Referrals from current employees are the most common way companies find new hires, according to several surveys. But that doesn’t mean they always provide the most qualified candidates.

Companies trust their referral programs for good reasons — they’re cost effective and generally produce successful employees who stick around. But relying too heavily on referrals can lead to several problems, such as:

1. Discrimination charges — When employers over-rely on referrals, the pool of applicants can get very homogeneous, excluding members of some protected classes. In one recent case, Wal-Mart lost a court fight based on allegations that its referral process screened out African-American truck drivers.
2. No variety — Beyond just avoiding lawsuits, companies benefit when workers come from different backgrounds and experiences. Current employees are most likely to refer applicants who are just like them — which is not always the best thing.
3. Cliques — When referrals are frequently used, companies get big groups of employees who already know each other or have something else in common — for example, they may all have come from the same previous employer or graduated from the same college. That can make it easier for employees to form cliques, which might create friction with other co-workers.
4. Flood of low-quality applicants — Of course, employees aren’t always going to make a referral just because they know someone who’s a perfect fit. It could be to do a friend a favor, or for the bonus if one is offered. Problems can arise when managers give referrals too much weight in the decision-making process.

What HR can do

Does that mean employers should eliminate their referral programs? Of course not. But HR should take some steps to make sure referrals are really bringing in the best hires:

• Make sure managers understand this simple rule: Referrals help bring candidates into the applicant pool — they shouldn’t replace interviews and other tools used to pick the best candidate.
• Let employees know their reputations will be affected (positively or negatively) by the candidates they refer. That’ll help them screen their referrals even more closely.
• Don’t treat every job the same — some are easier to find applicants for than others. A targeted approach is better — the reward should be higher when finding a candidate for a tough-to-fill position.

And, of course, referrals should be used in conjunction with other recruiting strategies — not as a replacement.

Does your company use referrals to find new hires? How do you make sure the program is successful? Let us know in the comments section below.

Referrals are one of the most trusted and time-tested ways to recruit new employees. But a recent court ruling offers a warning to any companies that use them:

An African-American man applied to be a truck driver in Wal-Mart’s delivery fleet, but was rejected.

He sued the company, claiming its hiring practices for truck drivers unfairly screened out minority applicants.

Wal-Mart’s truck drivers were recruited “almost exclusively” through a referral program. All current drivers were given cards to hand out to anyone interested in getting a job. The cards listed minimum qualifications and a number to call to get an application.

In addition to finding candidates, current drivers were also heavily involved in the interview process. Applicants who passed an initial screening were interviewed by a panel of employees who chose which applicants to send to the hiring manager.

The rejected applicant claimed the mostly white workforce was only recruiting and hiring white applicants. He found some statistics to bolster his case: Though African-Americans make up 15% of all U.S. truck drivers, only 8% of Wal-Mart’s drivers were African-American.

Wal-Mart argued there was no intentional bias. But the court said it didn’t matter, citing other decisions that ruled a referral program can be the source of accidental discrimination.

The judge let the case move forward as a class action lawsuit (Cite: Nelson v. Wal-Mart Stores, Inc.).

Should you scrap referrals?

Relying too heavily on referral programs can lead to costly problems. In another case, nearly all of a company’s new hires were referred by current employees. The result: Most new hires were white.

After failing to have the case tossed, the company settled for $2.5 million (Cite: E.E.O.C. v. Carl Buddig & Co.).

Does this mean companies should stop asking employees for referrals? Of course not. When done correctly, referrals are still a legal, cost-effective way to recruit.

The EEOC recommends companies keep track of which groups a referral program brings in and scale down their reliance on that strategy if the results look biased.

The common approach: Ask current employees whom they know that might be interested in a job.

It works, but companies can also get valuable leads by asking former employees and new hires, says hiring consultant Mel Kleiman.

Think about it: The people who’ve been with your company for a while likely don’t have as wide a network of folks outside the organization as newbies and alumni.

New hires may know colleagues at their previous employer who are also looking for a new place to work.

Your company’s alumni may know some good people, too. Keep in contact with them — you may even be able to bring some of the former employees back.

In today’s economy, many companies are working with tight recruiting budgets. That’s why now is the perfect time to revisit some tried and true ways to attract talent without spending a lot — or sacrificing the quality of new hires.

Just look around. HR departments already have plenty of resources available — the company’s Web site, current employees, alumni, etc. What’s working best today?

