Yes. Or perhaps "undefined". Was it legal? Where? Who would have passed a law forbidding the practice? Why would they pass such a law? Why wouldn't you pay someone in whiskey?
Consider two things -
- With all due respect to @Samuel Russel, the early government was
concerned with labor law only where it concerned servitude. The
division between North (commercial, anti-slave) and South
(Vehemently anti-commercial, pro-slave) was far more important than
the distinction between employer and employee.
- Nobody had money - the economy was based on barter, and whiskey is
an excellent barter good.
Immediately after the American rebellion, and most especially during the period of the Articles of Confederation, (1777 to 1789), the national government was uninterested in labor law. Controversies such as the role of slavery, the pre-eminence of the North and South, the role of commerce vs agriculture, the right to Navigate the Mississippi, or the relative evils of France and Britain were dominant issues. State governments were relatively stronger than the Federal government (by design), and each state government had different opinions about the future of the country.
The new US was an economic disaster. Government officials abandoned their posts and refused to be re-appointed because the government couldn't pay them. State governments were in severe debt and many were close to default. As a result of these factors, there simply wasn't money with which to pay people. Almost everyone used scrip or barter. Being paid in whiskey was no more unusual than being paid in tobacco, or bacon, or any other good. If anyone had tried to make it illegal, they probably would have faced laughter rather than revolution.
For years, the US economy was based on shipping tobacco to England, and most commerce was conducted in tobacco for years - merchants would issue and accept scrip in the form of tobacco that was payable only if the tobacco was conveyed to England and sold there.
West of the Appalachians (where the colonies had been forbidden to settle, and where the "national government" had a very tenuous presence) were particularly poor in specie. People turned to barter. West of the Appalachians, the dominant industry was farming, but the country didn't yet have the transportation infrastructure necessary to send farm goods to market. The one good that could be transported over long distances was distilled spirits and whiskey.
Any frontier farmer who raised more grain than he could eat or feed to his livestock could distill whiskey at home. If he didn’t own a still, he found a neighbor who did and gave him a portion of the whiskey as payment. A bushel of corn made about three gallons and was worth more in liquid form.
note that this was not an employer/employee relationship, but barter between merchants
Whiskey is a natural medium of exchange for barter. It is stable, divisible and transports well. Why wouldn't you pay in whiskey?
Update: @Samuel Russell points out that I neglected to address the nearly pathological fear of scrip in the new colonies. I thought I had mentioned that, but I see that I did not. Then I tried to find good sources to explore the topic, and I can't (yet) find any that are succinct.
As sure as death all mortals trips,
THOUSANDS will rue their faith in scrips
A Maryland paper as quoted in "The Opposition Press of the Federalist period"
Well managed scrip might have provided an alternative to barter the trick was finding someone with the discipline to manage the scrip. Nobody understood monetary theory or inflation, so nobody had the intellectual tools needed to effectively manage scrip.
The new states (particularly Rhode Island) had very bad experiences with scrip. Speculators bought up scrip during an inflationary period and a small minority found themselves in effective possession of the entire state of Rhode Island. It is difficult for modern minds to appreciate just how deeply the new Americans distrusted scrip. Pauline Maier's "Ratification: the People debate the constitution" is probably the best source I've read on this, although anything about Jefferson will reveal the level of irrational fear. (OK, perhaps Jefferson's as America's leading deficit spender was justified in fearing commercial interests, but that is a separate topic).