Termination Based on KPI/Performance Standards in the Philippines

A doctrinal‐and‐practical guide for HR, lawyers, and managers

1. Statutory Framework

Legal Source	Key Point
Article 297 [old Art. 282] of the Labor Code	Lists “gross & habitual neglect of duties” and “other causes analogous to those above” as just causes for dismissal. Persistent failure to meet key performance standards is anchored here.
Art. 296 (probationary employment)	Employer must “communicate the reasonable standards” (often KPIs) at the time of engagement; failure to meet them is a ground for termination even without the “habitual” element.
Department Order (DO) 147-15, s. 2015	Codifies due-process steps for just-cause dismissals: (1) first notice (specifying facts & rule violated), (2) ample opportunity to explain or be heard, (3) written decision stating basis.
Constitution, Art. III, Sec. 1	Substantive & procedural due-process guarantee—any dismissal that is arbitrary, disproportionate, or procedurally infirm constitutes illegal dismissal.

2. What Counts as “Performance-Based” Just Cause?

Gross & Habitual Neglect: Gross = serious; habitual = repeated despite warnings, coaching, PIPs.
Analogous Cause: Courts also accept “poor or unsatisfactory performance” even if not gross/habitual provided the standard was reasonable, communicated, and objectively measured (e.g., failing a KPI like 80% sales quota for three successive quarters).
Probationary Standards: Single failure to achieve KPI may suffice because the law requires consistency with pre-communicated standards rather than grossness or habituality.

3. Elements the Employer Must Prove

Element	Documentary Proof That Usually Wins in NLRC / Courts
(a) Clear, reasonable KPI communicated in advance	Signed job offer, job description, onboarding checklist, copy of KPI matrix acknowledged by employee.
(b) Objective measurement & periodic appraisal	Monthly/quarterly scorecards, performance appraisal forms, system reports (e.g., CRM dashboards).
(c) Opportunity to improve	Performance-Improvement Plan (PIP), coaching logs, e-mails reminding of targets.
(d) Gross or at least repeated failure (for regulars)	Trend charts showing dips below threshold, comparative team rankings, written warnings.
(e) Observance of twin-notice rule & hearing	(1) Notice to Explain stating acts/omissions & KPIs breached; (2) minutes of hearing or written explanation; (3) termination notice with factual & legal basis.

Burden of Proof: Always on the employer. Failure to present the above will normally result in a finding of illegal dismissal even if the employee’s performance was objectively poor.

4. Procedural Due Process: The “Twin-Notice + Hearing” Model

First Notice (NTE) Facts: specific KPI shortfalls (e.g., “achieved 63 % vs. 90 % target for Q1-Q3 2024”). Rule: cite policy or KPI clause.
Employee’s Opportunity to Defend
- Written explanation and/or meeting. Courts will not insist on a full-blown trial, only “meaningful chance.”
Second Notice (Decision)
- Must state that dismissal is for just cause, summarize evidence, specify effectivity date, and inform of benefits (e.g., pro-rata 13th-month pay).

Failure in form ≠ automatic illegal dismissal but triggers nominal damages (₱30 000 is common). Failure in substance (no reasonable KPI, no substantial evidence) = illegal dismissal with full backwages & reinstatement / separation pay in lieu.

5. Jurisprudential Guideposts

Case (SC En Banc / Division)	Doctrine
Innodata Phils. v. Quilloy (G.R. 154232, 9 Mar 2010)	Repeated failure to meet computer-verified productivity targets + prior PIP justified dismissal; evidence was “substantial.”
St. Luke’s Medical Ctr. v. Notario (G.R. 220621, 2 Jul 2018)	12 incidents of low quality scores + coaching logs established habitual neglect; dismissal upheld.
Genuino Agro-Industrial v. Romano (G.R. 166429, 27 Feb 2006)	Poor sales performance but no prior notice of standard → dismissal illegal.
Precision Printing v. NLRC (G.R. 113267, 16 Mar 1999)	Single low-output appraisal does not amount to “gross & habitual”; employer must prove both.
Abbott Labs. v. Alcaraz (G.R. 192571, 22 Apr 2014)	Probationary employee dismissed for failure to meet KPI; SC reversed because KPIs were not communicated at hiring.

