The legal risks of providing references on ex-employees has caused some companies to put up a "No references" sign. That's not a smart move. Eventually, refusing to provide references on ex-employees will compromise your own ability to find out about applicants.
As long as the reference information you provide is objective and well documented, courts will likely side with you if a former employee files a defamation suit. But your legal protection disappears if you mislead a prospective employer about an ex-employee or you make accusations with malice or deliberate ill-will.
Stick to verifiable facts when giving references, not vague observations. That can even mean limiting your references to basic data on employment dates, job duties and salary. Also, don't try to stand in the way of an ex-employee's future employment as a way to "get back" at the worker. And make one person on staff responsible for handling reference inquiries.
When must you speak up? You can be sued if you fail to provide potential employers with information about an ex-employee's dangerous or illegal behavior. Plus, certain employers, such as those in the health care and child care business, are bound by federal and state law to report illegal conduct of former employees.
Recent case: A security company called an ex-worker's new employer to tell them she was suing for back wages and was improperly collecting workers' comp benefits. The employee heard about the tattling phone calls and sued for retaliation, claiming the actions caused her anxiety and panic attacks, not to mention possibly her new job.
A district court said the employee had a case, concluding that the call to the new employer, just two weeks after she filed her Fair Labor Standards Act suit, was an obvious retaliatory move. The call carried a "significant risk of humiliation, damage to reputation, and ... harm to future employment prospects." (Johnston v. Davis Security Inc., No. 148, DUtah, 2003)