Performance Management and Managing Low Performance in the Employment Relationship

Companies are currently under significant pressure to transform. Digitalisation, skills shortages, and increasing efficiency requirements mean that employee performance, particularly so-called "low performance", has become an increasingly important issue. From an employment law perspective, low performance constitutes a disruption of the contractual relationship, the assessment of which presupposes clarity as to what performance is owed and by which standards it may be measured. There are various approaches and instruments for systematically defining and continuously assessing such performance requirements, including the implementation of employment law measures in cases of insufficient performance, all of which can be subsumed under the concept of performance management.

Performance can only be assessed if the required level of performance is clearly defined. This is not determined only once the employment relationship is underway, but is established even before an employee is hired. The job description and requirements profile determine which tasks, responsibilities, and competencies the employee is contractually required to perform and what performance the employer expects. If tasks are not clearly defined, or if job profiles are carried forward unchanged for years despite changes in the role’s content and requirements, the employer will generally lack the basis for taking employment law measures. At the same time, recruiting decisions continue to have legal and practical consequences: by entering into the employment contract, the employer proceeds on the assumption that the employee is capable of meeting the required standards. If that assumption later proves incorrect, the scope for corrective action within the existing employment relationship is generally limited.

From an employment law perspective, the probationary period and the six-month statutory waiting period under the German Protection Against Dismissal Act (KSchG) are a decisive, yet often underestimated, phase in dealing with performance deficits. They serve as the initial benchmark between the defined performance expectations and the performance actually delivered. Here, too, however, the following applies: without clearly defined expectations, there can be no reliable assessment. If performance deficits are merely tolerated informally or are not addressed with sufficient clarity, the impression may quickly arise, from an employment law perspective, that the performance has been accepted. Close onboarding, repeated feedback discussions, and clear documentation are therefore not merely HR instruments, but legally significant measures from the outset. In addition, the probationary and waiting period should be used consistently where performance deficits arise within the first six months and, in the employer’s view, are unlikely to be remedied in the future.

The relevant starting point for assessing deficient performance is the so-called subjective performance standard. Under this standard, the employee does not owe a specific work result, but rather the performance of work within the limits of their individual capability. The German Federal Labor Court has summarized this principle as follows:

What is contractually required is the level of performance that the employee can sustain over time by making reasonable use of their mental and physical capacities, without endangering their health. Below-average performance must therefore be accepted as long as the employee is fully utilizing their personal capacity. Only significant performance deficits become relevant from an employment law perspective. A comparison with colleagues may provide an important indication in this regard. However, such a comparison does not replace an assessment of the individual case, which is also necessary in light of the various potential causes of reduced performance. These may include health-related limitations, changing or intensified job requirements, as well as performance issues in dysfunctional working environments.

Accordingly, a multi-step assessment will generally need to be carried out:

Even in cases of low performance, a warning letter (formal warning) and termination are not initial measures, but measures of last resort. A distinction must be drawn in particular as follows: if the employee is capable of performing but refuses to render the contractually required performance (they can, but are unwilling), a conduct-related termination may generally be considered, although usually only after a prior warning letter. If, by contrast, the employee is willing to perform but, despite that willingness, is unable to render the contractually required performance (they are willing, but unable), this may may constitute grounds for a conduct-related termination. The labor courts’ case law draws strict distinctions based on the facts of each individual case. Nevertheless, from a practical perspective, employers are well advised in any event to issue a warning letter where performance shortcomings have been identified. In addition, the employee must be granted a reasonable period for improvement, during which they are given the opportunity to improve their performance before the employment may be terminated. The length of that period depends on the circumstances of the individual case.

Low performance is rarely an isolated instance of individual failure. It is often the result of a longer process and, in many cases, also an expression of structural deficiencies. Employers preserve their employment law options only if they establish clear structures before hiring and consistently maintain them throughout all phases of the employment relationship. Those who address performance deficits at an early stage, clearly formulate expectations, carefully analyze causes, provide feedback, and document the relevant steps can, in many cases, successfully stabilize or improve performance.