent of being paid twice, he would be guilty of theft and would owe you the amount of the overpayment. That is a small consolation if you cannot find him or if you consider it too much trouble to chase after him or press criminal charges.How can you protect yourself against this sort of problem? You could start by asking such employees to sign a statement certifying that they have in fact lost or misplaced your first check, that if they find that check they will return it to you, and that they agree to hold you harmless (to repay you) if you are forced to pay on both the original and the replacement check. Obviously, such a statement is useful only if you can enforce it. You could also put a relatively prominent notice on all of your checks stating that they are not valid unless presented for payment within a fixed number days (e.g. 30 days) from the date of issuance; someone cashing the check after the expiration of the stated time period would then likely be held to have had notice that the check was overdue, and would not be a "holder in due course" entitled to payment.

Not to be too repetitive, but pursuant to Article III of the UCC, a holder in due course may enforce the item against the maker notwithstanding the stop payment so long as there are no "real defenses" such as duress, infancy, incapacity, etc. In my jurisdiction, the item must also be presented within 90 days from the date of issue in order for the check casher to defeat the stop payment.

As a practical matter, we do not cash anything over 30 days.

Is this fair? The policy behind the UCC is to influence commerce. Without these protections, many people would not accept checks. Where would our economy be if checks were not accepted? When looking at all three parties (maker, payee and check casher) only the check casher is innocent. The maker put multiple checks into the stream of commerce, and the payee is a thief. What did the check casher do wrong??? The answer is: nothing. Furthermore, as check cashers we take many precautions prior to cashing a check, including a call to the maker in various circumstances. Even if we call the maker to get an OK (which is very time consuming, expecially for every check), there is still no guaranty that a stop won't be placed prior to presentment - which can take 5 to 7 days after encashment.

What should a maker do? I say wait 90 days before re-issuing (or put a time limit on the face of the check). I'm told, however, that under federal law an employer can't wait too long to pay an employee. I guess there is an inconsistency here and, ultimately, the maker will be on the hook. In short, know your employees.

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When looking at all three parties (maker, payee and check casher) only the check casher is innocent.

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I understand what you are trying to say, but this is not true. The employer is innocent and the bank is innocent. Everyone is innocent except the employee. What you may have been trying to point out is that the check casher (and the bank), if it does its job correctly, is not a party to the transaction and should not take the loss on the transaction for negotiating a check in good faith.

Well, no. The check casher need do nothing to negotiate the item "in good faith," which is only stripped if the check casher has actual knowledge that there is a problem with the check at the time of cashing it. In other words, the check casher is "presumed innocent." I maintain that in this situation, only the check casher did nothing wrong. Under the Code, check cashers (holders in due course) are not required to call the maker first, but, rather, makers assume the risk when they flood the market place with multiple checks. Sorry if this does not sound fair, but the Code provisions clearly support public policy behind negotiable instruments.

Well, YES!

OK, what did the bank do wrong? Nothing. (Stopping the payment was not wrong.) What did the employer do wrong? Nothing. (Issuing the second check was not wrong.) You are incorrect sir or madam, there are several innocent parties who did nothing "wrong."

The issue is not about guilt or innocence when it comes to who the UCC determines would be ultimately liable between the bank, the employer, and the check casher. They were all innocent parties and the check casher and employer were innocent victims. Between the two victims, the casher and the employer, the casher wins because it was a holder in due course.

The only party who is not innocent in this scenario is the employee. However, the fact that a party is innocent does not mean that they do not have liability. The employer has liability under the UCC to the check casher and the employee has liability to the employer and the check casher.

It is not always a question of right or wrong, guilt or innocence. In this case, there seems to be a "chain of liability". Well stated, Z.

I give up. Sometimes a crooked path cannot be set straight.

Hi Everyone:

Thanks again for your help. One final question. As of now I have only actually paid the second check. The first one was stop paid and I am being sued by the check cashing service. Would everyone suggest waiting until the case comes to trial and a judgement is made against me (which seem to be the consensus as to what will happen) before contacting the DA?

I'd offer to settle with the check-casher, and then enlist the DA's or police's help to chase the twerp who caused this mess, your former employee.

Settle. Once you get to court, you will incur not just your own costs and fees, but the judge will probably make you pay for the plaintiff's as well. If you blow it off and default, the check casher will get a judgment that far exceeds the face amount of the check. This is the advice I always give to makers when I make my first contact with them. After all, I'd rather have the face value in hand rather than to chase them down for 6 months to maybe collect on the judgment. If you don't pay now, you will pay much more later.

As much as we all hate it, John's dead on right. Lesson for everyone to learn. Have employees sign affidavits of loss before reissuing checks.

John wrote:

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If the employee insists there had truly been a loss of the check and the indorsement to the check casher had been a forgery, once the check is paid, the employer has control. If the employee signs a forgery affidavit, the check casher ends up holding the bag under his transfer warranty. He gets to chase the person who cashed the check with him, whether it's the real payee or a thief. Everyone's good, except the check casher.

