Capability dismissal: guide for HR

Capability dismissal refers to an employer terminating an employment contract on the basis of poor performance where they have a reasonable belief that the employee is unable to carry out the duties required of them to the expected standards.

Employers are permitted to lawfully dismiss employees by reason of poor performance and capability, but they must follow a fair process in doing so. The following guide provides information for employers on how to follow a lawful and fair process when dismissing an employee for performance-related issues.

What is poor performance?

Poor performance is one of the statutory fair reasons for employment dismissal. However, it should be treated as a measure of last resort, suitable only after reasonable attempts have been made to try to understand, manage and improve employee capability issues.

Employers should also have performance management procedures in place to proactively identify concerns and try to resolve them. This is rarely a straight forward or swift process. For example, it will be important to ascertain whether an employee’s underperformance relates to an inability to improve or to an unwillingness to improve. In the case of the latter, where the issue is a negative attitude, it would be a misconduct issue. Where the issue is capability-related, performance management would be appropriate. This distinction could be critical in the event of an unfair dismissal claim. You should be able to show that you fully considered the facts and acted fairly in opting to follow the conduct or capability procedure.

Where performance management efforts are failing to result in the required improvements, you may consider capability dismissal as a final option.

Fair dismissal for underperformance

In most cases, employees need two years’ continuous service to be able to claim unfair dismissal. However, when considering dismissing an employee for capability issues, you should ensure you follow a fair process which, as a minimum, has to follow the standards set out in the ACAS code of practice.

Failure to meet these standards can expose your organisation to the risk of claims for unfair dismissal. In the event an employee brings a claim for unfair dismissal, the employment tribunal will refer to the ACAS guidance when determining if the dismissal was unfair. If the employer is considered by the tribunal not to have met the required standards under the ACAS guidance they face an increase of up to 25% of any compensation awarded to the employee.

Employee performance should be monitored and discussed on an ongoing basis. Using the annual appraisal meeting alone to raise the issue of underperformance is not generally helpful. Where performance is discussed on a regular basis, however, there is more opportunity for feedback and to identify and address issues before they escalate.

Performance should be measured against standards and levels known and understood by the employee and the employer. You must make all employees aware of the standards of performance required of them. For example, sales personnel are required to secure a certain level of sales income within specific time periods.

Where concerns are identified, these should be raised with the employee as soon as possible.

Line managers and supervisors in your organisation should be trained to deal with appraisals and performance reviews competently and honestly.

It will also be important to have clear evidence to support any performance management procedure, to show how the employee is underperforming against the expected levels. Performance management and capability dismissal should be based on an identifiable performance gap between the required standards or KPIs and the employee’s performance. This gap triggers performance management procedures used to restate what the employee should be doing and how their performance is not meeting this level or standard, and to put measures in place to address the performance gap.

Where the issues have not resolved through informal methods or discussions, the next step would be to formally notify the employee that they are subject to a performance management process. This should also be in writing with details of how they have failed to meet the required standards or objectives by reference to specific KPIs or measures, and inviting them to attend a meeting to discuss the issues and how improvements can be made through. for example, training or additional tools.

The outcome of the meeting should be to ascertain if there are any specific reasons behind the performance issues, such as personal difficulties or disability limitations, and if there are any measures you can take to support or address the causes, such as providing further training. You should also agree specific performance targets. These targets should be measurable, realistic and attainable given adequate support and guidance. Review times should be realistic for improvements to be made and targets to be met.

Alternatives to capability dismissal

Capability dismissal should be a measure of last resort in cases of for underperformance, where efforts or consideration has been given to alternatives such as:

Alternative role

If a capability dismissal results in an employment tribunal, the employment tribunal may examine whether an alternative role was offered to the employee in determining if the dismissal was fair. The employer is likely to have a greater prospect of defending an unfair dismissal claim if they can show they considered alternative employment before dismissal.

