Managing Poor Performance And Distinguishing It From Misconduct

Termination of employment has been a much-deliberated issue between employers and employees in India for decades and, over the years, has become a nuanced topic. Apart from Indian labour laws that strictly regulate termination of employment, Indian courts have also laid down various principles in this regard, particularly on termination for misconduct. 

Employers often wrestle with the question on whether a termination for poor performance is akin to a termination for misconduct. Moreover, Courts are not new to disputes being raised by disgruntled individuals whose employment has been terminated, on the ground of wrongful termination – these claims primarily arise from contentions of employers not following due process prior to termination. In this context, it becomes extremely pertinent for employers to be clear on the route of termination to be followed.

In this article, authors have examined the treatment of poor performance as a ground for termination vis-à-vis misconduct, these authors' legal processes around termination of employment for poor performance and have also discussed certain practical considerations for employers to bear in mind.

At the outset, it is relevant to understand the legalities around a termination of employment. Termination is categorised into two broad categories – stigmatic termination, i.e., termination for cause or misconduct, and termination simpliciter or termination for convenience. Termination simpliciter typically requires employers to provide prior notice, usually of 1 month (or payment in lieu thereof), along with reasons for the termination. In some cases[1], notice to government authorities and retrenchment/ severance compensation is to be paid. Employers are further required to pay all applicable terminal dues to employees upon termination simpliciter, including accrued salary, leave encashment, gratuity, statutory bonus and other contractual dues, as applicable.

On the other hand, stigmatic termination involves a lengthier process. It requires employers to conduct a disciplinary inquiry into the alleged misconduct to prove the guilt of the employee. There are certain statutes[2] that briefly set out processes and timelines for conduct of such an inquiry. Judicial precedents have highlighted that the principles of natural justice[3] have to be followed to ensure a valid disciplinary inquiry. Specific principles that have evolved in this regard[4] include issuance of a show-cause notice to the employee detailing the allegations and terms of employment alleged to have been violated with any evidence, providing the employee a reasonable opportunity to be heard and to cross-examine witnesses, culminating into a report with findings on the guilt of the employee and recommendations on disciplinary action, proportionate to the alleged acts of misconduct. 

Unlike in a termination simpliciter, in case of a stigmatic termination, employees are not entitled to any notice period or payment in lieu thereof, severance/retrenchment compensation, and in some specific cases may even be disqualified from gratuity payments, as well as contractual payments (subject to applicable internal policies).

Poor performance is not defined or explicitly dealt with under employment legislations. However, it is important to note that courts have recognised that poor performance is not considered as misconduct, and that termination for poor performance is termination simpliciter[5], thus attracting the requirement to inter alia provide prior notice or payment in lieu, reasons for termination and severance/retrenchment compensation (as applicable). The key rationale for excluding poor performance from the ambit of ‘misconduct’ is that although misconduct cannot be precisely or exhaustively defined, it connotes delinquency in performance of an employee, improper, unlawful or unethical behaviour that is wilful in nature, a transgression from established rules of service.

Despite not having to follow the elaborate disciplinary inquiry process, a termination for poor performance cannot be instantly implemented without any prior process. To avoid the termination being considered as arbitrary, Courts have held that an employee must be made aware of the deficiencies in their performance, provided a reasonable amount of time to improve their performance against objective targets, only failing which an employer can proceed to terminate their employment[6]. 

In order to ensure the same, a well-defined performance improvement program (“PIP”) serves as a helpful tool for employers. A robust PIP should set out the details of when an employee may be placed on PIP (such as consistent low ratings in periodic evaluation cycles), time periods for improvement, allocation of mentors to assist the growth of the employee etc., regular feedback and setting out that the final step in an unfortunate situation where performance cannot improve, will be termination of employment. Having in place such a precise policy allows a definite framework to be followed in a poor performance scenario and paves way for a formal line of communication with the employee.

Unambiguous target-setting, goal planning and effective mentoring during a PIP process provide a strong foundation for an employer to tackle any performance-related issues, including an eventual termination of employment. Moreover, ensuring that each step of the PIP is well documented – from initial communication to the employee, efforts taken to train and assist the employee with their work, objective target-setting and assessment of change in performance standards – is crucial for the success of a PIP and a dispute-free exit. 

Categorising the kind of termination of employment is important since the legal regulations vary depending on the route of exit. For a termination for poor performance, the implementation of a defined PIP and establishment of an unambiguous paper trail will help employers defend the termination should a dispute arise before a Court, not only against a claim questioning the procedural aspect but also against a claim denying the existence of poor performance. 

[1] This is a requirement for employees who are workmen. The term ‘workman’ is defined under the Industrial Disputes Act, 1947, broadly to include all types of employees except those in a supervisory capacity earning over INR 10,000 per month or those in a purely managerial role. In some States too (such as Andhra Pradesh), non-workmen may also be entitled to statutory severance compensation/ retrenchment compensation.

[2] These are set out under State-specific model standing orders prescribed under the Industrial Employment (Standing Orders) Act, 1946.

[3] The principles of natural justice are those rules which have been laid down by courts to protect the rights of an individual against the arbitrary procedure that may be adopted by an authority, which include, inter alia, that (a) every person whose civil rights are affected must have a reasonable notice of the case he has to meet; (b) such person must have a reasonable opportunity of being heard in defence; (c) the authority must act in good faith and not arbitrarily but fairly, justly, reasonably and impartially.

[4] To name a few precedents: Venkataraman v. Union of India AIR 1954 SC 375; Food Corporation of India v. A. Prahalada Rao (2001) I SCC 165; ECIL v. B. Karunakar (1993) 4 SCC 727; Khem Chand v. Union of India AIR 1958 SC 300; 

[5] State of Punjab and Ors. v. Ram Singh Ex. Constable, AIR1992 SC 2188; Management of Karnataka State Road Transport Corporation v. M. Boraiah, AIR 1983 SC 1320; Punjab Land Development and Reclamation Corporation v. The Presiding Officer, Labour Court, Chandigarh, 1990 SCR (3) 111; Ms T.N. Chandra v. South India Corp (Agencies) Ltd. and Anr, (1992) I LLJ 739

[6] Sumati P. Shere v. Union of India, AIR 1989 SC 1431