Performance Management & Capability Procedures: How UK Employers Can Manage Underperformance Fairly

Underperformance is one of the most common and sensitive challenges UK employers face. An employee who is not meeting the required standard can affect team morale, productivity and customer service. At the same time, handling the situation poorly creates a real risk of unfair dismissal or discrimination claims.

A structured capability procedure gives employers a fair, consistent and legally defensible way to manage underperformance. This guide explains the difference between performance management and formal capability processes, the key stages involved, and how specialist supportreduces risk for employers. It addresses employment law in Great Britain (England, Scotland and Wales); Northern Ireland has a separate employment law framework.

Performance Management vs Formal Capability Procedures

Day-to-day performance management is part of normal line management. It includes setting clear objectives, giving regular feedback, holding one-to-one meetings and addressing minor concerns informally. Most performance issues can and should be resolved at this level.

A formal capability procedure is used when informal efforts have not produced sufficient improvement, or when the underperformance is more serious. Capability focuses on whether the employee is able to do the job to the required standard, as distinct from misconduct (which is usually handled under a disciplinary procedure).

Confusing the two processes is a frequent error. Treating genuine inability to perform as misconduct or moving straight to a formal process without first considering appropriate support can increase the risk that any subsequent dismissal is found unfair.Employment Law Services (ELS) regularly advises employers on the correct route and helps keep processes compliant as part of itsfixed-fee Annual Retainer Service.

Why a Fair Capability Process Matters

The AcasCode of Practice on Disciplinary and Grievance Procedures expressly covers disciplinary situations involving misconduct and/or poor performance. Employers may use a separate capability procedure, but the basic principles of fairness in the Code should still be followed and adapted as appropriate. Tribunals take the Code into account in relevant cases, and compensation can be adjusted by up to 25% for unreasonable failure to comply. A fair process typically involves:

Clear evidence that the required standard has been explained
A genuine opportunity for the employee to improve
Reasonable support and training where appropriate
Proper consideration of any underlying health or disability issues
A right of appeal

Failure to follow these principles can contribute to a capability dismissal being found unfair. A well-documented process helps protect the business and demonstrates that the employer has acted reasonably. Employers should also note that, from 1 January 2027, the qualifying period for ordinary unfair dismissal will reduce from two years to six months; discrimination and certain automatically unfair dismissal claims can already be brought without that qualifying service.

Step 1: Identify and Evidence the Underperformance

Before any formal action, managers need clear, objective evidence. This may include:

Failure to meet agreed targets or key performance indicators
Consistent quality issues or error rates
Customer or internal feedback
Evidence against clear role standards, objectives or consistently applied performance measures

Vague statements such as “not good enough” or “poor attitude” are difficult to defend. Specific examples, dates and impact on the business make the process far more robust.

At this stage it is also important to consider whether there may be an underlying reason for the underperformance, such as lack of training, unclear instructions, personal difficulties, or a health condition.

Step 2: Informal Performance Management

Most cases should begin with informal discussion. A constructive conversation that sets out the concerns, agrees specific improvement targets, and offers support often resolves the issue without the need for formal action.

Notes of these discussions should be kept. If improvement does not follow, the informal stage provides evidence that the employee was given early warning and opportunity to improve.

Step 3: Formal Capability Procedure – Invitation and Hearing

If informal efforts are unsuccessful, the employer may move to a formal capability process. The employee should receive a written invitation that:

Sets out the performance concerns clearly
Encloses relevant evidence
Explains the possible consequences (including eventual dismissal)
Confirms the statutory right to be accompanied where the meeting may result in a formal warning or other disciplinary action
Provides reasonable notice of the meeting

The hearing itself should be conducted by a manager who can consider the matter fairly. The employee must be given a proper opportunity to respond, explain any mitigating factors, and suggest what support might help them improve.

Step 4: Improvement Plans and Review Periods

A fair capability process will usually include a formal improvement plan with:

Specific, measurable targets
A reasonable timescale for improvement
Details of any training, coaching or adjustments to be provided
Scheduled review meetings

The length of the review period depends on the role and the nature of the underperformance. Too short a period can be criticised as unreasonable; an excessively long period may not serve the business. Regular review meetings allow progress to be monitored and the plan to be adjusted if necessary.

