Paycheck fraud: Stop Payment Fees and Holder in Due Course

Adam Rust

Employers take some risks when they pay workers by paper check.

Checks still bear the account number and the routing number of the payer’s bank account. A disgruntled employee may attempt to use those numbers to pay a bill. The police will have no problem tracking down the offender. However, the police will not do the work to recover the lost funds. The employer will have to pursue the worker for a judgment.

There is also the problem of stop payment fraud.

If a worker falsely claims that they have lost their paycheck, but then attempts to cash the check at the check casher, employers pay two fees. First, they must compensate their bank to request a stop payment.

However, it gets worse. The check casher can obligate the employer to pay the fee its bank charged for presenting a bad check. Thus, employers pay twice.

Here is how it works:

1. Dave is a worker at Joe’s Garage.

2. Joe’s Garage writes a paycheck to Dave for $1,000.

3. Dave receives the check but then tells Joe’s that he lost the check. Dave asks for a new check.

4. Joe’s Garage puts a stop payment order on the first check. Joe’s Garage pays a fee to its bank to do so. The stop payment fee may be between twenty and forty dollars. At the moment, many large banks charge approximately thirty dollars.

5. Dave isn’t telling the truth. He still has the check. He takes this check to a check casher.

6. The check casher exchanges the check for cash, minus the service fee. The check casher then deposits the check in its commercial account. The check casher becomes the “holder in due course.”

7. Dave cashes the second check. Dave would not cash the second check at the same check casher.

8. The check casher requests payment from Joe’s Garage’s bank. Joe’s bank refuses payment on the check. Joe’s bank places a fee on Joe’s Garage’s account.

9. Joe’s Garage has now paid a stop payment fee and an insufficient fund.

The check casher can put the cost back to the entity that wrote the check.

A Texas employer made this comment:

We moved to a debit card program for any employee that did not want to have direct deposit. It has eliminated the need for replacement checks. If they are lost or stolen, they can be easily canceled and reissued. The biggest reason we moved to debit cards, was because…we had a problem with employees claiming that their check was lost, we would put a stop payment on the check, which costs money and time, then reissue the check. However, the biggest problem it avoided was check cashing companies apparently do not have to absorb risk from stop payments. So we were out the amount of the check twice.

Picture of card
Person with Pinocchio Nose Considering Bank Account Fraud

The check casher may also have the ability to pursue the employer for the face value of the paycheck.

This privilege is referred to as the “holder in due course” (“HIDC”) argument. The HIDC is anyone who accepts a check for payment. As long as holder can reasonably assert that it had no way to doubt the integrity of the check, it is entitled to receive the full face value under the Uniform Commercial Code. The law extends protection to the holder even in situations where then payer requested a stop payment order. The holder has the right to sue. To defend that position, the holder may get a judgment against the payer.

Wouldn’t it be better to use a payroll card?

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