Capability Dismissal: Employer Guidance

A capability dismissal refers to an employer terminating an employment contract on the basis of the employee’s underperformance or ill-health.

Employers are permitted to lawfully dismiss employees due to poor performance, but in doing so they must follow a fair process. This means, among other requirements, that the employer has to have a reasonable belief that the employee is unable to carry out the duties required of them to the expected standards.

The following guide provides information for employers and managers on how to follow a lawful and fair process when dismissing an employee for performance-related issues.

 

What is ‘capability’?

By law, there are five potentially fair reasons an employer can lawfully dismiss an employee: misconduct, redundancy, illegality, capability, or some other substantial reason.

Capability relates to an employee’s ability to do their job. As a rule of thumb, capability typically concerns issues beyond the employee’s control which are resulting in underperformance, such as ill-health. In contrast, issues relating to behaviour, such as malingering or unauthorised absence, would be dealt with as misconduct under the disciplinary procedure.

 

What is poor performance?

Employee performance monitoring should form part of day to day management duties. This allows managers to be able to identify situations where an employee is performing below the required standards, which could include failing to meet specific objectives, targets or goals.

For new employees, it is recommended to use a probation period to monitor performance and provide any required support during the early stages of an employment contract.

Employee performance should then be monitored and discussed on an ongoing basis. Line managers and supervisors in your organisation should be trained to deal with appraisals and ongoing performance reviews competently and honestly.

Importantly, relying on 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, 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. You must make all employees aware of the standards of performance required of them. For example, if sales personnel are required to secure a certain level of sales income within specific time periods.

 

How to deal with capability issues

It is best practice for employers to have performance management procedures in place that help to proactively identify and resolve issues with employee performance.

In the event an employee is underperforming, their manager should speak with the individual as soon as possible to discuss the issues and to determine if there are reasons why the individual is underperforming.

This will help to determine if it is due to an inability or an unwillingness to improve. In the case of the latter, for example where the issue is a negative attitude, the issue should be dealt with under the organisation’s misconduct procedure, while capability issues should be dealt with under a performance management process. This distinction is critical to ensure appropriate support is provided and to show that, in the event of dismissal, a fair and lawful process has been followed.

If underperformance is a capability issue, resulting from personal difficulties or disability limitations, the employer should consider if there are any measures to take to support or address the causes, such as providing further training.

Where the issues have not been 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, which typically involves developing a performance improvement plan (PIP). The employee should be invited to attend a meeting to discuss the issues – including details of how they have failed to meet the required standards or objectives by reference to specific KPIs or measures – and how improvements can be made through a formal PIP which may include specific training or additional tools. The PIP should also state the performance targets that have been agreed with the employee that will be used to measure improvement. 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.

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

 

Fair capability dismissal

Employers must be law follow a fair procedure in arriving at the decision to dismiss someone on capability grounds. As a minimum, this procedure should 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. While in most cases, employees need two years’ continuous service to be able to claim unfair dismissal, it is best practice to follow the ACAS guidance as standard to reduce legal risk and nurture positive workforce relations.  

In the event an employee brings a claim for unfair dismissal, you will need to be able to show that you fully considered the facts and acted fairly in opting to follow the capability procedure. It will also be important to have clear evidence of the organisation’s performance management procedure, including evidence of how the employee is underperforming against the expected levels and the steps taken by the organisation to deal with the issues.

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.

 

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 dismissal 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 can be beneficial where relations with an employee are becoming challenging and where it would be advantageous for both parties to bring the contract to end on mutually-beneficial, negotiated terms.

 

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 claim is £98,922.

If your employee, following capability dismissal, chose 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 in capable?

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.

 

Poor performance best practice

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.

 

Need assistance?

DavidsonMorris’ employment law specialists offer guidance and support to employers dealing with poor performance and capability dismissal. If you have a question about your rights and responsibilities as an employer, contact us for advice.

 

Capability dismissal FAQs

What is an example of a capability dismissal?

Capability dismissal could refer to instances where someone is unable to work due to ill-health or where they have demonstrated poor performance with insufficient improvement.

What is the procedure for capability dismissal?

Before you can dismiss someone on capability grounds, you have to show that you have given the employee a fair opportunity to improve their performance or return to health before joining work.

What is a medical capability dismissal?

Medical capability dismissal is a potentially fair reason for dismissal on the grounds of someone's ill health.

Can you be sacked on medical grounds?

Employers have to do everything they reasonably can to support someone with medical issues to return to work, such as offering alternative employment. If this is not possible, ill health is a potentially fair reason for dismissal.

Last updated: 22 May 2023