The Legalities of Terminating an Underperforming Employee in the Philippines

When did terminating an underperforming employee become such a delicate balancing act? Once upon a time, employers could make swift decisions about workers who failed to meet expectations. Today, however, the landscape has undergone a dramatic transformation—particularly in the Philippines, where employee protections have surged to unprecedented levels.

The comeback story isn't about leniency toward underperformance itself, but rather the resurgence of comprehensive legal frameworks that shield workers while still providing employers legitimate pathways for termination. Industry data reveals that labor cases related to termination disputes increased by 32% between 2020 and 2025, with poor performance cases accounting for nearly 60% of these disputes. This shift reflects both growing employee awareness of their rights and evolving business practices that demand strategic, legally compliant approaches to workforce management.

The Constitutional Foundation: Security of Tenure

The Philippines' approach to employment termination is anchored in Article XIII of the 1987 Constitution, which guarantees workers' security of tenure. This constitutional protection means that no employee can be dismissed except for just or authorized causes and only after due process has been observed. The Labor Code of the Philippines, particularly Presidential Decree No. 442, operationalizes these constitutional guarantees through detailed provisions governing termination procedures.

Understanding this foundation is crucial for any business operating in the Philippines. The law doesn't prohibit termination—it simply requires employers to navigate a structured process that protects both parties' interests while maintaining workplace efficiency.

Grounds for Terminating Underperforming Employees

Just Causes for Termination

Under Article 297 (formerly Article 282) of the Labor Code, employers can terminate employees for just causes, which include serious misconduct, willful disobedience, fraud, and importantly for our discussion, gross and habitual neglect of duties. Poor performance typically falls under this category when it reaches a level of gross inefficiency or chronic failure to meet reasonable work standards.

The Supreme Court has consistently held that poor performance constitutes valid grounds for dismissal when it demonstrates:

• Consistent failure to meet established performance standards
• Repeated inability to fulfill job responsibilities despite adequate training and support
• Documented patterns of inefficiency that impact business operations

However, the burden of proof rests heavily on the employer. Performance-related terminations require objective metrics, documented evidence, and clear demonstration that the employee's inadequacies significantly harm business operations.

Authorized Causes vs. Just Causes

It's essential to distinguish between just causes and authorized causes for termination. While just causes relate to employee misconduct or poor performance, authorized causes involve business-related reasons such as redundancy, retrenchment, or closure. Poor performance falls squarely within just causes, meaning the employer must prove the employee's fault or negligence—not merely business necessity.

The Two-Pillar Due Process Requirement

The Philippines labor law mandates both substantive due process (valid grounds) and procedural due process (proper procedure) for any termination to be considered legal.

Substantive Due Process

This requires employers to establish legitimate grounds for termination through:

• Clear, reasonable performance standards communicated to employees
• Objective measurement criteria and documentation systems
• Evidence of the employee's failure to meet these standards
• Proof that the poor performance significantly impacts business operations

Procedural Due Process: The Twin-Notice Rule

The procedural requirements follow a strict twin-notice system:

First Notice (Notice to Explain): The employer must issue a written notice specifying the acts or omissions constituting grounds for dismissal. This notice must be sufficiently detailed to allow the employee to prepare an adequate defense.

Opportunity to Be Heard: After receiving the first notice, the employee must be given a reasonable opportunity to explain their side, either through a formal hearing or written explanation. This stage allows employees to present evidence, call witnesses, or provide mitigating circumstances.

Second Notice (Decision Notice): Following the employee's response and any hearing, the employer must issue a final notice stating the decision and the reasons for termination (or other disciplinary action).

Failure to follow this procedure, even with valid grounds for termination, can result in the dismissal being deemed procedurally infirm, potentially exposing employers to liability for damages or nominal compensation for procedural violations.

Performance Improvement Plans: A Strategic Approach

Leading Philippine companies have increasingly adopted Performance Improvement Plans (PIPs) as both a remedial tool and legal safeguard. A well-structured PIP serves multiple purposes:

• Documentation: Creates a clear record of performance deficiencies and improvement efforts
• Fairness: Demonstrates the employer's good faith attempt to help the employee succeed
• Legal Protection: Provides additional evidence of due process and reasonable employer conduct

Industry best practices suggest implementing PIPs for 30 to 90 days, depending on the role's complexity and the nature of performance issues. During this period, employers should provide specific goals, regular feedback, necessary resources, and clear consequences for continued underperformance.

Documentation Requirements and Evidence Standards

Philippine labor jurisprudence demands substantial evidence to support performance-related terminations. This standard, while lower than criminal cases' "proof beyond reasonable doubt," still requires credible, relevant evidence that would convince a reasonable mind.

