References take on new meaning

It really used to be that simple. References did little more than list an employee's name, rank and serial number, providing he had kept his nose clean and left the firm's silverware intact.

The references were barely worth the paper they were written on. A good reference was bland and mostly free of detail. It often said more by what it left out, with the eloquence of omission. But, more often, the only reliable information to be drawn from a reference was that the prospective employee was not wanted for murder or fraud.

Now, an increasingly litigious culture leaves employers less room for manoeuvre if they include an evaluation of an employee's performance in the reference. A negative appraisal can close the door to future employment and open the lawyer's casebook.

At the same time N2, the powers acquired by the Financial Services Authority (FSA) towards the end of 2001 under the Financial Services and Markets Act, require financial services firms to seek and give references for customer functions. Those references come with a duty of care both to the subject of the reference and to the receiving firm.

A judgment in the 1994 House of Lords case of Spring v Guardian Assurance gave employers a duty to take reasonable care when writing a reference. It must be accurate and must not mislead the recipient. Two further cases, culminating in Kidd v Axa Equity and Law in 2000, led to the duty on the referee widening even further. The information contained in the reference must also be fair and balanced.

But, most tricky of all, under the N2 regime the employer is obliged to give full disclosure in its references for FSA-approved persons.

Susan Loughe, a human resources consultant at law firm Eversheds, says: "You have a conundrum. Employers want to give just the bare, documented facts. If they are sacked because they are incompetent, you now have to disclose that and the context of their incompetence." Was it a one-off or chronic incompetence? Was there any improvement? If it was a disciplinary issue, then even warnings must be disclosed.

Loughe says the rationale behind N2 is sound. The FSA is trying to stop the merry-go-round of incompetent employees. However, the more stringent regulatory environment might be self-defeating. At the least it is offering employees an opportunity to dictate the terms of their own references.

Loughe says: "We are seeing several interesting cases. Individuals who are approved under the FSA regime are, at the first sight of performance issues, whistle-blowing. They are saying: 'I am not incompetent, it is my employer's FSA regime that is failing me'. They claim that the firm's training for threshold competencies was insufficient."

That is when the firm that is trying to manage the exit of an incompetent employee has to start negotiations for the ticket for the next ride on the merry-go-round - a good reference and a decent pay-off. It is a commercial and regulatory minefield and one that the professionally challenged employee can usefully exploit. More and more employees are pre-agreeing references as part of compromise agreements before their departure from the firm.

And there is a suite of other options, such as alleging deficiencies in regulatory training, open to the unscrupulous employee, all of which can help in the negotiations of decent exit terms and a better reference.

Loughe says: "You can threaten a discriminatory claim, raise grievances over equal pay and use employment law to create a spectre to haunt the firm. There is more legislation coming on flexible working and maternity and paternity rights."

But there is no doubting the goodwill among the financial services industry's human resources professionals to tackle these issues. The City Personnel Group (CPG), the City of London's HR membership organisation, launched its own guidelines last year to give its members a consistent way to approach the issues raised by the N2 requirements.

Stephen Sidebottom, CPG chairman and an HR director at Dresdner Kleinwort Wasserstein says: "We hope these guidelines will contribute to a consistent, industry-wide approach to the disclosure of relevant information in employment references which is fair, compliant and practical."

A spokeswoman for HSBC says: "It has always been an important part of the different checks and we will always ensure we have received references for the protection of our customers, staff and shareholders."

But of course they would say that publicly. Privately, one headhunter says references are as irrelevant as ever they have been. "There is a lot of lip service paid, but when you are hiring, by the time you are checking references, there is often too much at stake. Especially in the current climate, no one wants anything to go wrong."

He says it is ironic that now there are fewer hires and more time to check candidates, there is less checking actually taking place.

Roger Steare, a career consultant, says it is a shame that even the N2 full-disclosure references tend to be bland. He says: "A good, well-written reference is about the best guide you can get, compared to interviews or psychometric tests. None of the others measure a candidate's track record. But most companies will only give the bare minimum and a huge rider."

Which is why there has been significant growth in the number of firms offering deep background checks. Alan Beazley, a director of Zephon Employee Screening, says: "There is an increased openness and people want to go beyond the cv and reference and that's where we come in. In quite a lot of cases we even go as far as telephone interviews with the candidate's line managers."

Beazley is optimistic. He says: "Firms have a legal obligation with approved persons. For the first time they have had to join up appraisals, compliance and HR to form a virtuous circle."

But it is far from perfect. So even if you have failed to turn up, failed to do your job, stolen the silver and picked up a poor reference, then there is still a chance.

Beazley says that employment agencies are the way in. "The greyest area is where people have worked in temporary positions on contract. Employment agency reference checking is not as thorough. It is possible to then apply for a full-time post from the inside."

But the best way to get a good reference? Do a decent job, watch your back and make sure you have some dirt on your boss.