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And Raymond wrote:

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As much as we all hate it, John's dead on right. Lesson for everyone to learn. Have employees sign affidavits of loss before reissuing checks.

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I must be missing something. How does having the employee sign an affidavit of forgery/loss protect the employer from a holder in due course check cashing company?

An affidavit of forgery from a crook (the employee in this long discussion) isn't worth a lot. We already know he's dishonest, so why would we believe he wouldn't lie again by signing an affidavit?

There is the possibility that an affidavit could be used to "pile on" charges of perjury if and when the perp is apprehended. I'm not so sure that fact would dissuade someone who's bent on stealing from you.

Of all the preventive tactics discussed here, I think the most effective would be the delay in both issuing the replacement check and placing the stop order.

I agree with John. As I recall we would not reissue a Bank Check (Expense or otherwise) for at least 60 days when the original was reported lost. We also required the payee to sign an Imdentification Agreement which held us harmless in the event the original item was negotiated, as well as an Affidavit of Lost or Stolen Item. I remember vaguely that we also required a Bond or placed a hold on an account for 3 times the amout of the item but not sure the time perod we required the hold to last

If you are sure the former employee defrauded the bank then I would also file a complaint with the local police dept. They may not run out an try and find this person, but if they were ever stopped for a traffic ticket it may show up that they are wanted. If nothing else it may cause this jerk some grief when they least expect it.

If the affidavit is true, and the employee did lose the check, then the party negotiating the check to the check cashing firm is a forger, and could not provide holder in due course status to the check casher.

Or, looked at another way, the check casher, by endorsing the check, warranted that all prior signatures were genuine and authorized. The affidavit trips the warranty.

If the affidavit is spurious, it will have to be the check casher that tries to prove it, and his case will rightfully be against the fraudulent employee.

I gave a payroll check to a new employee for the week ending 2/25. The check was postdated for Feb. 24. The employee left work on the 23rd and did not return to work. On the 24 in the am we stopped the check. The employee however cashed her check on the 23 at a check cashing establishment. The check cashing establishment cashed the check one day early. Are we responsible to repay them? In addition is the check cashing store responsible to call the bank prior to cashing a check?

Under the Uniform Commercial Code, anyone who receives a postdated check is not required to honor the post-date in negotiating the item. This means that you are respoinsible for paying the item.

No one who accepts the check is required to call your bank prior to accepting it.

If you placed a stop payment order on the check, why was the check not returned by your bank when it hit their shop?

Here's another fun twist to this situation. A customer of ours purchased a Money Order from a teller and mailed it to a relative in another state. The mail was stolen and the Money Order cashed at a check cashing establishment. In addition the payee had been altered.
The maker of the money order signed an affidavit of alteration and the payee signed an affidavit of forged endorsement. (We wanted to cover all the bases.) We then sent the item, affidavits, and letters to the depository bank who charged the check back to the check cashing establishment's account.
Of course we then received the letter threatening legal action as they were the holder in due course. In this case, I shot it back to them claiming "Breach of Warrenty" undeer UCC 4-208. This took place in September 2004, and I have yet to hear back from them and I have not been served with legal papers so I think in this case they are on the hook. If it makes anyone feel better, they don't always win.

I believe that "Holder in Due Course" is a class required by all new CCC employees. I'm pretty sure that is their battle cry.

We all make mistakes.... You could pass a sewer rat dog. Very little dog! as a check... at any check writing service...[ A little smile] Shake it off and deal with it. I do every day. Its just a little pocket change...

i had recieved a payroll check from my last employer for two weeks of work... i had put the check in my bank and then two weeks later my company had stopped payment of the check.. i am now $1200 neg in my account... the bank is holding me responsable for paying back the stopped check... how can a company stop a payroll check when i did nothing wrong but quit on them.. i am really supose to get another check from them but you can see how that goes... where do i stand legally??? is there anything i can do to make them pay me back??

If the check had already been paid at the bank the check was drawn on, the employer should not have been able to stop payment. Two weeks seems like "pushing the envelope" on the time it would take for a check to come back. But without seeing the check and knowing all of the dates involved, we can't provide an answer.

I hope you are able to get the replacement check quickly.

the check stub states.. pay period 3/16/06-3/31/06... and the pay date of 4/1/06... i put the check in my bank on the 8th of this month... my bank hit neg. this morning.. is that any help? my employer is based in california and im in kentucky... my employer is trying to say that he does not know who i am... should i get a lawyer?? or is it something i cant fight? thanks for the help...

also, how long will my bank give me to pay back the money? will the bank take legal action against me?

Contact your bank to ask them. There is no better source for that information.

