Eliciting useful reference checks

Employers sometimes quake in their boots when they can't get detailed references for possible new hires. But fraud examiners can help their bosses glean information from references that can prevent disastrous hiring decisions and costly frauds.

You've verified the job applicant's education credentials. You've completed a criminal history check and a credit check. You've called past employers, who have verified her dates of employment, but that's all they'll tell you. She's never been charged with a crime or gone to jail, so is she a safe hire?

The ACFE's "2006 Report to the Nation" indicates that only 8 percent of fraud perpetrators had prior convictions for fraud.¹ You might interpret this statistic to mean that 92 percent of fraud perpetrators have never committed fraud before, so they haven't left a trail. But the statistic probably means something quite different - that many have committed fraud before but never faced the music. If they haven't been prosecuted, how can we check job references in a manner that will help reveal their trail of misdeeds?

Consider the following true cases that have recently come to my attention:

• A minister suspected of child molestation was passed on to another church with a glowing letter of recommendation that focused on his better traits. Since that time, he has passed through two more churches. No prosecutions have ever taken place.
• The minister's wife, a nurse, was terminated for stealing pain medications from her patients' intravenous drips and substituting saline solution. Since that time, she has passed through six more medical employers. No prosecutions have ever taken place.
• An employee at a property management firm was fired for embezzling and took a job three blocks down the street within the week. No prosecution took place, and no one was asked for a reference.
• Following 10 years of parents withdrawing children from a daycare provider's home because of strange behavior exhibited by their children, the provider was charged with homicide in the death of one of the children. According to news reports, she was feeding the babies liquor to keep them from crying. She was prosecuted.

WHERE'S THE DISCONNECT?
Regrettably, I have a laundry list of similar stories - all anecdotes that I've been told by personal acquaintances. All involve people who probably perpetrated numerous criminal acts. At this point in time, only one eventually resulted in prosecution and only when it resulted in a child's death.

Obviously, these cases don't all involve fraud; however, they give us an indication why 92 percent of fraud perpetrators might not have prior convictions. Some have surely never committed fraud before - there has to be a first time for any fraudster - but in many cases, they've done the deed or multiple deeds. And in several cases, there's insufficient evidence or impact for prosecution. The disconnect then occurs when knowledge about the employee's propensities doesn't pass from former employer to prospective employer.

We know that an important key to fraud prevention is hiring honest people. As these cases demonstrate, however, criminal history checks won't necessarily provide a clue to the applicant's proclivities. With no criminal history to tip us off and possibly no serious credit issues, we're left to rely on information provided by references.

A hospital administrator involved with the case of the terminated nurse divulged that his hospital rarely checked references anymore because they couldn't get useful information. This problem isn't unique to health care. I increasingly hear a mantra of "My organization absolutely forbids the providing of references."

Faced with this reference firewall, how can you glean information from references that can prevent disastrous hiring decisions? Before we look at specific actions you can take in the reference-checking process, it's helpful to understand why organizations are so hesitant to provide useful references.

WHY WON'T ANYBODY TALK?
A number of legal, financial, and publicity hurdles might deter employers from disclosing the truth with respect to current and former employees.

Lawsuits for defamation can arise if statements made about employees are false or unsubstantiated. Organizations don't necessarily trust their reference-providing employees to refrain from defamatory comments.

Lawsuits for invasion of privacy can arise in states that provide such protection. To avoid litigation, individuals providing references must refrain from disclosing information about an employee's medical history, disabilities, age, gender, ethnic background, marital status, religion, or any issues unrelated to ability to perform the job.

Federal or state charges of retaliation against whistleblowers must be avoided. An employer is vulnerable if he provides negative employment references with respect to an employee who has filed EEOC or OSHA complaints or engaged in other whistle-blowing activity.

Negligent referral cases might arise when an employer provides a favorable or even neutral reference for an employee if the employer has reason to believe that the individual could cause harm to others. The employer has a right not to speak at all in response to a reference request; but if he speaks, he has a duty not to misrepresent, and such misrepresentation seems to extend to information that's omitted.

Most widely cited negligent referral cases involve situations in which employers are aware of allegations of physical violence, sexual abuse, or substance abuse by a former employee and they fail to communicate this knowledge to prospective employers.² However, attorney Michael Carrico asserts that a negligent referral claim "may also lie where an employer knows, or has reason to know, that an employee is likely to engage in other misconduct (i.e. a negligent referral of an accountant who has a history of embezzlement).³ 

An easy way out is sometimes the motivator for employers who provide undeserved glowing referrals. They see these referrals as a way to make their "bad seed" someone else's problem and thus avoid unemployment compensation, severance costs, or difficulties associated with termination of tenured or unionized employees. Some are so eager to get rid of their "problem child" that they enter into a settlement agreement containing a neutral reference clause that confers upon the employer a contractual obligation to say nothing.

Public relations and third-party litigation issues might also deter prospective employers from providing honest references. In the case of the nurse, the hospital might have been unwilling to prosecute because of public relations concerns. They might also have feared lawsuits from families of patients who were affected by the nurse's activities. These same unwanted consequences can accrue when negative information is provided in an employment reference and is subsequently leaked to the general public.

In regulated industries such as banks, employers may fear the scrutiny of regulators if information leaks out about misdeeds of their former employees.

