UK: Employee References - The Pitfalls

Last Updated: 19 October 2001
Article by Oliver s'Jacob

Introduction

While most employers will not take on a new employee without a satisfactory reference, the provision of references does involve a number of legal issues. Not only do employers have to consider their duty of care to a prospective employer but, in so doing, they must also avoid breaching their varied duties to the employee. In addition, employers will sometimes also need to comply with further responsibilities imposed by a regulator.

This note seeks to outline the main pitfalls and suggest practical ways of minimising the risks. It will also consider briefly the legal issues that sometimes arise when a prospective employer receives an employee reference.

Giving References

Duty to the Prospective Employer

Fraudulent misstatement

An employer who knowingly makes a false statement in a reference intending it to be relied upon is clearly liable if the recipient suffers a loss as a result of that reliance.

Although it may appear unlikely that anyone would intentionally make a false statement in a reference, there are instances of some employers providing glowing references to head-hunters in order to ease an unsatisfactory employee out to another job. By making the employee believe he or she has been "headhunted" or otherwise recruited, the employer is seeking to avoid any question of unfair or constructive dismissal. However a claim for fraudulent misstatement could be the end result if the recipient of the reference finds that its new employee does not meet the expectations that the reference was designed to engender.

Negligent misstatement

Since the House of Lords decision in Hedley Byrne v Heller [1964] it has been clear that a person could be sued in negligence for giving a reference without taking reasonable care to ensure that it is true and correct where:-

a. it is reasonably foreseeable that the reference will be relied upon by its recipient; and

b. that recipient suffers loss as a result of such reliance.

This decision led to employers almost invariably incorporating an appropriate disclaimer in their references to the effect that, although their contents are believed to be true and accurate, no liability in respect of them will be accepted.

However, although a suitably worded disclaimer should be effective against the recipient of a reference (i.e. a future employer), it will not of itself be of use against a claim by an employee.

Duty to the Employee

Negligence

Since the House of Lords gave its judgement in Spring v Guardian Assurance Plc and Others [1994], an employee who suffers loss as a result of an inaccurate reference has had a clear claim in negligence against his former employer.

This principle was enhanced by the Court of Appeal in Bartholomew v London Borough of Hackney [1999] when it decided that the duty in Spring was not only to provide an accurate reference but also a fair one. In other words, even if a reference is factually accurate, an employer must also take reasonable steps to ensure that it does not give a misleading or unfair impression.

In some cases, employers will be under a duty to provide a "full and frank" reference by the rules of their regulatory organisation. Nevertheless employers should not simply use these rules as a fail-safe model as they are not relevant to the question of whether or not, vis-à-vis the employee, a reference is fair and reasonable (TSB v Harris [2000]).

However, it is not all bad news for employers. In Kidd v AXA Equity & Land Life Assurance Society Plc [2001] the High Court declined to extend the duty on employers to ensure that references are full and comprehensive. In essence, any omission (and, by analogy, inaccuracy) needs to be material (that is to say, reasonably likely to have had a material effect on a reasonable recipient) before a court will find a breach of duty on the part of the employer. Therefore, employers need not worry about creating the perfect reference but should simply ensure that what it does say is accurate and that it does not leave out information necessary to prevent the reference from being, on balance, misleading or unfair.

A recent case on this subject is Cox v Sun Alliance [2001], in which the Court of Appeal was faced with a claim by an ex-employee of Sun Alliance who resigned while subject to disciplinary proceedings. Mr Cox had originally been suspended after a rift with other staff in his office but resigned before any proper investigation had been carried out. Although there had also been an (unfounded) allegation that Mr Cox had received improper payments, at no time was he accused of dishonesty or the allegation discussed in detail with him.

Despite an agreed written reference being incorporated in the settlement agreed with Sun Alliance, the latter's personnel director gave an oral reference to Mr Cox's prospective employers which suggested:-

    1. that Mr Cox had left while under the shadow of disciplinary proceedings;
    2. that this was due to the allegation of financial impropriety; and
    3. that Mr Cox's honesty was questionable.

The Court found that Sun Alliance had failed to take reasonable care either to be accurate or fair when speaking to the prospective employers and gave the following guidelines for cases where, before the employer has completed disciplinary proceedings, the employee under investigation leaves:-

An employer should, before divulging unfavourable information in a reference about the conduct in question:-

  • genuinely believe that the employee was guilty of the alleged (mis)conduct;
  • have reasonable grounds for that belief; and
  • have carried out as much investigation into the matter as was reasonable in the circumstances.

The Court of Appeal stressed, however, that employers were not thereby being put under any obligation to complete pending investigations against an employee in order to provide a fair reference.

