Employee referral programs that award bonuses to employees who refer qualified candidates have proven effective as a recruitment strategy. Increasingly, some companies have used their employee referral programs to strategically recruit diverse talent by paying higher referral bonuses to employees who refer women, underrepresented minorities, veterans and other diverse candidates. Such programs can effectively help companies achieve diversity goals. But is it legal to pay more to recruit women and diverse hires?
In 2014 and 2015, various technology companies began to use background checks and
pay increased referral bonuses to employees who referred candidates who are women, minorities or veterans. These tech industry companies’ employee bases were predominantly male, and they struggled to recruit minority candidates. Yet, after incentivizing female and diverse referrals, diverse hiring increased.
Thereafter, more companies followed suit. In 2016, Pinterest modified its employee referral program, requesting that its employees refer diverse candidates (though no financial incentives were employed). In February 2016, Accenture committed to sharing its employee data publicly and to paying employees “enhanced” bonuses when they refer black, Hispanic, women or veteran candidates that resulted in successful hires.
These enhanced referral programs have seen success and can provide a robust, business solution to enhancing diversity and inclusion efforts. But on what basis could they survive a legal challenge?
The distinction lies in recruiting practices versus hiring practices. To be clear, it is improper and illegal to hire someone based on their race, color, religion, sex, sexual orientation, gender, national origin or other protected category. But ensuring that a company has diverse candidates in its recruiting pipeline is not only fair game, it is also strongly encouraged by federal agencies and watchdog organizations, and quite frankly, it is the right thing to do. For example, both the Department of Labor’s Office of Federal Contract Compliance Programs and the U.S. Equal Employment Opportunity Commission specifically recommend using employee referral programs as a diversity recruitment strategy, while welcoming and considering all applicants for hire, regardless of race, color, gender or other such status. And to date, no published case law authority has held that paying higher bonuses to encourage referrals of diverse candidates is illegal or discriminatory.
Historically, diverse candidates have faced barriers to accessing non-diverse workspaces. For example, certain discrimination lawsuits in the U.S. have established that even facially neutral employee referral programs have run afoul of disparate impact laws in the U.S. That is, in non-diverse workspaces, employee referral networks often operate homogeneously, to the exclusion of diverse candidates, and perpetuate the onsite lack of diversity. In short, absent incentive to do otherwise, employees tend to refer candidates who look like them and share the same background. While neutral on their face, such programs can freeze the discriminatory status quo and otherwise deny access to women and diverse candidates. [See In the Matter of: Office of Fed. Contract Compliance Programs, United States Dep’t of Labor, 11-OFC-00006 (Aug. 5, 2013) (“To make a case of disparate impact a plaintiff need not show intent to discriminate. It may make its case by showing that a facially neutral employment practice caused a statistically significant disparity with respect to a protected class.”); Watson v. Fort Worth Bank & Trust, 487 U.S. 977, 987, 1008 (1988) (“[T]he necessary premise of the disparate impact approach is that some employment practices, adopted without a deliberately discriminatory motive, may in operation be functionally equivalent to intentional discrimination.”)]
Thus, focusing on the recruiting pipeline to ensure that more women and minority candidates are part of an increasingly diverse applicant base makes sense, as it diversifies the pool of potential hires. In this way, companies can proactively promote a more diverse workforce by increasing bonuses paid for these referrals, in an effort to incentivize and introduce more diversity into their recruitment pipelines. So long as businesses monitor their hiring practices to ensure that all qualified applicants are properly considered for employment, regardless of their race, color, religion, sex, sexual orientation, national origin or otherwise, then such enhanced referral programs are not unlike job fairs, scholarship and internship programs that encourage female and minority students to apply—recruitment tools that diversify the recruiting pipeline for potential hires.
• Efforts to encourage referrals of diverse candidates in a company’s recruiting pipeline is encouraged by federal agencies. A program that pays higher bonuses to current employees who refer diverse candidates is likely legal, but companies should continue to monitor evolving legal and regulatory requirements.
• Importantly, a company’s policies and practices around hiring should continue to ensure fairness and equity regardless of categorical status, in step with legal requisites. Yet businesses should do what they can to ensure that diverse candidates make it into their recruiting pipelines and applicant pools.
• Proactively promoting diversity by increasing employee referral bonuses to current employees who refer women and diverse candidates, may be an effective tool to further diversity goals and combat subconscious bias in recruiting.
• Moreover, referral bonus programs are the right thing to do and can provide companies a highly effective diversity recruitment strategy, particularly in industries that may struggle to recruit and retain diverse talent.
The views expressed in this article are exclusively those of the author and do not necessarily reflect those of Sidley Austin LLP and its partners. This article has been prepared for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers.