Performance Improvement Plan and Termination: Employee Rights to Severance Pay in the Philippines

Disclaimer: The following discussion is for general informational purposes only and is not intended as legal advice. For specific concerns about your situation, please consult a qualified Philippine labor lawyer.

1. Introduction

Under Philippine labor law, employers must exercise caution and follow due process when dealing with employees whose performance falls below the employer’s expectations. One commonly used mechanism for addressing subpar performance is the Performance Improvement Plan (“PIP”). The PIP gives the employee an opportunity to improve within a specified timeframe. If, however, the employee fails to meet the standards set out in the PIP, the employer may proceed with termination based on “just cause.”

A key issue surrounding terminations related to performance is whether the employee is entitled to severance pay (commonly referred to as separation pay). This article outlines the relevant legal bases, procedures, and employee entitlements concerning PIPs, terminations for poor performance, and severance pay under Philippine law.

2. Legal Framework

2.1. Labor Code of the Philippines

The principal source of labor legislation in the Philippines is Presidential Decree No. 442, otherwise known as the Labor Code of the Philippines. Book VI, Title I of the Labor Code deals with termination of employment. Although the Labor Code does not specifically mention a “Performance Improvement Plan,” it does regulate the grounds and procedures for lawful termination.

2.2. Department of Labor and Employment (DOLE) Regulations

Implementing rules and regulations, as well as numerous Department Orders issued by the Department of Labor and Employment (DOLE), further interpret and guide employers on proper procedures. Employers are required to adhere to due process requirements and fair labor practices in handling performance-based and other forms of dismissal.

2.3. Supreme Court Decisions

Philippine Supreme Court decisions help clarify the principles under the Labor Code. Several cases highlight the necessity of giving employees ample opportunity to be heard and to rectify their shortcomings before an employer proceeds with termination for poor performance.

3. Performance Improvement Plan (PIP)

3.1. Definition and Purpose

A Performance Improvement Plan (PIP) is an internal, often written, managerial tool designed to:

Identify specific performance deficiencies of an employee.
Articulate clear, measurable goals or metrics for improvement.
Set a definite timeframe within which the employee must show improvement.
Outline the resources or support the employer will provide (e.g., training, mentoring).
Convey the consequences if the employee fails to meet the improvement goals.

While Philippine law does not mandate the use of a PIP, many employers implement it to demonstrate good faith and to fulfill part of the due process obligations under the Labor Code.

3.2. Advantages of a PIP

Due Process Compliance: Using a PIP often helps illustrate that the employer gave the employee a fair chance to improve.
Documentation: A PIP provides a formal record of the employer’s efforts to help the employee, which can serve as evidence if a legal dispute arises.
Employee Development: If properly implemented, a PIP can be constructive, helping employees align with company standards and expectations.

4. Grounds for Termination Under Philippine Labor Law

Termination of employment in the Philippines can generally be categorized as follows:

Just Causes (Art. 297, Labor Code):
- Serious misconduct or willful disobedience.
- Gross and habitual neglect of duties.
- Fraud or breach of trust.
- Commission of a crime or offense against the employer or his representative.
- Other analogous causes (e.g., poor performance, under certain circumstances).
Authorized Causes (Art. 298-299, Labor Code):
- Redundancy.
- Retrenchment to prevent losses.
- Closure or cessation of operation.
- Installation of labor-saving devices.
- Disease not curable within six months (when continued employment is prejudicial to the employee’s health or co-employees’ health).
Other Special Causes as recognized by law (e.g., completion of a project in project-based employment).

Poor performance is not expressly listed as a “just cause” by name, but it is frequently classified under the catch-all “other causes analogous to the foregoing” or “gross and habitual neglect of duties,” depending on how severe and persistent the performance issues are.

5. Due Process Requirements for Performance-Based Termination

Whether an employer uses a PIP or not, due process must be observed under Philippine law. This typically involves:

First Notice (Notice to Explain)
A written notice informing the employee of the specific acts or omissions that may lead to dismissal. The employee must be given a reasonable period to explain and present evidence in their defense.
Opportunity to be Heard
The employer should hold a hearing or conference or otherwise provide a fair chance for the employee to respond to the allegations of poor performance. This can be done in writing or in person.
Second Notice (Notice of Decision)
After evaluating the employee’s explanation (and the totality of evidence), the employer issues a written notice of its decision, whether it is dismissal, suspension, or exoneration.

