The laws against religious discrimination present employers with a seeming contradiction. On the one hand, you can't make employment decisions based on a person's religion. On the other, you might have to take an employee's religion into account when making certain workplace decisions.
This apparent contradiction comes from the fact that religion is not just a characteristic -- it is also a set of practices and beliefs. The law prohibits you from discriminating based on the fact of someone's religion (for example, that an employee is Jewish or Catholic or Baptist). However, it also requires you to make allowances for a person's religious practices and beliefs (for example, that an employee needs time after lunch to pray or that an employee needs Saturdays off to observe his or her Sabbath).
The first part is fairly simple. You can't refuse to hire someone because he or she is Jewish; you can't promote someone because he or she is Muslim. There is a very rare and narrow exception to this rule, called the bona fide occupational qualification (BFOQ) requirement. If the nature of the job you are filling absolutely requires that it be filled by an employee of a particular religion -- for example, if you are hiring priests in the Catholic Church -- then you can make religion part of your hiring criteria. In all other situations, however, your job-related decisions must be based on nondiscriminatory reasons.
The second part is more complicated. You must work with your employees to make it possible for them to practice their religious beliefs -- within reason. This might mean not scheduling an employee to work on his or her Sabbath day or relaxing your dress code so that an employee can wear religious garments.
In legal parlance, these allowances are called accommodations. You are required to accommodate your employees' religious practices and beliefs unless doing so would cause your business too much hardship. For instance, if changing an employee's schedule to accommodate a religious belief would wreak havoc with your seniority system and cause severe morale problems among your other employees, you might not have to accommodate the worker.
For more information on workplace policies, see The Manager's Legal Handbook, by Amy DelPo and Lisa Guerin (Nolo).