Performance management processes are undergoing a period of change as employers seek to contain costs, drive efficiency and develop and retain the best talent.
For some employers, the formal annual appraisal cycle can appear heavy-footed and backwards-looking in the context of fast-changing business environments where agility, innovation and team-working are critical to success. Instead, regular feedback, coaching and informal ‘debriefs’ upon completing cycles of work are seen by some as more effective in developing people and keeping the best engaged1.
Regardless of which performance system is adopted, the inevitable question always arises: how to deal with poor performers? Left unmanaged, poor performance can generate conflict, resentment and stress within work teams and disrupt the business. Gross incompetence may even result in damage, injury and losses, depending on the activities involved.
Our research across a number of countries reveals surprising similarities in the way different legal systems expect employers to behave when dealing with poor performers in the context of any resulting dismissal.
We consider below some common core components of a typical performance process across twelve jurisdictions (Great Britain, Germany, Austria, Hong Kong, Hungary, Italy, Netherlands, South Africa, France, United Arab Emirates, Finland and Spain). In addition, we review the key requirements of settlement agreements in these countries, given the frequent use of such agreements to compromise potential claims when poor performers leave the business.
Common approaches to poor performance procedures
Poor performance in this context references skills, knowledge and aptitude. Performance issues arising from health, particularly disabilities, require a different approach and are not the subject of this briefing.
There is normally no necessity to undertake a poor performance process in Hong Kong, providing statutory and contractual payments (notice, holiday pay etc.) are paid on termination. There is also no legally established performance process in the UAE, but many employers prefer to terminate under settlement agreements given uncertainty over the scope of a valid dismissal reason.
In contrast, while the European countries surveyed and South Africa do not typically set out a mandatory poor performance process, where an employer seeks to legally justify a subsequent performance dismissal there are typical procedural steps which should be followed before the termination:
- the employee should be made aware of his/her poor performance which typically involves inviting the employee to a meeting and giving prior notice of the poor performance issues to be discussed
- the poor performance evidence should be scrutinised (are targets realistic, have other employees met theirs, is there objective evidence of poor performance, is the poor performance the fault of the employee or external factors, etc.?)
- the employer should provide the employee with the opportunity to respond including explaining the reason for the poor performance and any training or assistance needed to improve
- one or several warnings are required to ensure the employee understands the issues and the consequences of a failure to improve
- written evidence should be retained of the performance process
- the employee may have rights to be accompanied at meetings by an employee or others and to meet with his/her trade union
- the employer should consider alternatives, short of dismissal, such as offering a transfer to a different position
- the employee should be given time to improve and to receive training. A period of months (or even a year or more) may be required, depending on the facts, and some countries have prescribed timescales for the sending of letters and the convening of meetings
- dismissal is usually the last resort and is sometimes made subject to a right of appeal.
Local requirements may alter the above steps and should be checked, for example, in collective agreements.
Some jurisdictions provide greater discretion to dismiss poor performers during a probationary period or before a qualifying period is served (but not if discriminatory reasons are involved). Check if this applies and ensure that probationers are reviewed and early action taken where performance issues are identified.
In practice: the use of ‘PIPs’ and settlement agreements
Performance management processes can be time-consuming, distracting and protracted. Gathering sufficient objective evidence of poor performance is challenging and the employee may respond by going on sick leave, adding to the risk and complexity.
As a result, our experience is that many managers across the world shy away from tackling poor performers, preferring to exit them on other grounds, often on agreed terms and sometimes in the guise of a ‘redundancy’. However, as budgets for severance payments come under greater pressure, we see some employers taking a firmer line, including the early deployment of performance improvement plans (PIPs) for poor performers and reduced terms on exit.
Typically, a PIP will adopt many of the core procedural steps outlined above. Some employees respond positively by turning around their performance and are retained while others react by finding a new job and leaving their employer voluntarily. Inevitably, some employees will do neither and their employer may choose to enter into a settlement agreement to end their employment and settle any potential claims, or, simply dismiss the employee and accept the risks. The advantage of a PIP is that they can result in reduced exit terms, given that the employee may agree to leave for less to avoid a disagreeable performance process and potential dismissal.
In the jurisdictions surveyed, a settlement agreement between employee and employer to release or waive liabilities should normally be in writing and signed by both parties. Some countries require the employee to have received independent legal advice or the authorisation of the Labour Office. Others require the agreement to specify the potential claims being settled or particular wording to be adopted if the employee is to retain social security benefits. It should be noted that in some countries there are limits to the effectiveness of a settlement agreement. For example, in Austria, there is the risk of an agreement being declared null and void if the sole intention is to avoid complying with termination protection measures. In France, the agreement must be signed after the date of the dismissal notification letter. Finally, some countries, such as France and Spain, have two alternative forms of agreement, one for employer terminations and one for mutually agreed terminations. The formalities and effects of both are different and employers should take advice.
As the economic climate continues to challenge some employers and the need for agility and innovation increases, this firmer approach to poor performers seems set to continue.
Our survey shows that there are common themes across different countries when it comes to PIPs and settlement agreements and this can only help when managing a global workforce. However, there are notable local exceptions or requirements, particularly in relation to settlement agreement formalities, and these should be checked when exiting poor performers, particularly where higher risk employees are involved.