Question: “Dear DGK, I am currently struggling with an employee who has consistently underperformed despite verbal warnings and informal discussions. Their failure to meet key performance indicators has affected the team’s overall output and morale. I want to address the issue fairly and legally but am concerned about the risks of wrongful dismissal claims. How should I proceed?”
Managing employees who do not meet performance expectations is a challenge many SME owners face, and it requires a delicate balance between protecting your business and respecting employee rights. Poor performance, if left unaddressed, can undermine productivity, affect client satisfaction, and demotivate other staff. Yet, acting hastily or without proper legal grounding can lead to disputes and costly legal claims.
This article will explore 4 foundational solutions to manage non-performing employees effectively.
By setting clear expectations, structuring probation appropriately, understanding the legal grounds for dismissal, and following due process, SMEs can safeguard their operations and foster a fair workplace culture.
1. Set Clear Expectations and Documentation
The first and most crucial step in managing employee performance is establishing clear job scope, responsibilities, and measurable key performance indicators (KPIs) from the outset. A well-drafted employment contract that defines the employee’s role and expectations forms the foundation for any performance management.
By documenting these expectations formally, you create objective criteria against which performance can be assessed. This clarity benefits both employer and employee by reducing ambiguity and setting a mutual understanding of what success looks like.
Under Section 11 of the Contracts Act 1950, parties must enter contracts with mutual consent and clear terms. A contract that defines the job scope, duties, and KPIs is legally enforceable and crucial in justifying any performance-related actions.
In Goon Kwee Phoy v J & P Coats (M) Sdn Bhd [1981] 2 MLJ 129, the Federal Court underscored the importance of contractual clarity in dismissal cases, emphasizing that ambiguity in job expectations can weaken an employer’s position.
Illustration:
A MNC company employed a marketing executive whose contract specified detailed KPIs including monthly lead targets and campaign deadlines. When performance dipped, the client could point directly to these documented standards during reviews, supporting fair performance management.
Myth: Myth: “Verbal agreements or vague job descriptions are enough to manage performance.” But actually, without written clarity in contracts, it becomes difficult to prove expectations and justify dismissal in legal disputes.
FAQ:
FAQ: Can I add KPIs or performance expectations after hiring?
Yes, but changes should be mutually agreed upon and documented to avoid claims of unfair treatment.
2. Use Probation Periods Strategically
Probation periods are a valuable tool for assessing new employees’ suitability without immediate long-term commitment. A properly structured probation allows you to evaluate performance, conduct, and cultural fit comprehensively.
For SMEs, it is advisable to set a reasonably long probation period, commonly three to six months, with clear benchmarks for confirmation.
During probation, employers can address issues early and decide whether to confirm employment or end the contract if performance falls short.
It is equally important to structure the employment agreement on a fixed-term basis during probation if you anticipate risks.
This avoids automatic confirmation and affords flexibility if performance is unsatisfactory.
The Employment Act 1955 Section 12(3) permits termination of probationers with notice or payment in lieu. However, employers must still act fairly and not dismiss for discriminatory or unlawful reasons.
While probation periods do not provide absolute immunity from claims, Industrial Court decisions reflect that a well-managed probation with documented feedback strengthens an employer’s case.
Illustration:
A telecom company avoided a protracted dispute by employing a 6-month probation for a junior manager with monthly performance reviews. The employee was not confirmed after failing to meet agreed milestones, and the fixed-term contract facilitated a smooth conclusion.
Myth:
“Probation means I can fire an employee at will.”
But actually, termination during probation must still comply with contract terms and not violate fundamental fairness or discrimination laws.
FAQ:
FAQ: Can I extend probation if performance is borderline?
Yes, but extensions should be reasonable, agreed upon in writing, and include clear objectives.
3. Understand Legal Grounds for Dismissal
Knowing the valid legal grounds to dismiss an employee is essential knowledge for an employer. The 3 primary grounds commonly accepted in Malaysia are:
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Performance: Failure to meet reasonable and documented performance standards.
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Misconduct: Breach of company rules or policies.
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Retrenchment: Redundancy due to business restructuring or financial necessity.
Dismissals based on these grounds require employers to follow due process, provide evidence, and ensure procedural fairness. Employers cannot dismiss arbitrarily or without just cause.
The Industrial Relations Act 1967 Section 20(1) states that an employee can be dismissed for “just cause or excuse,” and the employer must prove such cause. The Act also mandates adherence to fair procedures as set out in Sections 20-22.
In Steelcorp Sdn Bhd v Loh Wai Kong [2001] 5 MLJ 97, the court found that failure to follow disciplinary procedures rendered a dismissal unfair, regardless of the employee’s conduct.
Illustration:
A manufacturing company dismissed a technician for consistent poor performance after formal warnings and a disciplinary hearing. When the decision was challenged, the documentation of just cause and proper procedure supported the company’s position in the Industrial Court.
Myth:
Myth: “Poor performance alone justifies immediate dismissal.”But actually, dismissal must be both substantively and procedurally fair to withstand legal scrutiny.
FAQ:
FAQ: Can I dismiss an employee without warnings if performance is bad?
Warnings and opportunity to improve are generally required except in cases of gross misconduct.
4. Follow Due Process with Documentation
Regardless of the grounds for dismissal, following due process is critical. This means:
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Giving the employee written notice of performance concerns.
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Conducting fair and documented disciplinary hearings.
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Offering opportunities for the employee to respond or improve.
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Issuing clear, written termination notices with reasons.
It is equally important to keep detailed records of all performance failures, warnings, meetings, and communications throughout the entire performance management lifecycle. These records form the evidential backbone to support any disciplinary or dismissal decisions and help protect the employer’s position in case of disputes or wrongful dismissal claims.
Under Section 12 of the Employment Act 1955, notice of termination or payment in lieu is mandatory. The Industrial Relations Act 1967’s principles on fair procedure further require transparency and providing the employee a reasonable opportunity to be heard.
Illustration:
A retail firm dismissed a store supervisor for poor performance but failed to keep proper records of performance reviews, warnings, or disciplinary hearings. When the employee filed a claim, due to the lack of documentation, the dismissal was ruled unfair and RM120,000 had to be paid as compensation for wrongful dismissal.
Conclusion
Effectively managing non-performing employees starts with clear expectations and well-structured contracts, followed by fair and documented probation and dismissal processes. Understanding the legal grounds for termination and maintaining thorough records are essential to protect your business from wrongful dismissal claims.
Each SME’s circumstances are different, so tailoring these approaches to your specific situation is important. Seeking professional legal advice ensures your processes are fair, compliant, and reduce the risk of costly disputes, helping you maintain a productive and motivated workforce.
