The employer was taking the check back immediately in exchange for cash. He may never have cashed those checks, but used a different check or transfer mechanism to repay himself (or the cash could've been the company's to begin with). Handing the checks to the employees, as part of a tax dodge, could've been just enough action to appear legitimate to the people working for him, but the trail could easily end with him since all he had to do was burn those checks afterwards.

Or you'd dummy up some pay stubs and fake checks that no bank would ever cash, then make your employees give the paychecks back to you immediately and pay them face value for their paycheck in cash.