Wrongfully Reviewed?  Risks of Performance Review Process

Performance reviews are a necessary step in the path to ensuring a team of productive employees.  However, as illustrated by a series of recent lawsuits filed by Yahoo employees against the internet giant, performance reviews are not without risks to the employers who administer them. In one such suit, an employee alleges that he and approximately 600 other Yahoo employees were unfairly fired based upon an allegedly unfair performance evaluation system, and were terminated without the notice required by federal and state laws, including the Worker Adjustment and Retraining Notification Act (WARN).

According to the Complaint, the evaluation involved a ranking process which required managers to designate a certain percentage of staff as low performers.  Another part of the review involved input from higher-level management who, per the Complaint, “often had no actual contact with the employees whose score they were modifying.”  The employee alleges in the suit that this opacity amounted to a manipulation of the review process that permitted employment decisions, including terminations, to be made based on favoritism and stereotyping.

While such a system is not inherently unlawful, it could be problematic if use of the system has an adverse impact on certain protected groups.  Specifically, while ranking employees may be permissible, if the rankings are bumping individuals in a protected category into a lower ranking, this could give rise to a suit similar to the instant one.  The risk is increased with more subjective rankings systems.

Indeed, one survey showed that 27% of Fortune 1000 companies reported using forced ranking in 2015, down from 44% in 2013, while another demonstrated that just 16% of mid- to large-sized businesses still use the system.  The trend has moved from numerical ranking to more frequent feedback, often in the form of dialogue.

Critics of the system note it does not yield improvements in business performance and is perceived negatively by employees it sends the message that the bosses are simply trying to cull the masses rather than develop their teams.  In addition, the competitive nature of stack ranking is inconsistent with workplaces that are becoming more collaborative and team-based, creating a paradox that does not benefit the business.

To be clear, performance evaluations are recommended for most if not all employers. Yet, with any type of performance evaluation, here are some tips to keep in mind:

  • Consistency counts. Design the system around consistency.  Establish objective standards or criteria against which a manager rates employees, and then provide objective feedback to the reviewed employees.  Ensure your HR professionals provide training, communication, and oversight throughout the review process, so that your system is uniformly effective, consistent, non-discriminatory and non-retaliatory.
  • Supplement for security. Consider building additional checks into the process, such as input from an HR consultancy firm or legal counsel.  This extra layer of oversight can help ensure there aren’t any patterns or disparate treatment of employees in protected groups, such as race, gender or age.
  • Rate to reduce. If you wish to use a performance evaluation to terminate an employee, get input from legal counsel regarding if and how this will be carried out.
  • Stack sparingly. If you must implement a stacked ranking, the most “defensible” time to do so in during a turnaround, when tough decisions are needed and you do not trust managers to make them.  Even then, this sort of system should be the exception rather than standard procedure.


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