Reference checks serve several purposes during a selection process.
The overall aim is to determine if you are going to be an asset to your potential employer. Generally, everyone that reference checks you will assume you have chosen referees that show you in the best light. If you are unable to provide referees, you are sending a very loud negative signal.
Usually three referees will be requested. Many employers ask for someone you have reported to, someone you have worked alongside and a customer. Others will insist only on people you have reported to. Personal references are usually not valued.
The more recent that you have worked with the referee, the better. Referees that you last worked with more than 5 years ago start to become less important than the most recent ones.If you are a recent graduate, then you can choose your final year project lecturer, your industry project employer and your most recent employer (even if that is from a casual retail job).
Are you afraid of using your current employer? Try an ex-employee that has left.
Formal reference checks are usually performed after your first interview. This allows the employer to validate what you stated in the interview. It also saves your referees from being called on for every job that you apply for - something that they will appreciate.
It is good manners to alert your referee that they are about to receive a reference check call soon. This can also speed up your recruitment process as you will know who is available and who is not.
It is advisable to refrain from putting your references in your resume. It can mean that your referees are contacted before you are invited to an interview. This usually occurs when the employer does not have a defined efficient recruitment process and is going by instinct.
The employer is searching for more information on you - but may catch the referee of guard.