Reasonable adjustments

An employer must also question whether or not an employee’s inability to perform is related to a disability preventing them from doing so or whether there are personal issues affecting them. If the poor performance of your employee is a result of ill health or a disability it is vital that you handle the situation carefully before continuing to follow the route of capability dismissal. For example, you will need to potentially make reasonable adjustments to assist them in carrying out their duties, find other means to support them and grant them time for their health to get better to reassess the situation.

Where there are medical issues, you should request professional medical advice on the employee’s condition. This could include a medical report from their GP or other relevant healthcare consultant and an occupational health assessment.

While medical capability dismissal would not in itself constitute unfair dismissal, if the process is not handled correctly, you may be at risk of a tribunal claim.

Where there are medical issues, you should request professional medical advice on the employee’s condition. This could include a medical report from their GP or other relevant healthcare consultant and an occupational health assessment.

Demotion

Depending on the circumstances, it may be favourable and appropriate to consider offering the employee a role with lesser responsibility or less challenging KPIs. Reassignment, or demotion, can be a more favourable solution for both parties. Take professional advice if you are uncertain about varying an employee’s contract terms.

Settlement agreement

Settlement agreements certainly have their uses, particularly for senior exits, but employers should be wary of using settlement agreements as their “default” position to avoid workplace perceptions that poor performers will always receive generous pay-offs.

Managing poor performance

With an effective performance management procedure in place, your organisation should be well-positioned to address underperformance and evidence fair treatment in the event you dismiss the employee and they claim unfair dismissal.

Training of line managers, supervisors and other personnel responsible for teams and employee performance will be essential in ensuring they are aware of the process to follow if they are dealing with underperformance.

While some organisations set out the timescales for performance managements, others allow for more discretion and flexibility. When setting an appropriate and reasonable timeframe for improvement, you should ensure a balance between giving the employee enough time to make the necessary improvements without making the process protracted. There will be a number of factors to consider here. For example, the nature of the role and the performance measures may dictate a period,  if the employee is measured on a daily, weekly or quarterly basis. If the employee’s track record is generally sound, you could consider giving a longer period to improve, particularly if the issues are as a result of personal circumstances. Larger employers may have more resources to be able to offer longer review periods.

It is helpful to agree the length of the review period with the employee, in writing, to avoid accusations that the period was unreasonable.

You could also consider extending the timeframe if you are not satisfied with the improvement or that it is being sustained to the required levels and standards. If you do this, ensure you are clear with the employee about what is happening and your reason for this.

Risks of unfair capability dismissal

Failure to follow a fair and correct procedure when dismissing an employee can give rise to an employment tribunal for unfair dismissal. The current cap on compensation awards for unfair dismissal claims is £98,922.

If your employee, following capability dismissal, chooses to bring a claim for unfair dismissal, they must establish and evidence to the tribunal a number of key criteria. An employment tribunal will assess:

• How long has performance been a concern and when was the employee informed?
• Whether or not the employee’s performance was carefully examined?
• Whether reasons were given regarding the poor performance?
• Whether they were given sufficient time given to correct poor performance?
• Whether warnings were given by the employer that the poor performance could result in a dismissal
• If different work was possible and if so, they would expect this to have been offered, therefore, if this is possible for any employee you may be considering for capability dismissal ensure you offer this
• What type of evidence the employer collected, including who they may have consulted and if there was anything they did not do as part of this which you could have done.
• If they are satisfied themselves that an employer has fair grounds for believing the employee was incapable and that they honestly believed the employee to be incapable?

As part of this an employment tribunal will take into account the length of time your employee has worked for you as well as the potential consequences of capability dismissal on the overall business, including on the remaining employees.

An employment tribunal will consider this in light of what another employer would have done in the same business or profession. This could, for example, include what type of evidence a similar employer may normally seek to rely on for a dismissal or the process that would be followed under the ACAS code.

Where capability dismissal is a result of a disability or ill health, generally it would not automatically be considered unfair dismissal. However, if it has not been dealt with correctly or fairly, it could result in a discrimination claim. A claim based on discriminatory dismissal is not capped in terms of the potential amount of award.

Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.