Labour and Employment Law Blog

One of the vexing issues that employers face in dealing with poor performers in the non-union context is whether it is more cost effective to terminate the employee’s employment without cause or to put the employee on a performance improvement plan (“PIP”), with the goal of establishing termination for just cause when the employee fails to meet the performance standards set out in the PIP. Of course, if just cause is established, then no severance is payable (except perhaps in Ontario…note to Ontario – please fix your Employment Standards Act). And note, for unionized employees, employers rarely have the option of terminating employment on a without cause basis – warnings and progressive discipline are almost always required for poorly performing unionized employees.

But in respect of non-union employees, where the preferred outcome is to terminate the employee’s employment, trying to achieve a just cause termination through a PIP often makes little sense, unless the employee has long service or is otherwise entitled to a lengthy notice period for a without cause termination.

Keep in mind that in order to establish just cause for termination for performance reasons, an employer must establish all of the following:

1. That it told the employee what was wrong with their performance;
2. That it told the employee what they had to do to improve their performance and set a reasonable standard of performance to be achieved;
3. That it gave the employee a reasonable amount of time to improve their substandard performance; and,
4. That the employer told the employee that if they don’t meet the required standard in the time given for them to improve, their job was in jeopardy (or, more bluntly, they were going to get fired).

For short service employees or for those employees with limited severance entitlements in their employment contracts, the “reasonable” amount of time an employer is required to give the employee to improve their performance (which is often at least two to three months), may exceed the severance to which the employee is entitled. If the employer has little expectation that the employee can meet the required standard, in many cases it will be more cost effective to dismiss the employee on a without cause basis and pay whatever severance is required. That is, if the purpose of the PIP is to document the performance deficiencies so that the employer may substantiate cause and pay no severance, then the wages paid during the PIP period will often exceed the severance that would otherwise be owing.

Also, a poorly performing employee often will be able to pull their socks up during the PIP period and show improvement, only to fall back into the same bad habits shortly after the PIP is ended. In those circumstances, the employer may be in the same position some months later of having to put the employee on another PIP and be exposed to the same costs for a further PIP period. When this occurs, most employers wish they had just cut their losses earlier.

In addition, the employer will need to prove the case for just cause even if the employee, in the employer’s view, fails to meet the improved performance standard met in the PIP. All sorts of possible pitfalls await an employer trying to prove that it met all the requirements for a performance-based just cause termination. Many of the requirements are open to the subjective interpretation of a judge or adjudicator. For example, was the performance standard set “reasonable” in the circumstances? Was the employee given sufficient time to improve? Was the employer sufficiently clear and unequivocal about what was going to happen to the employee’s employment if they didn’t improve? If the employer misses the mark on any of these points, the employer will likely not be able to prove just cause and end up paying severance anyway.

Finally, there is the problem of employees going off on “stress leave” as soon as they are told they are on a PIP. As employers know, that cost (particularly for the self-insured) can quickly outweigh the costs of any severance that an employer might have to pay for an immediate without cause termination of employment.

That said, PIPs can be useful tools. They certainly are where an employer is satisfied that they have a potentially valuable worker who just needs a bit of a push or direction to reach their goals or a long service employee who may have slacked off but who the employer believes is capable of getting back to the expected performance standard. PIPs may also be cost effective tools for an employer considering the without cause termination of a long service employee or an employee who otherwise has significant severance entitlements. But, in my view, if the expected outcome is termination of employment and the employee is entitled to less than seven or eight months’ severance, use of a PIP to establish a “for cause” termination of employment usually will not be cost effective.