Paying by cheque – Have you actually paid your staff?
Paying by cheque to your employees their wages or salary, whether that be weekly or monthly. The question this raises is that by utilising this payment method, have you contractually fulfilled your agreement to pay someone on a certain date? Extending this further, if you are paying by cheque as you do not have bank details for the employee, have you assumed that they will be able to present it – Have you actually paid them?
But surely cheques are on their way out?
Well, that was the original idea from the UK Government and the Banks, but as there is no current alternative for those without a bank account, the threat of removing this as a payment method has been removed [source].
What UK Banks have been working on is speeding up the method of processing cheques to enable a secure and faster process [source].
Cheques – The Fundamentals
What are the fundamentals we need to know about cheques;
- The Bills of Exchange Act 1882 defines a cheque as a written order from an account holder instructing their bank to pay a specified sum of money to one or more named beneficiaries
- Ever since their inception, it has been the case that cheques are not a promise to pay by the bank, but a request to the bank that it pays, out of the funds deposited by the customer, an amount to a third party. This means that the bank will only honour the cheque if the account holder has sufficient funds to meet it or it can be covered by an agreed overdraft or other lines of credit
- Cheques are not legal tender and never have been. Even today, if you owe someone money they are not obliged to accept a cheque. Instead, a creditor is entitled to be paid in legal tender and can refuse payment in any other form
- Most cheques are crossed ‘A/C Payee’. The Cheques Act 1992 and Section 81 of the Bills of Exchange Act 1882 give statutory power to the ‘A/C Payee’ crossing when it is used. The rules mean that a cheque that bears the ‘A/C Payee’ crossing can only be paid into an account in the name of the recipient exactly as it appears on the cheque
- A cheque payable to two people (normally known as a joint account) can only be paid into an account in the name of the two people exactly as they appear on the cheque. The crossing cannot be deleted, nor can the cheque be transferred over to a third party.
So, if you have been paying your staff by cheque, have you discharged your agreement to pay them on a certain day? Case law is limited, however, on a matter related to Housing Rent, (Andy Coltrane v Janice Day (2003)), the Court of Appeal reviewed and applied the case law on the date of payment where payment is made by cheque: payment by cheque is a conditional payment; if the payee accepts the cheque and the cheque is honoured on the first presentation, then the condition is satisfied, and the payment is taken to have been made when the cheque was delivered.
Fundamentally the above appears to say a cheque is fine if the receiving person accepts it. However, what this does not consider is that the cheque will be crossed ‘A/C Payee’ only. What if the recipient does not have a bank account? Effectively they are unable to present the cheque, therefore payment has not been made. The only option for the employee, (unless the Issuer offers an alternative payment method or arranges encashment locally), is to convert the cheque through a cash checking bureau and as you will note from the table below, this is at a cost to them (Check out our blog ‘Bridging the Banking Gap‘ for more information);