Implementing a PIP can serve as an extension of this process by showing that the employer explicitly (1) identified the shortcomings and (2) gave a structured period for improvement. If, after the PIP period, the employee’s performance remains unsatisfactory, the employer may issue the required notices leading to potential termination.

6. Separation Pay (Severance Pay) in the Philippines

6.1. Just Cause Termination

As a rule, no separation pay is mandated under the Labor Code when an employee is terminated for a “just cause.” When poor performance rises to the level of just cause, an employer may legally end the employment without the obligation to pay severance. However, some companies or collective bargaining agreements (CBAs) provide for ex gratia separation benefits even when the termination is for just cause. This is entirely at the employer’s discretion unless contractually promised.

6.2. Authorized Cause Termination

For terminations based on “authorized causes” under the Labor Code (e.g., redundancy, retrenchment, closure), separation pay is generally required by law. Typical rates are:

Redundancy or retrenchment: One month pay or at least 1 month pay for every year of service, whichever is higher (the exact rate can vary; the Labor Code sets a minimum of one month or one-half month’s pay for every year of service, depending on the specific authorized cause).
Closure not due to serious business losses: One month pay or at least 1 month pay for every year of service, whichever is higher.
Disease: One month pay or at least 1 month pay for every year of service, whichever is greater, provided the disease is incurable within six months and continuing employment is detrimental to health or workplace safety.

6.3. Exceptions and Company Practice

Contractual Provisions: Employment contracts or CBAs can offer more generous separation benefits even for just cause terminations.
Company Policies: Some employers have internal policies that go beyond statutory minimums, granting separation pay as a gesture of goodwill or to avoid disputes.
Illegal or Constructive Dismissal: If a dismissal is found to be illegal (e.g., the employer did not comply with due process or lacked a valid ground), the employee is typically entitled to reinstatement (or payment in lieu of reinstatement) and full back wages, among other possible damages. Separation pay is awarded in lieu of reinstatement only in certain circumstances as determined by the courts.

7. Performance Improvement Plan as a Shield for the Employer

A properly documented PIP can serve as a vital component in defending a performance-based dismissal. It demonstrates:

Employer’s Good Faith: Showing that the employer invested time and resources to help the employee improve.
Notice of Deficiency: Written goals and metrics in a PIP reduce ambiguity about whether the employee was aware of performance shortfalls.
Opportunity to Improve: A PIP highlights that the employer gave the employee a chance to correct the deficiencies before resorting to termination.

However, the mere existence of a PIP does not automatically justify dismissal. The employer must still demonstrate that performance issues were real, significant, and habitual (if invoked under “gross and habitual neglect of duties”), or that they meet the threshold of an “analogous cause.” The employer also needs to follow the two-notice rule (notice to explain, plus notice of decision).

8. Practical Considerations

Clear Documentation
All steps taken—from issuing the PIP to the final evaluation—should be documented in writing. Documentation is often the decisive factor if a labor case reaches conciliation or litigation.
Fair and Reasonable Targets
The goals in the PIP should be realistic and measurable. If they are unreasonably high or vague, it may undermine the employer’s case if questioned.
Timelines and Support
The time frame for improvement should be sufficient for the employee to address the identified gaps. Employers should also demonstrate the support and resources made available to the employee (e.g., additional training).
Company Policies and Contracts
Employers should revisit internal policies and contractual agreements to determine if any additional procedural or monetary obligations exist beyond those in the Labor Code.
Seeking Legal Counsel
Especially for contentious terminations, consulting with an experienced labor lawyer helps ensure compliance with procedural and substantive due process, reducing the risk of an illegal dismissal claim.

9. Conclusion

In the Philippines, addressing poor performance through a Performance Improvement Plan can be a constructive way to both comply with labor law due process requirements and give employees a fair chance to improve. If, after a fair and documented PIP process, an employee’s performance remains unsatisfactory, the employer may proceed with termination for a “just cause.”

Under such a scenario, the general rule is that no separation pay is due for just-cause terminations. However, if the separation is based on “authorized causes,” or if company policies, contracts, or CBAs provide otherwise, an employee may still be entitled to severance pay.

Ultimately, the success of a PIP—and the validity of any subsequent dismissal—hinges on proper documentation and strict adherence to due process. This combination helps ensure a fair working environment for employees and legal protection for employers.

Again, this article is intended for informational purposes and does not substitute for formal legal advice. For a thorough assessment of any specific case, it is advisable to consult with a qualified labor law practitioner in the Philippines.