You want to protect your business, so you listened to your attorney and you implemented a policy of only "neutral" references. That is, you only confirm dates of service and title. This is a great policy, and the one recommended by many attorneys.
In fact, last week, I asked six labor and employment attorneys their opinion and all six said that should be your general policy, especially for bad employees. (They all had exceptions, as well, and you should especially note Donna Ballman's point that you don't want to keep your former employees unemployed.) As Jon Hyman said, if simply confirming dates and titles sends the message that this employee was terrible, why risk a lawsuit by giving details?
Absolutely. I totally agree. Except when it comes to people who worked for me. You want a reference on one of my former employees, I'm going to tell you exactly what I think. And, furthermore, since I don't work for that company any more, there's not any policy that is going to hold me back. I mean, what can they do? Fire me?
And this is the problem with restricting references to simple dates of service and title. It makes great legal sense. You're only giving documented, truthful information. There is no reason anyone can come back and say you defamed them. And, even on the positive side, no one can come back and say that you said Jane was awesome and it turns out she's terrible. It's great advice, and your employees aren't following it. Here's why:
You can only control HR. I can pretty much guarantee if a company has a neutral reference policy, that HR will dutifully report titles and dates of service and maybe confirm a salary (which you shouldn't be asking anyway). The HR person will say, "I'm sorry, but our company policy is to only give neutral references." But, if your recruiter knows the name of a former manager, that manager is likely to spill the beans--positive or negative.
You hurt good and bad candidates. I've never seen a company with a "neutral references for bad employees, whatever you want to know for good employees" policy, but many individual managers do operate that way. And some sleazy recruiters like to play tricks like, leaving voice mails that say, "I'm calling about John Doe. If he was a good employee call me back, and if he was a bad employee, no need!" so that you can get around your company's policies without actually saying anything. Because many people play this reference game, it's become a code. The problem comes in that since your policy says "only neutral references" you'll have some managers who follow the rules, and as a result send the message that John Doe stinks when, in reality, he was absolutely fantastic.
It's rare to have a truly bad employee. Yes, you have that guy who stole petty cash, and that woman who was never, ever on time, and lied to customers, but most often, your " bad" employees were simply bad fits. If people conducting reference checks didn't just ask, "would you rehire?" or "tell me about John," but instead, "We're considering John for a job where A, B, and C are the core skills. Can you tell me if John would be a good fit?" This is a better question because it gets at what you really want to know--can John do this job and not is John a great guy?
You ask for references when you hire. This is something that drives me up the wall. Every company I've worked for has had the "neutral references only" policy (that almost everyone outside of HR ignored) but wouldn't hire someone if they couldn't come up with 3 good references. If you want to play the neutral reference game, feel free, but play it on both sides. Don't require what you won't give out. And keep Daniel Schwartz's warning in your mind: "That's fine, just don't be disappointed when the employee you hire is a "dud" because another employer also subscribed to same theory."
You're not properly educating your managers. Companies may have a policy on their books, and all your employees have seen it and signed a little piece of paper saying they have seen it, and that's good enough, right? Wrong. Most managers have only a handful of employees and may only give a reference once a year, or less. Therefore, it's not on their radar and it's not a core focus of your business. You have other problems to deal with. As a result, they aren't paying attention to that policy and unless there is a lawsuit filed, you don't have a clue what they are saying to recruiters. So, your policy is pretty worthless anyway.