Here are some of the top low-cost strategies experts recommend:

1. Blogs – Ask employees to write blog posts about what it’s like to work at your company. Also, find out if any of them contribute to other blogs related to their professions. If so, they can include some positive words about your organization.
2. Alumni employees – Especially in this rough economy, your company may have some ex-employees who are regretting their decision to leave and will be happy to come back on board if they’re contacted. Bonus: You already know about their performance and cultural fit.
3. Referrals from new hires – New employees are often the best source for referrals because they’re coming straight from a different company. During orientation, ask them for the names of former colleagues who are qualified and might be interested in a position.
4. Top candidates who turned down the offer – At one point or another, most companies have offered a job to the best candidate, only to have the offer turned down. After some time has passed, you can get back in touch with the candidate and re-sell the position or describe a new opportunity that’s available.
5. Industry associations – Ask top employees, managers and execs to get involved in organizations related to your industry. That will raise the company’s profile and provide priceless networking events.

What low-cost recruiting strategies have worked best at your company? Share your experience and advice in the comments section below.

The results: For white collar jobs, referrals are number one.

Almost half (46%) of those jobs were filled by referrals, according to a survey by the Inavero Institute for Service Research.

Why? According to a lot of companies, getting a reference from an employee you trust is one of the best ways to predict a new hire’s success.

The facts:

The company had a referral program in place, which was the source of many of its new hires. The problem: Nearly all the candidates referred were white, and minority applicants were rarely hired. A group of unsuccessful applicants sued for discrimination.

The employer said:

It was just choosing hires from the pool of candidates given by current employees. There was no intentional discrimination.

Who won the case?

Answer: The applicants.

Why: The company failed to get the case thrown out and ended up settling for $2.5 million. According to the EEOC, referral programs can be a source of discrimination, either intentionally or unintentionally.

In this case, relying too heavily on referrals had an unintentional “disparate impact” on minority applicants. The company should have realized the impact of the program and used other candidate sources to balance the pool accordingly.

Cite: E.E.O.C. v. Carl Buddig & Co.

Giving employees some tips on whom to refer will help you increase the quality of your candidates. Here are some reasons to think twice about making a referral, courtesy of Katherine Spencer Lee, a Computerworld columnist:

1. Personal relationships might suffer. Everyone knows you don’t always get along with co-workers. But even people you used to like can get on your nerves when you spend more than 40 hours a week together — especially if friends start to expect favorable treatment. Solution: Try to avoid referring close personal contacts and stick to people you’ve already worked with — they’re usually the best referrals anyway.
2. They might get mad if they don’t get a job. Obviously, not everyone who’s referred can always be hired. That can lead to resentment if you exaggerate their chances. Solution: Don’t overstate your influence and remind referrals that your good word is no guarantee.
3. You don’t always know everything. Another common mistake is referring people because of personality traits while ignoring other relevant factors like prior experience. Solution: Employees should know a little about how to “play recruiter” and find out enough about someone’s background to make a solid recommendation.

It’s no secret that referral programs are a great way to find new hires. But many managers make the mistake of just handing out bigger bonuses to current employees who make the referrals. There are better ways to get more out of your program.

Obviously, giving employees a little money when they help bring on a great new hire will motivate them to do it more often. But it’s not the only way to get your current workforce to help with the recruiting process.

Face-to-face conversations

Having a formal program in place and asking people to come to you with potential candidates can get you some great employees. But you can find even more by simply asking people for referral contacts in person.

When you have a position to fill, casually ask employees you trust if they know anyone who might be interested. Even if you don’t have a formal program or offer any rewards for referrals, you’re likely to get a few this way.

Give rewards quickly

Many programs are designed to refrain from giving out a reward until it’s clear the referral was a success. That’s an important key, but you also want to give at least part of the reward as soon as possible. After all, the referral was good enough for you to extend a job offer.

Consider giving the bonus on a part now, part later schedule, or giving a cheap reward (a restaurant gift certificate, for example) as soon as the referred hire starts.

Also, bolster your rewards with the power of recognition. Money’s great, but people will also appreciate being publicly thanked for helping build a better team. That can also work even if you don’t give out a monetary reward.

Explain the importance

Current employees have a lot to gain by helping improve the quality of the people they work with. When you develop a referral program, communicate with employees in a way that emphasizes all the things they gain by participating.

That’s especially the key with managers. Having a great team makes their jobs easier, so they should be willing to help you tell employees about the value of good referrals.

Be selective

A referral program will be more successful if you make it clear that you don’t want people to just give you the names of their friends. Make sure employees are familiar with the work of the people they’re referring. Ask them for specific examples about why they think these people would be good hires.

Also, keep track of the referrals employees give you and weigh their future suggestions based on the success or failure of previous efforts.