Defamation and Malicious Falsehood

Although it is possible for an aggrieved employee to sue an employer in defamation for a reference which attacks his or her reputation, the employer will usually have the defence of qualified privilege. This defence will apply so long as the employer honestly believes that the statements it makes are true. Unless the employee can prove malice or some other improper motive by the employer, the claim will fail. Likewise claims for malicious falsehood also require an employee to prove malice on the part of his or her employer and so are equally unlikely to succeed.

Contract

Although the majority of the case law has been concerned with claims in negligence, there appears to be a number of possible ways in which an employee might instead sue for breach of contract in relation to an unfair or inaccurate reference.

Compromise Agreement

In the Cox case, the Court of Appeal suggested that problems could be avoided where a fair and accurate reference is "fully discussed, clearly agreed and carefully recorded in writing" at the same time as other severance terms. Generally this should be done by way of a compromise agreement but even in cases where this is not suitable it is always wise to try to discuss and agree a form of reference in advance with the employee and, if possible, obtain their written consent to its disclosure (see also References and Data Protection below).

In the end, the employee's contractual claim in Cox was not ruled upon by the Court of Appeal as the employer was held liable in negligence in any event. However, employers should note that any departure from a contractually agreed reference, including by way of verbal communication, would normally give rise to contractual liability if the employee suffers loss as a result. If for some reason, therefore, such departure from the agreed terms is required or is being considered, it should if possible be discussed and agreed with the employee in advance.

Contract of Service

In TSB v Harris, the Employment Appeal Tribunal held that the provision of an accurate but misleading reference was in breach of the implied duty of mutual trust and confidence owed by the employer to its employee as part of that employee's contract of service. This breach was sufficient to entitle Ms Harris to resign and claim constructive dismissal against TSB.

The reference in question stated that a number of complaints had been made against Ms Harris but omitted to mention that some of these had been investigated and been found to be unsubstantiated. Additionally the employer had not informed Ms Harris of the complaints nor given her a chance to respond to them before including them in the reference.

The Tribunal was of the view that, given the reliance that would be placed upon the details of the complaints, it was imperative that her employer verify that the information held in its files (upon which the reference was based) was correct and substantiated.

In the Harris case, the employee was still employed by the author of the reference at the time it was given so there was no doubt that the implied duty of trust and confidence was maintained. However, this duty usually falls away on termination and it remains to be seen whether a former employee could have a valid contractual claim in similar circumstances.

It is also quite possible that the duty of mutual trust and confidence will in time be extended further to oblige an employer to provide a reference in the first place. Although there is currently no such general duty under the common law, the House of Lords has already suggested that employers obliged to provide references by the rules of their regulatory organisation are also under an implied contractual duty to their employees to do so (Spring).

Exclusions

In the same case, the House of Lords suggested in passing that employers might be able to set parameters within which a reference is given, including, for example, agreeing to give a reference only if the employee signs an exclusion or disclaimer of liability in return. To the extent that this is contractual, it will only be valid if it satisfies the requirement of reasonableness contained in the Unfair Contract Terms Act 1977. However an employer is unlikely to have any problem satisfying this requirement if the reference has been discussed and agreed in advance between the employer and the employee (see Compromise Agreement above).

Discrimination

As already mentioned, employers are not generally under a common law duty to give references at all. However, the decision in Coote v Granada Hospitality Ltd [1999] is a stark warning that, if employers refuse to give a reference in respect of an employee who has brought a sex (or race or disability) discrimination claim against them in the past and the refusal can be shown to be because of that previous claim, they are in serious danger of bringing upon themselves a further discrimination or victimisation claim. Ms Coote was awarded some £195,000 in damages, so the risk is certainly one to consider carefully.

If the earlier claim is still being litigated, however, employers are permitted in a reference to preserve their position pending the outcome of the claim (Chief Constable of West Yorkshire Police v Khan (2001)).

As regards sex discrimination, the principle holds true whether or not the employee is still employed when the employer refuses to give a reference. The situation is in theory different in the context of race discrimination claims. Although the relevant sections of the Sex Discrimination Act 1975 and the Race Relations Act 1976 are identical, the involvement of EU law in sex discrimination cases required the tribunal in Coote to expand the meaning of the words "a woman employed by him" to include women suffering victimisation after their employment had ceased. At least for the time-being, this expanded meaning does not apply to cases of race discrimination (or, for that matter, discrimination based on disability or membership of a trade union) although it remains to be seen how long this rather artificial distinction will last.

Unfair Dismissal

Another reason why employers should be particularly careful when providing a reference is that it can come back and bite them in the form of an unfair dismissal claim. Employers are understandably often tempted to give favourable references where there is a parting of ways so that both parties can move on as quickly and easily as possible (see Fraudulent Misstatement above). However, if an employee is dismissed, say, for incompetence, the employer will have an uphill struggle convincing a tribunal that it had a fair reason for dismissal if the employee can present an exemplary reference from the employer as evidence in reply.

