Your risk in providing employment references to prospective employers is that former employees may sue you if your references are unfavorable and lead to job rejections. The claim that former employees are most likely to assert is that the references are false and damaging to their reputations and, therefore, defamatory.

An employer may be liable to a former employee for defamation if the employer communicates to a prospective employer or other person a false statement that results in damage to the former employee's reputation. Defamation is commonly referred to as "slander" if the communication is verbal and as "libel" if the communication is written.

Awards in successful defamation suits may include damages for lost earnings, mental anguish, or pain and suffering and, if the employer's conduct was sufficiently egregious, punitive damages.

A successful defamation claim requires more than merely showing that an employer provided an unfavorable employment reference. Because employment references play an important role in hiring decisions, the law usually protects an employer who in good faith discloses information that the employer believes is true to a prospective employer or other person who has a legitimate interest in receiving the information. This protection may be lost, however, if the information is not limited in scope to the inquiry being made, is disclosed at an improper time, or is disclosed in an improper manner. For further details, see guarding against defamatory statements.

The following are examples of the types of statements that you should avoid making in giving employment references:

• Accusations. Accusations that an employee engaged in illegal or improper conduct frequently form the basis for defamation lawsuits. Employers have been liable for defamation for making statements to the effect that a former employee was a thief, used illegal drugs, or made "improper" advances to women. If you fired an employee because you suspected that the employee engaged in illegal or improper conduct and you feel compelled to state the reason for the firing, then restrict the statement to your suspicion ("Employee was fired because he was suspected of taking company property," not "Employee was fired because he stole company property"). However, don't even state a suspicion unless you can support it with objective evidence.
• Exaggerations. Employers can also get into trouble by exaggerating an employee's misconduct. For example, a statement that employees were fired for "gross insubordination" was defamatory when the employees' only alleged misconduct was their refusal to adjust their expense accounts.
• Statements not made in good faith. The general protection extended to employers giving employment references requires that the statements be made in good faith. An employer's statements are not made in good faith if the employer knows they are untrue or if the employer makes no effort to determine if they are untrue. For example, an employer who lied in stating that an employee had admitted falsifying expense records was liable for defamation. Similarly liable was an employer whose manager made negative statements about an employee's work performance solely on the basis of rumors. The manager had never supervised, worked with, or evaluated the employee and misrepresented to the prospective employer that he had actually worked with the employee.
• Statements made to improper parties. The general protection extended to employers giving employment references also requires that the statements be made only to persons having a legitimate business interest in the information disclosed. For example, you can probably tell an inquiring employer that an employee was fired because the employee was suspected of stealing business property, provided there are objective facts to support your suspicion. In contrast, expressing your suspicion to others, such as other employees or friends who have no real reasons for knowing the specific details why the employee was fired, may be defamatory.