For many firms, employee referral programs are a win-win benefit. But be careful.

The EEOC has warned that such programs can unwittingly break the law. The reason: Referral programs can limit workplace diversity and increase the risk of discrimination. Employees typically recommend colleagues of the same race, gender and/or ethnicity. 

Even if it’s not meant as a form of discrimination, the end result is the same when companies do large-scale hiring based on these programs. As a result, the EEOC’s compliance manuals recommend that the majority of employers scale down or eliminate their referral programs.

If you have a referral program, be sure to measure its impact on diversity. Non-compliance is expensive. Example: Overreliance on a referral program by Chicago firm Carl Budding & Co. led to a $2.5 million settlement and EEOC fines. The firm rarely hired African-American job candidates.

If you already have a diverse workforce, there’s no need to scrap your program. The ROI on referral programs is usually good, because retention rates are higher among referral-program hires than those recruited other ways.