Adding fuel to the fire is a burgeoning cadre of "reference checkers." These services offer to pose as prospective employers and find out what an individual's references will say about her.⁴ 

WHY WOULD YOU EVER GIVE A REFERENCE?
With all the legal, financial, and public relations issues that hinder the reference process, is there any reason why anyone would provide a reference about a problem employee? Actually, there are a number of good reasons.

To begin with, "what goes around comes around." In the same way that an employer can be sued for negligent referral in providing deceptive references, he can also be sued for negligent hiring if he fails to perform due diligence in the hiring of an employee who then causes harm.5
Prospective employers need to be able to get honest and reliable references from past employers to protect themselves from negligent hiring claims. If all employers clam up, wrongdoers are given carte blanche to bounce from employer to employer. Instead of lawsuits arising from references, employers face a variety of losses arising from actions of employees whom they never would have hired if they'd had reliable information.

The law has recognized the legitimate need of businesses to get honest referrals. Consequently, employers in most states are protected by either reference-immunity legislation and/or a common law qualified privilege. The qualified privilege protects the employer from litigation over employment references as long as the reference:

• is based on an evaluation of the applicant's work and ability and is specific to the job;
• is made by someone in a position to know;
• is verified before it's disclosed;
• is disclosed to prospective employers who have a need to know; and
• isn't done maliciously.

The privilege typically only applies when a reference is requested from a current or former employer and won't protect a former employer who initiates communication with a prospective employer.⁶ The privilege doesn't protect non-employers who are asked for references, such as educators or friends of the applicant.

HOW CAN YOU MAXIMIZE INFORMATION FROM REFERENCES?
In the interest of fraud prevention, you'll want to find out as much as is legally allowable about your prospective new hires. There are some specific steps you and your organization can take to maximize useful information from references.

• Ask prospective employees to list former employers and job references and provide permission for you to check references whether listed or not.
• Have prospective employees sign a waiver releasing prospective and former employers from any claims related to those references.⁷ 
• Ask applicants what criticism they expect from former employers.
• If an applicant won't authorize you to contact a former employer, ask for reasons.
• Before you contact references, prepare a list of the important information you want to gather.
• If a previous employer hesitates to talk, offer to fax him a copy of the liability waiver.
• As opposed to relying only on the most recent employer, try to get referrals up to seven years back, particularly if the last employer was a temp agency.⁸  
• Encourage former employers to talk about the applicant's specific duties, work quality, work habits, and interactions with supervisors, peers, and subordinates.
• Ask the employer if he would hire this individual again if he could. A hesitation doesn't bode well.
• If an employer responds to some questions but won't respond to others, it's probably an important signal.
• Always ask whether there's anything else you should know or should have asked about the candidate.
• Document all of your reference attempts, whether successful or not.
• Don't confine your reference activity to supervisors. If possible, consult former coworkers and subordinates. If they won't talk, it's not a good sign.
• Personal references, such as friends, are worth the effort to contact. You can ask about qualities, characteristics, or knowledge the applicant might have if it's relevant to the job.
• If a reference is uninformed about the candidate, ask if they know someone who might provide more useful insight.
• If you're trained in deception detection, you'll listen not only for what you're being told but also for what you aren't being told.
• Do some online searching for "self" references that prospective employees and their acquaintances provide publicly in social network Web sites such as myspace.com or xanga.com.
• Many professionals in this area encourage employers to request all references in writing and get all references in writing. The benefits of this documentation should be weighed against the potential loss of information and spontaneity. Don't, however, assume that any conversations are "off the record" just because they aren't in writing.
• Finally, I haven't seen this suggestion anywhere, but I wonder what role a fraud hotline might play in this process. Most articles on hotlines suggest that we make employees, customers, and suppliers aware of our anonymous hotlines. Hotline reports by suppliers have been instrumental in detecting fraud cases. Because former employers are often our suppliers of labor inputs, what might happen if we routinely sent all parties from whom we requested references a card about our fraud hotline?

ALLEVIATE EMPLOYER CONCERNS
There are clearly many factors that may discourage former employers from tipping us off to fraudulent or other undesirable activity by their ex-employees. The impediments are not trivial, so when employers know or suspect problems, there's no surefire method to elicit this information from them. However, there are a number of steps we can take to alleviate employer concerns and increase our probabilities of extracting useful information and avoid hiring a fraudster.

1. Association of Certified Fraud Examiners. (2006). 2006 ACFE Report to the Nation on Occupational Fraud and Abuse. Austin: ACFE. 
2. See, for example, Randi W. v. Muroc Joint Unified School District, 60 Cal. Rptr. 2d 263 (1977); Davis v. Board of County Commissioners, Doña Ana County, No. 1999-NMCA-110 (Ct. App. 1999); or Kadlec Med. Ctr. v. Lakeview Anesthesia Assoc., No. Civ.A. 04-0997 (E.D.La. May 19, 2005). 
3. Carrico, M. L. (2000). "References and the Defamation Trap," Employment Law Alliance: News Room. 
4. For an example, see Allison & Taylor Reference Checking Services at www.myreferences.com. Retrieved Aug. 15, 2006. 
5. See Pittard v. Four Seasons Motor Inn, Inc. 101 NM 723, 688 P.2d 333. 
6. Op. cit. Carrico. 
7. Shin, J. (2003). "Avoiding Libel And Slander Claims: What You Can And Cannot Say About Your Employees In Today's Tight Job Market" [Electronic Version]. Employment Law Alliance: News Room. Retrieved Aug. 22, 2006  

Carol Johnson, Ph.D., Educator Associate, is an associate professor of accounting at Oklahoma State University in Stillwater.