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When an employee leaves on good terms, most employers are happy to give them positive reviews when a future employer calls for references. When the parting is on no-so-good terms, well, that makes the reference decision not-so-easy.
Most employers are wary of speaking ill about their former employees, especially when they run the risk of a defamation lawsuit. Of course you can always choose not to respond to reference requests, but how can employers provide negative references and avoid getting sued?
As noted above, you can't get sued for a bad reference if you don't give a reference at all. It could help to advise an employee who is being fired or otherwise leaving on bad terms that, if asked, you won't provide them with a positive reference. This could keep them from listing you as a reference in the first place.
Of course, prospective employers could still call in order to confirm an applicant's employment history. In this case, you can confine your discussion to the dates of his or her employment, position, and salary, and leave it at that.
There are two lawsuits a former employer has to be concerned with. You could be sued for defamation, which is providing false statements that hurt a person's reputation. Or, you could be sued for negligent misrepresentation for failing to disclose negative or improper behavior. If the applicant repeats the same offending acts at his or her new job, you could be liable for not warning the new employer.
The best way to avoid either lawsuit is to stick to the facts. Don't give a rave review if you've fired an employee for serious misconduct. But at the same time, don't overinflate transgressions or speculate on any wrongdoing.
A key element to any defamation claim is that the statement at issue is false. If you tell the truth about your employee's history, and only the truth, that's the simplest defense to a defamation lawsuit. And by accurately putting a new employer on notice about an applicant's past, you can avoid a negligent misrepresentation lawsuit. Just make sure you keep extensive and accurate records about employment history.
The best way to stay out of trouble may be to have a company-wide policy to confine your responses to employment dates only. As long as all of your managers are consistent and follow the set policy, it may be the best way to avoid liability for the company as a whole.