Problems with employee referrals (Toughest HR question)

How to properly use the workforce as a recruitment agency
By Brian Kreissl
|Canadian HR Reporter|Last Updated: 10/01/2010

Question: I’ve heard about some issues associated with using employee referral programs as a way of sourcing candidates for recruitment. What are some of these problems and how can they be overcome?

Answer: With the war for talent set to resume as the economy improves, employee referral programs are poised to become even more popular as organizations ramp up recruitment activities. Employers that use innovative means of sourcing talent in a tight labour market are at an advantage when it comes to finding candidates who aren’t necessarily pounding the pavement looking for work.

Employee referral programs usually pay a bonus to an employee who recommends someone — typically a friend, relative or former colleague — for a position at an organization. These programs can be a highly effective means of sourcing candidates for a number of reasons:

• Existing employees have a strong understanding of an organization’s strategy, culture, mission and values, and are more likely to recommend someone who is compatible. They often understand what’s required to be successful on the job.

• Employees’ friends, relatives and former colleagues have usually had a realistic job preview provided by the employee.

• Since their reputations are at stake, at least to some extent, existing employees are unlikely to recommend someone they wouldn’t personally vouch for.

• Since like-minded people tend to stick together, a successful employee tends to have a network of suitably like-minded individuals with similar skill sets.

• Employee referral programs often produce candidates who aren’t necessarily applying to every online job posting available.

• Referral programs are usually more cost-effective when compared with more expensive channels such as search firms or newspaper and job board advertisements.

• Employee referral programs help facilitate effective employment branding since employees act as brand ambassadors in promoting a company as an employer of choice.

However, employee referrals can also have certain drawbacks. These include:

• Allegations of nepotism and unfairness. Some people feel employee referral programs are more helpful to employees’ friends and relatives than the organization.

• If employees are paid a bonus, some may refer too many candidates, including those who may not be qualified.

• If organizations rely too much on employee referral programs, they can become “inbred” with employees who are too much alike.

To overcome some of these problems:

• Have a policy stipulating referred candidates hired by the organization must stay for a minimum period of time before a payout is made.

• Have a maximum number of referral bonuses that can be paid out to any one employee during one year — that way, employees are more likely to concentrate on referring only the strongest candidates.

• Provide feedback to a referring employee if a referral doesn’t quite meet the requirements for the position.

• Don’t rely solely on referral programs as a candidate-sourcing strategy.

In addition to the above concerns, the biggest challenges associated with employee referral programs relate to legal compliance. First of all — and this is something that ties into the concern about employees being too much alike — when an employer relies too heavily on employee referrals, the diversity of the employee population often suffers as a result. This could lead to human rights complaints.

The biggest concern, however, relates to inducement — when a candidate is enticed away from secure employment elsewhere to come and join the employer. If that employee is then terminated without proper cause, the employer can be liable for additional inducement damages, over and above regular damages awarded for wrongful dismissal.

This was the case in Egan v. Alcatel Canada Inc., a 2006 Ontario Court of Appeal decision where a Bell Canada employee with 20 years’ service was persuaded by two former colleagues to come join their new employer, Alcatel. Unbeknownst to the employee, her friends were eligible for a substantial employee referral bonus if she joined Alcatel. After 21 months, she was terminated without cause with 12 weeks’ notice. She sued Alcatel for wrongful dismissal, alleging she was induced to join Alcatel by the company and her two friends.

At trial, the employee was awarded nine months’ salary in lieu of notice. The Ontario Court of Appeal agreed, saying the situation was far different from a headhunter actively trying to recruit an employee from another employer because the individual knows the recruiter is being paid for her efforts and that person is usually not a friend or former colleague.

In order to cover themselves, employers should disclose to candidates the referring employees are being paid a bonus. Secondly, it’s also important to communicate to employees they should not make false representations or promises to a candidate in relation to job security, promotional opportunities or financial rewards.

Brian Kreissl is the managing editor of Consult Carswell. For more information, visit

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