6. KPI Design Principles (What Courts Expect)

Specific & Measurable – avoid vague “do your best.”
Attainable & Reasonable – targets impossible to meet = constructive dismissal.
Relevant to the role – a nurse’s KPI cannot be pure sales figures.
Time-Bound & Transparent – state cut-off dates, weightings, rating rubric.
Consistently Applied – selective enforcement is discriminatory and void.

7. Distinctions: Regular vs. Probationary

Aspect	Regular Employee	Probationary Employee
Cause needed	Just cause (Art. 297)	Failure to meet probation standards (Art. 296)
Element of “habitual”	Yes, unless analogous cause accepted	No; a single failure can suffice
Twin-notice	Mandatory	Also mandatory per DO 147-15
Separation Pay	None for just cause	None, but proportionate 13th-month etc.

8. Best-Practice Workflow for HR

At hiring: Issue KPI matrix & secure signed conformity.
Throughout employment:
- Run regular evaluations; keep evidence.
- Intervene early with coaching & PIP (typically 30-90 days).
- Document all interventions.
When thresholds are missed:
- Verify data accuracy; audit system logs.
- Issue NTE within reasonable time (ideally within 30 days of discovery).
Decision-making:
- Evaluate employee’s explanations & any mitigating factors (illness, new territory, systemic issues).
- Apply graduated penalties if warranted (suspension, demotion).
- For dismissal, draft detailed second notice.
Post-dismissal:
- Report to DOLE regional office if part of mass lay-off? Not required for just-cause terminations, but advisable for record-keeping.
- Secure clearance & release partial pay within 30 days (Labor Code Art 301-302).

9. Remedies & Liabilities

If Employer Erred	Consequence
Substantive defect (no just cause)	Reinstatement without loss of seniority + full backwages (Art. 294).
Procedural defect only	Valid dismissal but employer pays nominal damages (₱30 000 baseline; Jaka Food vs. Pacot).
Bad faith / malice	Moral & exemplary damages + attorney’s fees (10 % commonly awarded).
Non-payment of final pay within 30 days	Fines under DO 173-17; possible administrative case.

10. Practical Tips to Bullet-Proof KPI-Based Terminations

Automate Performance Data – audit logs, BI dashboards reduce disputes.
Neutral Third-Party Review – calibration committees lend credibility.
Always Offer a Hearing – even if employee submits a memo, an optional zoom or in-person meeting shows good faith.
Keep Contemporaneous Minutes – SC disfavors after-the-fact affidavits.
Observe Proportionality – minor variances may merit suspension, not dismissal.
Maintain Policy Hierarchy – handbook > department memo; conflict resolved in favor of employee under Civil Code Art. 1306 & Art. 1700.
Consistency Across Workforce – divergence invites discrimination suits.

11. Intersection with Data Privacy & BI Tools

Collect only necessary data (Data Privacy Act 2012, Sec. 11).
Provide transparency notices for productivity monitoring software.
Secure consent where KPIs rely on biometric or geolocation data.

12. Conclusion

Termination on the ground of KPI or performance failure is lawful in Philippine labor jurisprudence if and only if the employer meets two parallel burdens:

Substantive – The KPI is reasonable, pre-communicated, objectively measured, and the non-compliance is serious (or habitual) enough to amount to neglect or an analogous cause; and
Procedural – The twin-notice rule, opportunity to be heard, and written decision are scrupulously observed.

Failing either strand exposes the company to illegal-dismissal liability, reinstatement, and backwages—a costly lesson for what might have been cured by a well-drafted KPI matrix and paper-trail discipline. HR practitioners and counsel must thus treat performance management not merely as a business tool but as a legally sensitive process governed by constitutional due-process demands and a robust body of Philippine Supreme Court precedent.