When references can be too frank

Michael Johnson, a City of London IT manager, has brought a lawsuit against his former employer Perot Systems Europe, the computer consultancy, in which he claims the firm gave him a defamatory reference. He is demanding more than 10m (€15m) from Perot for loss of earnings and damage to his reputation.

After leaving Perot, Johnson worked for Deutsche Bank for 10 months. The claim says he was dismissed in 2001 after the bank received the unfavourable reference. This related to work Johnson had done at Perot on behalf of UBS Warburg.

Neither bank is a defendant in the case and both declined to comment. But the claim is likely to ring alarm bells throughout the City. Since December 2001, the UK Financial Services Authority has obliged employers to provide "all relevant information" in references for the thousands of individuals registered with the supervisory body.

This means banks may no longer provide rudimentary references, as they often used to. These glossed over any incompetence and revealed only an employee's job title and dates of employment.

But companies that provide negative references under the new system risk provoking a case like Johnson's.

Andrew Pullman, head of human resources for capital markets at Dresdner Kleinwort Wasserstein, says if registered persons are not competent in their role, this must be reported in a reference. "Employers need to take care in ensuring accurate references are given in order to avoid the consequences."

The law governing references is complex. A 1994 case, Spring v Guardian Assurance, established that employees who suffer loss resulting from an inaccurate reference can claim negligence against their former employer.

In another case, Cox v Sun Alliance in 2001, the court said organisations must ensure they are accurate and fair in their conversations with prospective employers.

Stephen Lorber, a solicitor at the law firm Lewis Silkin, says referees must ensure that references are not negligent and that no part of them is defamatory. Court cases involving references are becoming increasingly common, he believes.

In an effort to avoid legal pitfalls, human resources departments take responsibility for providing a legally sanitised written reference. However, companies looking to hire candidates frequently also seek a reference from the individual's manager. These are often given over the telephone, making it difficult to prove afterwards what has been said.

Alan Beazley, managing director of Zephon Screening, a firm that validates references for banks, said personal references from managers provide "valuable colour". But, because they can be subjective, he advises that two or three should be obtained, and that former employees should be given a chance to respond to what is said.

Zephon was involved in Johnson's case. One of the firm's researchers called his former boss, a Perot employee who, like Johnson, had been working on a project for UBS. In his lawsuit, Johnson says his boss described working with him as "the most horrendous episode I have experienced in my working life".

The claim also says the boss alleged that Johnson had been "kicked out" of another bank that he worked for previously and added that this was "something to do with obtaining a mortgage from the bank fraudulently".

Johnson's claim says this was untrue. Johnson had been erroneously registered as a possible fraudster with a credit organisation by Abbey National but the bank had later apologised and retracted the accusation, the claim says.

David Spencer-Butler, managing director of Financial and Personnel Research, a reference checking company, says referees prefer to discuss sensitive matters on the telephone rather than in writing. "It's a matter of perception. People think they won't be liable for what they say on the telephone. This is not the case."

Many banks forbid employees from providing references by telephone. The head of human resources at one bank says Johnson's case is prompting a fresh look at its policy on oral references. "It's impossible to know what line managers are saying. There could easily be inconsistency between written and oral references. It's an area of potential risk."

Richard Martin, an employment solicitor at law firm Gouldens, says individuals who provide personal references about previous colleagues are personally liable for the outcome. However, employers are also liable and claimants usually sue the companies because they have deeper pockets to pay compensation.

Johnson's case, which is being defended by Perot, has been delayed by procedural wrangling. Perot declined to comment on the case. The next hearing is scheduled for next month.

But if Johnson eventually wins even a fraction of what he is claiming, many more claims involving references are likely to head for the courts.