Legal Definitions - padded-payroll rule

The padded-payroll rule, also known as the fictitious-payee rule, is a principle in commercial law. It states that if a person issues a check or other commercial paper to a payee who they do not intend to have any interest in the instrument, a forgery of the payee's name will still be effective in passing good title to later transferees.

For example, if a company issues a paycheck to a fake employee, but the check is later stolen and the fake employee's name is forged, the person who receives the check from the thief may still have a legal claim to the funds.

This rule can be problematic because it allows for fraudulent activity to go undetected. However, it is important for businesses to take measures to prevent such fraud, such as verifying the identities of all payees and closely monitoring their accounts.