I just had a situation where a terminated employee said that the severance check I mailed to her was lost in the mail. I placed a stop payment on that check and mailed a new check. The employee cashed both checks. The stop payment check was cashed at a check cashing store (non-bank) and now the check cashing store is demanding that I make good on the check. From everything I've read here, it sounds like I'm just going to have to pay the check cashing store and go after the former employee.

My question is, going forward, is there anything I can write on the checks that I issue that says "Only negotiable at banks" or "not negotiable at non-bank check cashing establishments" or something like that which would make it impossible for the person to cash the check at a check cashing store? That way, I could know that when I issue a stop payment on a check, it will not be cashed.

I believe the check cashing store has the responsibility of going after the former employee. They probobly think that they can pressure you into paying because they know where you are and can't find the former employee. You placed a stop payment on the check, reason does not matter. You reissued the check and have no obligation to the check casher. Your bank should be able to guide you in this matter.

Big-Dog's opinion notwithstanding, the check cashing store is a holder in due course unless it is aware of the fact that the first check was stopped. That would be the case if the check had already been presented for payment and had been marked "Stop Payment," or if the dishonest employee/payee had boldly claimed that he/she was scamming the boss. But those things didn't happen here. The check-cashing store was ignorant of the sordid details, and cashed the check quite innocently.

The UCC protects the holder in due course and allows it to pursue the issuer of the stopped check.

Annotating the check in an attempt to prevent its being cashed except at a bank wouldn't work, either. The payee's scam could have worked just as well if (s)he had cashed the original check at a bank (other than the bank it's drawn on).

The employer's gripe here is with the former employee. Let's put the blame there, where it belongs. The check-cashing store is entitled to recover for the check. It can pursue the check's payee on his/her endorsement warranty, or it can pursue the employer as the drawer of the check. Which pocket do you think it will pursue, given those options?

John, so what should the employer above have done? Employee says the check is lost. Employer says, "too bad, We issued one to you and you lost it...your problem?"

I don't know what the employer might have done besides that. It's a business risk, I know. In simpler times, either the employee would have been honest, or the employer would have know the employee well enough to see his/her dark side. The result of these problems isn't always desirable from every perspective. But the fact of the matter is that the employee is the crook here, and the employer was the party with the most knowledge and the best chance of preventing the fraud.

In theory, too, the employer will be in the best position to know where to find the perp. So, the employer gets left holding the bag unless somehow the employee can be made to repay his/her ill-gotten gains.

Fair? The employer won't think so. Just? Debatable.

They way I understand it, check-cashing companies are putting themselves knowingly at risk, cashing checks that they have not verified the funds for. I don't see how the payer is responsible for them cashing a check that had a stop pay on it.

The law doesn't create a special category of holder for professional check cashers. While they admittedly take on added risk, they are also entitled to use the law for their own protection when it is available to them. Check cashing businesses are well-versed in what their legal rights are, and will exercise them doggedly when they need to.

Unless and until the law is changed (and I don't see that happening), an employer who replaces a "lost" paycheck does so risking that a dishonest payee will rip off the employer by lying about the first check, and cashing both.

You always explain the rationale very clearly, John. How would you explain the liability if the employee reported the check not merely lost but definitely stolen, say, if her purse was snatched on her way to the bank, and the thief was actually the one who got money from a check casher? (After all, there's probably ID in the purse, too.)

In the most fair of all possible worlds, of course, the thief would pay, but that's not going to happen.

Would writing "Third Party Endorsement Prohibited" on the check prevent this type of double-paycheck scam?

Fraudbuster - If the check had been transferred to the check cashing store with a forged endorsement, I think the outcome would be different. The store would not become a holder in due course because the thief would not have been a holder. That's my gut-level response, without a lot of research. In that case, the check cashing store would be left holding the bag, unless able to effect an arrest, conviction and restitution (good luck to the Mets, too!)

I think the only way an employer could prevent such a scam would be to pay employees in cash or cash all of their paychecks on the premises. That's not likely to happen.

This is not an area that I know anything about, but I'm curious - what if the employer would have waited 30 days (or 60 days?) before re-issuing the check? Would that be an option?

The employer might have been concerned about state labor laws that might require that people get paid promptly. But I'm not so sure they would have applied in this case, since the employee did receive the first paycheck. It might have been a good strategy.

Having been there (in the non-banking working world), I have seen some awfully convincing pleas for replacement checks made to some soft-hearted employers. So I can understand how this can happen.

Does anyone know if there is there anything I can write on the checks that I issue to employees that says "Only negotiable at banks" or "not negotiable at non-bank check cashing establishments" or something like that which would make it impossible for a person to cash the check at a check cashing store? That way, I could know that when I issue a stop payment on a check, it will not be cashed.

As John stated above, there is no such language to limit where a check is cashed and they could easily have cashed it at another bank, who also would not have known about the stop payment order.

Aren't banks networked in a way where a bank will detect that a check has a stop payment on it electronically?

Not at all.