During this phase the employer should continue to offer reasonable support. Simply setting targets without assistance weakens the fairness of the process.

Step 5: Further Action if Improvement Is Insufficient

If the required standard is still not met at the end of the review period, the employer may move to a further formal hearing. Depending on the stage reached and the circumstances, possible outcomes include an extension of the improvement plan, a written or final written warning, or, where fair and appropriate after prior support and warnings, dismissal on notice.

Dismissal should only be considered when it is clear that theemployee is unlikely to reach the required standard within a reasonable time, after appropriate support and any reasonable alternatives have been considered. The employer should also consider whether changes to duties or a suitable alternative role are practicable. The decision must be based on evidence and reached after a fair process.

Disability, Health and Reasonable Adjustments

Where underperformance may be linked to a physical or mental impairment that amounts, or may amount, to a disability under the Equality Act 2010, additional duties may arise. Employers must consider reasonable adjustments where they know, or could reasonably be expected to know, that the employee is disabled and is placed at a substantial disadvantage.

Adjustments might include changes to duties, working hours, equipment, or targets.Medical advice, often via occupational health, may be appropriate depending on the circumstances; employers should obtain the employee’s consent to medical reports and handle health information confidentially.Failing to consider reasonable adjustments properly can expose the employer to disability discrimination claims and may also affect the fairness of any dismissal.

ELS advisers help employers navigate these situations, including obtaining and interpreting medical evidence and assessing what adjustments are reasonable.

Documentation and Consistency

Every stage of the capability process should be documented: the evidence of underperformance, notes of informal discussions, invitation letters, hearing notes, improvement plans, review outcomes and the final decision letter.Good records provide important evidence if the process is later challenged.

Consistency across similar cases is equally important.Unjustified inconsistency can undermine the fairness and credibility of the process and may also create discrimination risk where protected characteristics are involved.

The Role of Clear Policies

A written capability or performance management policy sets expectations for managers and employees. It should outline the informal and formal stages,the right to be accompanied at relevant formal hearings, and the appeal process. Keeping policies up to date and accessible forms part of goodHR policies and procedures.

Managers also need practical training. Knowing the policy exists is not the same as running a fair hearing or drafting a robust improvement plan under pressure.

When Capability Issues Lead to Settlement or Claims

In some cases the employment relationship breaks down despite a fair process, or the employee raises a grievance or claim. A settlement agreement can provide a clean and mutually agreed exit. ELS assists employers with drafting and negotiating settlement agreements.

If a claim is issued, early specialist input improves the prospects of a commercial resolution or successful defence. ELS offers fixed-fee Employment Tribunal representation for capability-related claims.

How Ongoing Advice Reduces Risk

Capability cases often become more difficult because advice is sought too late, after an improvement plan has already gone wrong or a dismissal letter has been sent. Employers with access to unlimited advice through a retainer can obtain guidance at each stage: when first identifying underperformance, when drafting the improvement plan, before a formal hearing, and when considering dismissal.

Further details of what a retainer includes appear in What’s Included in an Employment Law Retainer Service. The model is especially valuable for SMEs that lack in-house employment law expertise. Related guidance for smaller organisations is available in the firm’s resource on employment law for small businesses.

Practical Checklist for Managing Underperformance

Before moving to formal action, consider:

Have the required standards been clearly explained and evidenced?
Has informal feedback and support already been tried?
Is there any indication of a health or disability issue that requires further exploration?
Are the proposed targets specific, measurable and reasonable?
Has the employee been given a genuine opportunity to improve with appropriate support?
Is the process being applied consistently with similar cases?
Is the decision-maker approaching the matter with an open mind?

Working through these points systematically produces a stronger, fairer process.

Getting Support When You Need It

Managing underperformance fairly requires clear standards, consistent process, proper support for the employee, and careful documentation. When these elements are in place, most capability issues can be resolved without formal dismissal. When dismissal is necessary, a well-run process significantly reduces legal risk.

Employment Law Services provides practical, fixed-fee advice on performance management and capability procedures. Whether you need guidance on a current case or ongoing unlimited support through a retainer, specialist help is available across the UK.

For advice on managing underperformance or to discuss how a retainer could support your managers, contact ELS for a free consultation. Fair process, clear evidence and timely expert input help employers address capability issues confidently while protecting the business from unnecessary claims.