Sentence Correction

Hello,
1. what I think about the sentence is that, "Their employees" refer to the Govenment's employee.
Now, If you further read Manhattan book, where the usage of "who" is explained, you will realize that the sentence is actually right.
Usage of who: "Who" can be used to present both essential and non-essential details. The only difference is use of comma. If comma is used, it means "who" refers to non-essential details.

Here, we have no comma, hence the latter part of sentence is refering to emplyee's essential details.

2. No, I dont think so. But need some one else to answer this query.

'Paychecks of their employees' is non-possessive, and therefore correct in the sentence. It's actually the way to write out "their employees' paychecks", which is possessive, and would be wrong.