There are lots of prohibitions in the law about what can and can't be asked during an employment interview. Conversely, there are no prohibitions in the law about what can and can't be asked during a reference check. If you do get called about a former employee, be careful about how you respond to questions. While there are no land mines to avoid when giving a good reference, the detonation can occur when giving a reference on someone you would not recommend hiring.
Here is how it happens: You get a call seeking a reference on one of your previous employees, who was a difficult or incompetent employee. If you give a bad reference on this person and the prospective employer, based on your reference, decides not to hire and tells the applicant (your previous employee) why he or she isn't getting the job, you have taken on liability for which you can be sued!
Here is how it plays out in court: The employee in question tells the judge he was not treated fairly while employed at your company and that his life was a living hell while he worked his blankity-blank off . Further, he asks the judge if it's fair, now that he's left, that your company ruin his chances for a new job and brighter future, by a negative reference. In all likelihood, the judge will rule against you, the employer, saying that the employee deserves a clean second chance.
There is another scenario: The prospective employer calls you and seeks a reference and you give a good reference on a bad person. The prospective employer now hires the person who turns out to be just as lousy an employee for the new employer as he was for your business. Believe it or not, you have now taken on liability and can be sued by the new employer! The legal premise here is that the new company "acted in reliance" on your reference and were damaged by the poor performance or behavior of the employee about whom you lied. That next employer, through the courts, can hold you (your company) accountable for the damage they suffered at the hands of the bad employee.
Moral of the story: When it comes to good employees, go ahead and sing their praises. But, when it comes to "bad" employees, provide only the title that they held and their dates of employment. Avoid answering the question, "Would you rehire that person?" Instead, say, "Our policy is to only provide the information that I have already given."