Does poor performance or a failed appraisal amount to being incompetent for the position?

In one case the employer produced a mass of evidence, including appraisal forms and appraisal criteria, to show that the employee was incompetent and had failed to meet the standard, and dismissed only after reassignment had also failed, relying on Article 40(2) of the Labor Contract Law, that is, where the employee is incompetent for the position and remains so after training or reassignment. The court held, however, that although the monthly appraisal forms showed a low rate of achievement of sales targets in some months, results depend not only on individual ability but also on the trading environment, market risk and other factors, and a finding of incompetence based on the monthly appraisal forms alone lacked an adequate factual basis. Cases of this kind are common in labor disputes. In (2025) Su 04 Min Zhong No. 5770, the court found that a Changzhou company's individual insurance premiums actually completed from January to May 2024, RMB 266,000, were indeed below plan. The shortfall, however, could have many causes: the market environment, competition in the sector, how well products matched demand, customer trust, whether product design and targets were reasonable, whether training and support were adequate, and the salesperson's professional ability, selling technique, attitude and client resources. To find Mr Yuan incompetent simply because the sales target was missed was far-fetched, and in May 2024 the half-year and annual appraisal cycles had not yet been reached. The first instance had been right to find that the company had failed to prove that Mr Yuan was incompetent and that his performance fell seriously short, and that it should bear the adverse consequences.

In practice performance appraisal is one of the employer's management tools and usually involves the appraisal system, the criteria and the scoring of results. Article 26(2) of the Notice of the General Office of the Ministry of Labor on Issuing the Explanation of Several Articles of the Labor Law (Lao Ban Fa [1994] No. 289) defines "incompetent for the position" as failing to complete the tasks agreed in the employment contract, or the workload of employees in the same type of work and the same post, as required; an employer must not deliberately raise the quota so that the employee cannot meet it. The minimum standard for completing the work is therefore not the same as poor performance from a management perspective: coming last, or near the bottom, in a routine appraisal does not amount to incompetence. Some provinces and cities have local rules. Article 9 of the Answers (II) of the First Civil Division of the Zhejiang High People's Court and the provincial arbitration institute on several issues in the trial of labor dispute cases addresses an employer whose internal rules set appraisal grades and provide for "last-place elimination", and asks whether it may dismiss an employee on that basis. The answer is that an employee in the lowest appraisal grade is not thereby "incompetent for the position", the statutory conditions for unilateral termination are not met, and the employer cannot terminate on that ground.

"Poor performance" or "a failed appraisal" is therefore not the same as legal incompetence. Performance appraisal is normally a comprehensive assessment of the employee's ability, or an incentive, and results directly affect pay, but poor results do not equal incompetence. An employee's results are affected by national and local policy, the strength of the product, the market environment and the employer's own management, and one or several failed appraisals cannot automatically be treated as incompetence.

Minton suggests the following points on performance appraisal.

First, link the appraisal result to incompetence. The employment contract or the internal rules may provide, for example, that a grade of D or below, or achievement of less than 50 per cent of the sales target, means that the employee is incompetent for the post. Without prior agreement or a rule to that effect, a missed target does not show that the employee is incompetent.

Second, the appraisal system must go through the full democratic and publication procedures, the targets must be reasonable, and the criteria must be objective and quantifiable. A system that has not been through the statutory process is invalid, and in setting targets the employer must consider whether they are reasonable and workable, and must not set unrealistic targets or deliberately obstruct their achievement. Employees should also assess the targets and discuss them fully with the employer.

Third, the assessment must be objective and fair, and must be communicated to the employee. The process and the result must be objective and not overly subjective, and a finding on the employee's performance must rest on an objective assessment. In (2024) Jing 01 Min Zhong No. 8622, for example, the 2022 appraisal result for Mr Shen produced by the company had been prepared unilaterally and was not signed by him, and the company had not produced the specific basis for the result or the records of the appraisal process.

Fourth, other factors must be excluded: the shortfall must be attributable to the employee's own skills or qualities. Declines caused by market fluctuation, weak product competitiveness or the employer's failure to provide the necessary working conditions, rather than by the employee's ability, must be ruled out.

Finally, foreign-invested enterprises often use a performance improvement plan (PIP) to raise an employee's ability. Consistent with the Labor Contract Law, training should form part of the PIP; if the employee remains incompetent after training, the employer may terminate in accordance with the rules and pay economic compensation.