Legal Regulation of Employment Reference Practices
University of Virginia School of Law, Legal Studies Working Papers Series No. 96-25
Posted: 29 Apr 1997
Date Written: October 1996
A lively debate has raged in recent years about how to regulate employment reference practices. According to the conventional account, employers refuse to provide candid references because they fear defamation liability and perceive only the most speculative benefits from exposing themselves to the risk of suit. As a result, almost everyone appears to agree that employers are getting too little information about prospective employees. An intuitively appealing response to this problem would be to impose on the former employer a duty to disclose. Another obvious possibility is to reform defamation law so as to reduce the threat of liability that employers face when they provide candid references. Although these are plausible policy options, prior commentators have seriously underestimated the difficulty of designing appropriate legal reforms. The framework that I develop in this Article highlights the unique problems associated with regulating information flows and reveals complex interactions among the various legal and economic forces that influence employment reference practices. In particular, I examine three potential inefficiencies arising from employee turnover -- mismatching, churning, and scarring. Contrary to the conventional wisdom, I conclude that defamation law functions reasonably well in its present form, that disclosure obligations might well produce more harm than good, and finally that the most promising legal reforms are those that focus on the problems associated with hiring for high-risk occupations. I also explore how the law might facilitate both preexisting and innovative market mechanisms for information sharing.
JEL Classification: K31
Suggested Citation: Suggested Citation