Should we offer an employee referral bonus?

Finding the right person for the right job can be an arduous and time-consuming task. While many companies have experienced recruiting efficiencies and convenience by offering an employee referral bonus, some employers have asked if this practice is a good idea because of its limitation on hiring a diverse workforce.

The short answer? Yes, a referral program does tend to limit diversity and may create a disparate impact. However, that doesn’t mean an employee referral program is a bad idea.

What does “disparate impact” mean?

Disparate impact refers to a group of people that are adversely affected because of an action. For example, only posting a job vacancy on Snapchat would have a disparate impact on most people over the age of 40 because, with the exception of those who are super-hip, most people 40+ years old don’t have a Snapchat account. The same would be true if you advertised your job opening on multiple platforms but used words like “digital native” or “new grad” in your job description, which target younger employees.

When employees refer friends and family to work for the same company, there could be a potential disparate impact on protected groups if those referred candidates are of the same age, race, gender, religion, national origin, or other protected class. While cultural integration at work becomes a breeze, employee referrals could create a severe lack of diversity.

What are the advantages of offering an employee referral bonus?

While many employers love how cost-effective an employee referral program is, this study entitled “You’d Be Perfect for This: Understanding the Value of Hiring through Referrals” researched the implications of referred vs non-referred workers. They found that referred employees:

• Are substantially (10-30%) less likely to quit
• Are more intuitive
• Have fewer accidents
• Have a significant positive impact on the total welfare of the company
• Are better matched for the job

In addition, Gallup found that employees who have a best friend at work are twice as likely to be engaged (63%) as compared with those who don’t (29%).

With so many advantages, an employee referral bonus program seems like an obvious addition to your recruiting methods. But that potential problem of creating a disparate impact is still hovering, making you wonder how you balance the best of both worlds.

How do you offer an employee referral bonus without creating a disparate impact?

As with anything, too much of a good thing ends up hurting you in the end. Consider the following best practices when juggling an employee referral bonus with hiring a diverse workforce.

• Advertise job vacancies across multiple platforms to create a diverse pool of candidates. While referred workers are great, you never know what talent is available outside your employees’ networks.
• Don’t overly rely on employee referrals. Cap the number of referrals an employee can give or the amount of incentive pay an employee can make from referrals within a given timeframe.
• Conduct an analysis to determine if you have too many applicants from the same demographic. For example, if your applicant pool is 80% men and 20% women, consider using other channels to recruit more women. If your applicants are mostly Caucasian, consider methods to recruit a more culturally diverse population. You can legally pay a higher referral bonus for diverse candidates to help offset a non-diverse candidate pool.
• Ensure your referral program is available to all employees within the company (not just specific employees or departments), as well as vendors, business partners, and customers.
• Avoid giving preferential treatment to employee referrals. You never know if your next key employee might walk in from the street.
• Review your recruiting methods annually to determine if funds are better spent on an employee referral program, more diverse recruiting methods, or perhaps on retention efforts to limit turnover.

For more information on building a successful employee referral program while maintaining a diverse workplace, please contact your certified HR expert. Not a current Stratus HR client? Book a free consultation and our team will contact you shortly!

Related articles:

• Estimated Time on HR: Recruiting Tasks 
• Job Descriptions: 10 Ways to Attract More Applicants
• 7 Red Flags for Interviewers to Discern
• “Must Be Currently Employed.” Is Unemployment Discrimination Legal?

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