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Employers should not use performance improvement plans in bad faith.

Stuart Rudner here with another Rudner Law employment law update.

This was actually going to be my rant on season 6 episode 3 of Fire Away with Cameron Atlas, but our discussion was going so well, I just didn’t want to interrupt it and go to my rant, so I saved it for a separate video. The topic today is employers using PIPs, performance improvement plans, in bad faith – don’t do it.

I’m talking about employers who put employees on PIPs in order to build a file so that they can let them go, or to give them a negative performance review so they can reduce their bonus or otherwise cut their compensation, all of these are essentially recipes for liability. You often end up paying the severance that you tried to avoid, plus additional damages for bad faith, plus your own legal fees and of course, if you lose in court, you typically have to pay a portion of the other side’s legal fees. In other words, it can be about four or five times more than you would have paid if you just let them go with a reasonable package to begin with, which is what I’d recommend if you’ve already made the decision that you don’t want them around anymore.

First of all, if you want to know how to performance manage well, fairly, reasonably, but also effectively, so you can build a case if they don’t improve, please watch season 6 episode 3 of Fire Away with Cameron Atlas, he gives some amazing insights for how you can work with someone, how you can be fair and compassionate, but also be very direct in setting expectations, but also setting out consequences for what is going to happen if they don’t improve.

If you are now in a situation where you have an employee who’s not performing well, you don’t know what to do, I want to dispel one myth – it is not true that you can’t fire someone in Canada for cause based on performance. You can, and in my book, which, as regular viewers will know, I update twice a year, the book is called “You’re Fired”, there are lots of cases where judges and arbitrators have agreed that there was just cause based upon performance, but there are a number of hoops that you’re going to have to jump through as an employer, a number of expectations that the courts have.

First of all, you must establish clear and reasonable expectations for performance. Second, you have to communicate those expectations. Third, you have to clearly communicate the shortcomings or how the employee is not living up to the expectations. Fourth, you have to communicate the consequences of a failure to improve, that’s where a lot of people have trouble, because you have to be clear in saying that their job is at risk. And five, you need to provide the employee with a reasonable opportunity to improve, which involves not only a reasonable amount of time, but also reasonable support, which might be coaching, or supervision, or whatever is going to help them to improve, you need to do that, you can’t just sort of throw them out there, sink or swim, you need to give them reasonable time and opportunity. So if you’re willing to do all that in good faith to help the employee get things on track, then you should, but if you don’t do it properly and the employee does not, sorry if you do it properly, and the employee does not improve sufficiently, then you may be able to fire them for cause. If you don’t do it properly, then you’re not going to have a strong cause argument and you’re going to be on the hook for severance.

Here’s a few common mistakes: first of all, not clearly telling the employee what is expected or what will happen if they don’t meet expectations. I know it’s very awkward to say to someone you must do this or this or that or you’ll lose your job, and Cameron Atlas in season 6 episode 3 of Fire Away goes through a tremendous example of how to do this, but courts have been very clear in saying that if you don’t tell the individual what the consequences will be, it’s going to be extremely unlikely that you can impose those consequences later. Another common mistake: telling the employee that they have X number of weeks or months to improve and then leaving them entirely on their own. The expectation is that you will meet with them regularly and provide updates on how they’re doing. You can’t just show up on the date when the plan ends and say you didn’t improve so you’re fired, you have to give them regular feedback, assistance, and let them know how things are going, you can’t just show up and fire them at the end. Another common mistake: setting impossible expectations.

There’s a great case, it goes back about 20 or more years now, involving Frito-Lay, and they did everything right, they had a route sales person whose job it was to go around from place to place and restock the chips and that type of thing, and they had very clear expectations, they communicated them, they communicated with this individual to say that he was not meeting them, they gave him warnings, they gave him support, they did everything right, except for one problem – this case actually went to a hearing and the evidence was absolutely clear that nobody in this role was able to meet those expectations, because they were impossible to meet, therefore the employer failed, there was no just cause for dismissal, and he was entitled to a severance, so that’s why you need to make sure that you have clear and reasonable expectations.

Next thing is that, probably the most common mistake, not addressing performance concerns at all. You just let them go for months, years sometimes, you don’t do anything, you don’t say anything, and then all of a sudden you reach a point where you’re just exasperated and you call your employment lawyer and you say we want to fire them now, and what happens in that case, when they call us, is we say okay send us the file, and what do we see? We see there’s nothing in the file except for the annual performance reviews and typically the individual will be rated with a ‘meets expectations’ or whatever the equivalent is. In other words, there’s no negative review, there’s no negative commentary, there’s no discipline, there’s nothing to support any potential dismissal for cause, which means it’s going to be a dismissal without cause, and a severance package. So that’s the most common mistake and you should, if there are concerns, deal with them quickly, deal with them fairly, but don’t just let them drag on, because very rarely do they get better by themselves.

Another really bad idea: using performance reviews to reduce variable compensation. I’ve seen this more recently, actually, where you have an individual who’s always had good reviews, all of a sudden the end of the year their review takes a dive and now they are not meeting expectations, and guess what? That means that they’re not going to get the same bonus, or the same stock options, or the salary increase that they would otherwise have. That looks really, really bad and can form the basis for bad faith damages, in addition to potentially constructive dismissal claims. So, courts don’t like that, they will penalize you if you do that.

So, when clients call me and they want to go down the road of a performance improvement plan, I always ask them what the goal is because if the goal is that they just want to get rid of this individual, I encourage them not to bother going through with a charade, just package them out and be done with it. But if the goal is really to hopefully get the employee back on track so that they are meeting expectations, then we can design a plan and we can make it happen.

The bottom line here, as I often like to say, just cause is not a lost cause, even for performance concerns, but it must be done properly, and if you do it in bad faith it will cost you. So as we often also say, talk to an employment lawyer before you proceed, and if you’re an employee and you’re facing a PIP, or an improper review, or a dismissal, don’t assume that the organization had the right to do as they did, and that you have no further entitlements, make sure to talk to a lawyer before you sign anything.

And I will say it now, if you think you may need an employment lawyer you probably do, so feel free to reach out to us.

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Stuart and others on the team at Rudner Law are frequent contributors to the following sites: 

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