Check, cash (gold for that matter) - the form of the compensation is irrelevant.
When you pay for services in the underground economy you are denying that employee his Medicare and Social Security credit. You are denying that employee the mandated protection provided by Workmen's Compensation and Unemployment Insurance, or taxes depending on the state.
And obviously neither you or your employee are contributing your fair share of taxes toward government services, while you're also undercutting the small businesses that do play by the rules.