Employee Referral Programs—The Good and the Bad

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Employee referral programs can be one of the best sources for hiring good employees. However, these programs can also come with some unintended consequences, if not implemented well. There are at least three good reasons for companies to have an employee referral program:

  1. Employee referral programs are typically less expensive to implement than other means of attracting talent, even with the incentives awarded to the referring employee. There are no ads or employment search engine subscriptions that need to be paid. There are no external recruiters to pay when if used can typically range from 15% - 50% of the first year compensation of the new hire. Also, the time from requisition to hire can be shorter, since candidates are typically identified early in the recruitment process. This lessens the need for temporary help or overtime payments. 
  2. The quality of the hires is often better. Referring someone for a job is viewed as a reflection on the employee doing the referring. Therefore, employees are less likely to refer someone who they don’t believe is capable of success in the job. 
  3. Having a friend at work can lead to greater job satisfaction and retention for both employees. Studies have also indicated that having a best friend at work can lead to increased productivity. 

With all these advantages, it’s hard to imagine why an organization would not reward their existing workforce to identify potential new hires. As long as companies are aware of potential pitfalls, they can take steps to avoid them. Referral programs can result in unintended disparate impact if the hires from your referral programs are not a diverse representation of your community’s labor force. Although an employee referral program probably doesn’t intentionally target any specific group, if employees refer candidates of the same sex, religion, race or national origin, or other class, and these individuals are selected, this can create an imbalance in the makeup of the workforce. Research has shown that employees often refer individuals most like themselves. So a company with an existing workforce that is not very diverse should consider whether an employee referral program is an effective program to use. 

Recent Office of Federal Contract Compliance Programs (OFCCP) lawsuits against two tech firms, Palantir Technologies and Oracle American Inc., illustrate this point. Both suits questioned the use of employee referral programs, and the impact they had on the selection of new hires. In the Palantir case, OFCCP alleges the employee referral system disproportionately excluded Asians. In the case against Oracle, OFCCP alleges the use of the referral program disproportionately favored Asians, specifically Asians of Indian descent. 

These lawsuits are ongoing, and we don’t know the outcomes. However, companies can take some proactive measures to ensure that an employee referral program doesn’t disproportionately favor or exclude any one group. First, an organization should ensure that the program is open to all employees, not just a specific department. In promoting the program, companies should emphasize the desire to achieve and maintain a diverse workforce. Possibly the most important action companies can do is to conduct on-going analyses of their workforce and applicant pools to determine if their hiring practices create unintended preferences or exclusions. And, if issues are identified with the employee referral program, there will be a need to establish a process for corrective action. One possible solution may be to limit the number or types of open positions for which the employee referral incentives are paid. 

In addition to the referral program, another action may be to use a variety of other recruitment methods to create a more diverse pool of qualified applicants. Eventually, there could be a need to eliminate the employee referral program. However, if an organization understands the benefits and takes safeguards to avoid pitfalls, creates a plan based on these understandings, monitors appropriately, and when necessary makes adjustments, they should be able to continue to reap the benefits while minimizing the risk.

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