Individuals are presenting government checks that are indorsed by the owner of the check and requesting us to cash the check without the owner being present. (The owner does have an account with us). We are refusing to cash the checks and are telling the individual we will deposit the check into the owners account. Two questions. 1. Are we correct in this practice. 2. How do we legally support this position (if we are correct)

1. You are correct, in the sense that your procedure is not illegal or 'wrong.'
2. You are not obligated to accept a check if you don't want to, for the most part. Even if your state laws require you to cash government checks, I'd bet a dollar to a cookie that the law stipulates that your obligation only extends to the actual payee, and only if that person is present and can be properly identified.

HERE is an excellent overview of the government check scenario by the FRB Boston. It supports your position and provides payees with options.