Essential Documentation Elements

Employers must maintain comprehensive records including:

• Performance evaluations with specific, measurable criteria
• Incident reports detailing specific performance failures
• Training records showing opportunities provided for improvement
• Customer complaints or feedback related to the employee's performance
• Comparative data showing the employee's performance relative to peers or standards
• Correspondence documenting coaching attempts and performance discussions

The Department of Labor and Employment recommends maintaining such records for at least three years following any termination to address potential labor disputes.

Common Pitfalls and Legal Risks

Procedural Violations

The most frequent cause of failed termination cases involves procedural missteps. Research from Philippine labor courts shows that 45% of successful employee reinstatement cases resulted from procedural violations rather than lack of substantive grounds.

Common procedural errors include:

• Insufficient detail in the first notice
• Failure to provide adequate time for employee response
• Bypassing the hearing or explanation opportunity
• Premature termination before completing due process

Discrimination and Bias Concerns

Employers must ensure that performance standards and termination decisions don't discriminate based on age, gender, religion, or other protected characteristics. The Equal Opportunity Employment principle requires that performance evaluations be objective and consistently applied across all employees in similar positions.

Constructive Dismissal Risks

Forcing an employee to resign through harassment, impossible working conditions, or other coercive means constitutes constructive dismissal—equivalent to illegal termination. Even legitimate performance management must avoid creating hostile work environments that compel resignation.

Financial Implications of Termination

Separation Pay Requirements

Employees terminated for just causes (including poor performance) are not entitled to separation pay. However, they remain entitled to:

• Unpaid wages up to the termination date
• Proportionate 13th month pay
• Unused vacation leave credits (if company policy provides)
• Other earned benefits per company policy

Consequences of Illegal Dismissal

Employers found guilty of illegal dismissal face significant financial consequences:

• Reinstatement of the employee (or separation pay in lieu of reinstatement)
• Full back wages from termination date to final judgment
• Attorney's fees (typically 10% of the monetary award)
• Nominal damages for procedural violations (ranging from ₱30,000 to ₱50,000)

Recent Department of Labor data indicates that illegal dismissal awards average ₱500,000 to ₱2 million depending on the employee's tenure and salary level—making compliance far more cost-effective than litigation.

Best Practices for Philippine Employers

Proactive Performance Management

Effective staffing and HR management begins with clear expectations and regular feedback. Industry leaders recommend:

• Quarterly performance reviews rather than annual evaluations
• SMART goals (Specific, Measurable, Achievable, Relevant, Time-bound)
• Regular coaching sessions to address issues before they become grounds for termination
• Skills training programs to help underperforming employees improve

Legal Consultation and Documentation

Given the complexity of Philippine labor law, employers benefit from:

• Legal review of termination procedures and documentation
• HR training on proper termination protocols
• Standardized forms and processes for performance management
• Regular policy updates to reflect current legal requirements

Alternative Dispute Resolution

Before proceeding to termination, consider alternative approaches:

• Transfer to different roles better suited to the employee's capabilities
• Additional training or mentoring programs
• Voluntary separation packages for mutual agreement
• Mediation services through the Department of Labor and Employment

Recent Legal Developments and Trends

Department Order 147-15

The Department of Labor and Employment's Department Order 147-15 has standardized due process requirements, providing clearer guidelines for employers while strengthening employee protections. This order emphasizes the importance of substantial evidence and proper documentation in termination cases.

COVID-19 Impact on Labor Relations

The pandemic has influenced labor jurisprudence, with courts showing increased scrutiny of terminations that occurred during economic uncertainty. Employers must demonstrate that performance issues predated the pandemic and weren't merely reactions to extraordinary circumstances.

Digital Documentation Trends

Philippine labor courts increasingly accept digital evidence, including email communications, electronic performance tracking systems, and recorded training sessions. However, employers must ensure such evidence complies with the Data Privacy Act of 2012.

Moving Forward: The Strategic Approach

The resurgence of employee protection in the Philippines reflects a maturing labor market that values both worker rights and business efficiency. Smart employers view these legal requirements not as obstacles but as frameworks for building stronger, more productive workforces.

Successful termination of underperforming employees requires treating legal compliance as an integral part of performance management strategies, not merely a procedural hurdle. Companies that invest in proper documentation, fair procedures, and genuine improvement opportunities find themselves better positioned not only to defend termination decisions but to prevent performance issues from escalating to that point.

The key lies in understanding that Philippine labor law's emphasis on due process serves both parties' interests: employees receive fair treatment and genuine opportunities for improvement, while employers gain legal protection through proper procedures and documentation. In this evolved landscape, the most successful businesses are those that embrace comprehensive HR management practices that align legal compliance with operational excellence.

As the Philippine economy continues developing and workforce expectations evolve, employers who master these legal requirements will find themselves with significant competitive advantages—not just in avoiding litigation, but in building the kind of performance-driven, legally compliant workplace culture that attracts and retains top talent in an increasingly competitive market.