PIP or Package? Legal Risks for Employers and Employees

Introduction

Employers, particularly in the technology sector, are increasingly using what has become known as the “PIP or Package” approach.

Employees are told that concerns have arisen about their performance, or that they have received a low-performance rating and are then presented with two apparent alternatives: enter a Performance Improvement Plan or accept a severance package and leave employment.

At first glance, this may look like a choice. In practice, it can raise serious legal and procedural issues. The central question is whether the employer is genuinely offering an opportunity to improve or whether the employee’s exit has already been decided.

What is a Performance Improvement Plan?

A Performance Improvement Plan (“PIP”) is intended to be a structured process for addressing performance concerns. Properly used, it should support the employee in meeting identified standards and remaining in employment. It should not be a device for managing an employee out of the business.

A fair and effective PIP should:

• Clearly identify the areas of concern

• Set measurable and realistic objectives

• Provide appropriate support, guidance and training

• Allow a reasonable period for improvement

• Include regular reviews and constructive feedback

The process must also comply with basic principles of fair procedures and natural justice. The employee should know the case being made, be given a meaningful opportunity to respond and improve, and be assessed objectively by decision-makers who have not prejudged the outcome.

Severance Packages and Settlement Discussions

A severance package is an agreement under which an employee leaves their employment in exchange for certain payments and other benefits. Depending on the circumstances, these may include:

• An ex-gratia compensation payment

• Notice pay and accrued annual leave

• A contribution towards legal fees

• An agreed reference or statement of employment

• Confidentiality and provisions on making negative statements about the employer

• A waiver of employment-related claims

Any severance arrangement, compromise agreement or settlement proposal should be entered into voluntarily. Employees should be given reasonable time to consider the offer, obtain independent legal advice and make an informed decision free from undue pressure.

Why “PIP or Package” Creates Legal Risk

The difficulty is that the two options pull in opposite directions. A PIP is designed to preserve the employment relationship whereas a severance package is designed to end it.

Offering both at the same time can create the impression that the employer has already concluded that the employee should leave, before any genuine performance process has been completed. That impression can be particularly damaging where the employee has a positive performance history, has not received prior warnings or is offered an exit package at the outset of the PIP.

Employees may reasonably question the legitimacy of a PIP where:

• They have not previously received formal warnings

• They have a positive performance history

• The exit package is offered at the outset of the process

• The employer appears to be encouraging departure regardless of the PIP outcome

The earlier an exit proposal is made, the stronger the argument that the employer may already have formed a view about the employee’s continued employment. In some cases, this may undermine the credibility of the entire performance management process.

Warning Signs in a PIP Process

Not every PIP is problematic. However, concerns can arise where the process appears to be designed to justify dismissal rather than facilitate improvement.

Potential warning signs include:

• Unrealistic or unattainable targets

• Vague or poorly defined performance concerns

• Insufficient support or training

• Excessive monitoring or scrutiny

• Constantly changing objectives

• Unreasonably short timelines for improvement

• Criticism that is inconsistent with previous appraisals or feedback

Where alleged performance concerns arise suddenly and are immediately accompanied by a suggestion that the employee should leave, the employer may face a challenge that the PIP was not genuine and that the outcome had effectively been predetermined.

Fair Procedures Remain Central

Irish employment law requires employers dealing with performance concerns to act fairly and objectively. One of the core principles of fair procedures is that decision-makers must approach the process with an open mind.

If an employer raises performance concerns while simultaneously offering to pay the employee to leave, it may support an inference that the decision has already been made. A process that appears predetermined may be vulnerable to challenge before the Workplace Relations Commission (“WRC”) or the Labour Court.

The key point is simple: a PIP should not be used as a paper exercise to justify an eventual dismissal. It must provide a real opportunity for improvement, based on fair, objective and evidence-based assessment.

“Without Prejudice” Does Not Always Mean Protected

Some employers assume that discussions regarding a severance package can automatically be kept out of any future legal proceedings by marking them “without prejudice” or by saying it is “off the record”. This is not necessarily correct.

Ireland does not have the same statutory “protected conversations” regime as the United Kingdom. Labelling a discussion “without prejudice” or “off the record” will not automatically prevent it from being considered in later proceedings. In the wrong circumstances, what is said during an exit discussion may become relevant evidence before the WRC.

Constructive Dismissal Exposure

A poorly handled “PIP or Package” process may also increase the risk of a constructive dismissal claim, particularly where the employee argues that the employer’s conduct has destroyed trust and confidence.

Constructive dismissal occurs where an employee resigns because the employer’s conduct has fundamentally damaged the employment relationship or breached the implied duty of trust and confidence.

An employee may argue that being presented with an exit package at the same time as a PIP demonstrates that the employer no longer genuinely wishes to retain them. In such cases, the employee may contend that resignation was a reasonable response to the employer’s conduct.

While constructive dismissal claims are often difficult and highly fact specific, the circumstances surrounding a “PIP or Package” proposal can be highly relevant when assessing whether an employee was treated fairly.

Case Study: Danica Gutierrez v Cafico Corporate Services Limited

An illustration of the inherent risks can be seen in the WRC decision in Danica Gutierrez v Cafico Corporate Services Limited (ADJ-00050330).

In this case, the employee was placed on a PIP and, just three working days later, was invited to a meeting where she was offered a severance package. The employer maintained that she could either accept the package or continue with the PIP. The employee argued that the employer had already decided she would be leaving the business.

The WRC found in favour of the employee and awarded compensation of €17,917. The Adjudication Officer described the employer’s conduct as the “embodiment of unreasonable behaviour” and concluded that the employer’s actions undermined the relationship of trust and confidence.

This decision does not mean that every settlement discussion following a PIP will be unlawful. It does, however, underline the importance of timing, context and fairness. Where an employer moves quickly from alleged performance concerns to an exit proposal, it may become difficult to maintain that the performance process was genuinely open-ended.

Practical Takeaways for Employees

Employees who are presented with a “PIP or Package” proposal should avoid making an immediate decision. The proposal should be assessed carefully, both from a legal and practical perspective.

It is generally advisable to:

• Request that any proposal be provided in writing

• Seek independent legal advice

• Ask for full details of the alleged performance concerns

• Review the proposed PIP objectives and timelines carefully

• Keep detailed records of meetings and communications

• Consider whether the process appears fair and genuinely focused on improvement

Where a severance package is offered, employees should look beyond the headline compensation figure and consider matters such as notice pay, bonuses, commissions, share awards, pension implications, continuing benefits, confidentiality obligations, restrictive covenants, tax treatment and the value of any legal claims being waived.

Conclusion: Substance Over Labels

The “PIP or Package” model should not be treated as a routine HR option. While performance management and negotiated exits can each be lawful when handled properly, combining them can create significant risk if it suggests that the employer has already decided the employee’s future.

Irish employment law looks at the reality of what occurred, not merely the labels used. If the employee was not given a genuine opportunity to improve, or if the process appears predetermined, the employer may face legal challenge.

For employees, the practical message is clear: take advice early, ask for the proposal in writing and carefully consider whether the employer’s conduct indicates a genuine performance process or a predetermined exit.

Further Information

For expert legal guidance regarding performance improvement plans and severance packages, please contact Partner Marc Fitzgibbon or Solicitor Ernesta Staponkute in our Employment Team.

For further guidance, see our previous article: Navigating Redundancies: Common Pitfalls for Employers