Small-business owners are constantly asked by "friends" for informal references for former employees. Be aware: "What you say can be held against you in a court of law." OK, you have been Mirandized!
So how does all this happen? Your "friend" asks you for a reference and you say something that causes the friend to not hire your former employee. He/she finds out his/her rejection was due to your reference and sues you for defamation or slander depending if your reference was spoken or written. One way to avoid this risk is to just not give references.
As your "friend," I'll assure you that what you say is just between us. I can greatly increase pressure if I'm a good friend, large supplier or key customer, and so you relent and give me a reference. If I decide not to hire the person and he or she makes a claim of discrimination, I now face the decision to be sued by the Equal Employment Opportunity Commission or tell them what you said, which protects me if it is a legitimate business reason to not hire the individual.
With your reference now a matter of public record, he or she goes after you. Your best defense to a defamation or slander suit is the legal truthfulness of your statement. I emphasize legal truthfulness because your statement may be true, but can you prove it in court? As a small-business owner you are probably rather casual about your administrative affairs. Usually you don't have a Human Resources Department or full-time legal staff, so you probably don't have the documentation to support your reference in court. Note that you also can be held liable for references given by any of your management staff.
So what is an effective way to handle references? First, be sure only one person in your business is authorized to give references. For a small business, make it your policy that only you give references. Be sure all your employees are aware and enforce the policy. Having the policy in writing is a really good idea.
Next, when asked for a reference, say that you will be happy to confirm what the former employee has said about their employment experience with your organization. That moves the burden to your friend to ask specific questions. If a prospective employer relates what your former employee has said, you can confirm it or, if the former employee said something you believe to be untrue, you can refuse to confirm the statement. It is then up to the prospective employer to make an employment decision.
Let's end with a short example of how this works. Your friend calls and says he just interviewed Jane and he would like to confirm some statements she made. He says she worked for you from January 2008 through June 2012. This is true, so you say, "I can confirm that statement." He then says she said she left on good terms to be at home with her family. Your position is that you fired her because of absences from work. All you say is, "I cannot confirm that statement" and nothing about her being fired or why. It's a good idea to memorialize your conversation with your friend, noting what he told you she said and your response to the statement.
It should be obvious to the prospective employer on the other end of the phone to figure out there may be something more to her leaving. He can then make the hire decision or go back and question Jane a bit more about her leaving your organization. In your worst case scenario he tells Jane he asked you about her leaving, and you wouldn't confirm what she told him. If she contacts you, you say you could not confirm the statement he said she made about her leaving, and that's all.