Once again a suitable compromise agreement between employer and employee, incorporating an agreed reference should normally eliminate the danger of this happening.

Receiving References

It is usually the case that, for obvious practical reasons, an employer will not take up references until a job offer has been made and accepted. It is therefore imperative that the contract of employment is made explicitly conditional upon the receipt of satisfactory references.

The good news for employers is that the courts will not usually interfere with an employer's opinion as to whether or not a reference is satisfactory.

However employers should always ensure that the initial job offer makes it clear that the offer is subject to satisfactory references being received. If this condition is only communicated after the job offer has been made and accepted by the employee, a valid contract will already be in existence, making it too late to try to impose further conditions. It is unlikely that a court would imply the condition into the contract.

Ideally job offers and/or employment contracts should also provide for dismissal without notice in the event that an unsatisfactory reference is received after the employee starts work. This should prevent any later argument that the employer has waived the satisfactory reference condition by allowing the job to commence. Watch out, of course, for unfair dismissal claims where the reference is received and/or acted upon more than one year after the job started (especially if the reference reveals only minor previous defaults by an employee whose performance for the new employer has been satisfactory during that year).

References and Data Protection

The giving of a reference to a third party amounts to the processing of data and is therefore subject to the provisions of the Data Protection Act 1998 ("DPA"). The DPA generally permits the giving of a reference so long as it does not include any sensitive information (as defined in the DPA) since the recipient of the reference has a legitimate interest in receiving it.

If, however, a reference is to include sensitive information, the explicit informed consent of the employee is required. Sensitive information in this context will include information about absences due to illness and also any information about an employee's conduct which would indicate that a criminal offence has been committed. Employers should therefore be extremely wary in cases where an employee's honesty has been brought into question. Additionally the DPA will usually prohibit giving a reference to a recipient outside the European Union. In either of these cases, employers should get a signed consent from the employee.

References are not covered by the usual rule that employees have the right to see any documents which relate to them, but the exemption applies only to disclosure by the author of the reference and not disclosure by the recipient. An employee may therefore request a copy from a new or potential employer under the DPA. Although the new or potential employer will in turn need to obtain consent from the author of the reference (i.e. the former employer), if such consent is not forthcoming the new employer makes the final decision as to whether, on balance, the benefit of disclosure to the employee outweighs the duty of confidentiality to the author.

The most sensible approach therefore is for employers to assume that any reference they produce will eventually be read by its subject. If in doubt, an employer would be well advised to get a signed consent from the employee before sending a reference on to a new or potential employer.

Conclusion

The onerous obligations placed on employers have led some to ask whether or not it is worth giving references at all. Although there is currently no general common law duty to do so, it is not inconceivable that one will shortly be recognised.

In any event, the giving of references is often mandatory in some sectors, e.g. in financial services and certain social services, and it is generally thought that to do so is good practice. This owes mainly to the moral obligation to provide a reference (recognised by the House of Lords in Spring), presumably because of the often severe consequences for the employee if an employer did not. However employers must also be aware of the risk that they may be the subject of bad press themselves if they unnecessarily hamper employees' career prospects by refusing to provide references "point blank".

Although the burden seems high, the duties of an employer really boil down to taking reasonable care not to give misleading information either as a result of the unfairly selective provision of information, or by the inclusion of facts or opinions in such a way as to create a false or mistaken inference in the mind of a reasonable recipient.

Ideally, employers should always discuss and agree the form of any reference with an employee in advance and get the employee to sign a suitably worded consent to disclosure and exclusion of liability. However, where this is impractical, employers should consider limiting their references to a mere confirmation of the employee's details rather than a commentary on his or her character, conduct and integrity.

Reference requests in the form of questionnaires sent by the proposed recipient should generally be avoided as their contents will often be "loaded" in a certain way. Refusing to answer some of the questions, even for innocent reasons such as lack of information, can give a false or misleading impression about the subject of the reference. Where possible, employers should therefore always provide references in their preferred format and on their own terms.

A uniform policy is necessary in relation to references, making it clear who is permitted to write them and what they should contain. Employers should beware of refusing to give references where this could be seen to be discriminatory or where the refusal itself constitutes adverse or critical comment.

Finally, if an employer giving or receiving a reference is a public authority, further issues (not set out in this note) might be raised by the Human Rights Act 1998, which incorporated the European Convention on Human Rights into English law. Please contact us if you have any concerns in this regard.

 

This briefing note is intended to raise your awareness of certain issues (as at October 2001) under the laws of England and Wales, and is not intended to be comprehensive or a substitute for proper advice which should always be taken for particular queries.

© Gouldens October 2001

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