If a tribunal asked you tomorrow to produce the written targets you set, the support you provided, and the formal notification you gave before dismissing on capability grounds, could you? For most SME employers, the honest answer is no. That gap between what happened and what can be evidenced is where capability dismissals fail. 

Capability dismissal is one of the five potentially fair reasons for dismissal under the Employment Rights Act 1996. Used correctly, with a properly run capability procedure, it is a legitimate route to ending employment where an employee cannot meet the required standard. Used incorrectly, rushed, undocumented, or confused with a conduct matter, it becomes an unfair dismissal claim waiting to land. 

This article covers the most common mistakes, why they happen, and what a procedure that actually holds up looks like. 

The capability procedure most SMEs use is not a procedure at all 

It typically looks like this. A manager raises concerns informally. No notes are kept. A review period is mentioned, but never formally started. Targets are not written down. A month passes, then another. The employee is quietly moved off key accounts or given less demanding work. Eventually, someone decides they need to go. 

At that point, the business calls in HR or a solicitor, and the question becomes: how do we do this now? The answer is expensive. 

Defending an unfair dismissal claim at an employment tribunal costs £8,000 to £15,000 in legal fees alone, whether you win or lose. The median compensation award in recent years has been around £8,000 to £10,000, and in cases where documentation is poor or the process plainly failed, awards climb significantly higher. Add management time, the cost of any settlement negotiation, and the operational disruption, and a capability dismissal that was handled without a proper procedure regularly runs to a five-figure total before it closes. 

And that is just the case that surfaces. The greater cost is invisible: the underperforming employee who stays in post for another eighteen months because the manager is afraid of getting the process wrong, reducing output in a team of ten while the problem compounds. 

Conduct vs capability: why the wrong diagnosis leads to the wrong outcome 

The conduct vs capability distinction matters more than most employers realise, and confusing the two is one of the most common causes of procedural failure. 

Conduct is about choice. The employee could do the job; they chose not to. Persistent lateness, ignoring instructions, dishonesty: these are conduct matters, and they follow a disciplinary procedure. 

Capability is about ability. The employee cannot meet the required standard, whether because of skills, qualifications, performance, or ill-health. A salesperson consistently missing targets because they lack the skills, or an employee absent for extended periods due to illness: these are capability matters, and they require a capability procedure. 

The distinction determines which procedure applies, which evidence you need, and how a tribunal will assess whether the dismissal was fair. A conduct dismissal and a capability dismissal are judged against different legal tests. 

A common mistake is treating a performance issue as a conduct matter because it feels more manageable. Capability procedures feel longer and more uncertain. Conduct procedures feel more definitive. So managers reach for the disciplinary route when capability is the real issue. The result: a dismissal that applies the wrong tests, produces the wrong documentation, and fails the fairness assessment on procedural grounds. 

The capability vs conduct question must be asked at the start, not retrofitted after the decision to dismiss has already been made. 

Five things employers get wrong in a capability procedure 

1. They do not start the procedure formally enough 

Informal conversations about performance are not the beginning of a capability procedure. The formal procedure begins when the employee is told in writing that their performance is being formally assessed against specified standards, that they will have the opportunity to improve, and that failure to improve may result in a formal warning or dismissal. That letter starts the clock and creates the documentation trail a tribunal expects to see. 

Many employers have the conversations without the paperwork. In a tribunal, conversations without paperwork did not happen. 

2. They set targets without teeth 

A performance improvement plan that sets vague targets such as "improve communication," "show more initiative," or "be more proactive" is not measurable. A tribunal will ask whether the employee knew precisely what improvement was required, by when, and how it would be assessed. If the answer is no, the process fails the fairness test regardless of whether the employee's performance was genuinely poor. 

Targets must be specific, measurable, and achievable within the timeframe set. Vague targets protect nobody: they create the appearance of a process without the substance. 

3. They skip the support obligation 

The ACAS Code of Practice on disciplinary and grievance procedures, which applies to capability cases, requires employers to give the employee a reasonable opportunity to improve. That includes providing support: training, supervision, regular review meetings, and addressing any obstacles to performance. 

Dismissing an employee who was never given the tools to improve is a dismissal that tribunals find very hard to call fair. Even where the employee's performance falls short, the question the tribunal asks is: did the employer do what a reasonable employer would do to help them improve? 

4. They rush the timeline 

A capability procedure needs sufficient time for genuine improvement to be possible and measurable. What "sufficient" means depends on the role, the complexity of the standards, and how long the performance issue has been developing. Dismissing someone after a two-week improvement plan in a technical role they have held for four years is unlikely to survive scrutiny. 

There is no fixed minimum period in law, but an improvement plan of four to twelve weeks is typical for most roles. Rushing reflects poorly on the employer's intentions, and tribunals notice. 

5. They confuse a sickness absence case with a performance case 

Dismissal on capability grounds covers two distinct situations: poor performance and ill-health absence. The procedures are different. A long-term sickness absence case requires medical evidence, a formal consideration of reasonable adjustments under the Equality Act 2010, and a specific structure of meetings before any dismissal decision can be made. 

Applying a performance framework to a sickness case, or vice versa, creates immediate legal exposure. An ill-health capability dismissal that did not explore reasonable adjustments may also be a disability discrimination claim. That changes the risk profile entirely. 

What a legally defensible capability procedure actually looks like 

A capability procedure that holds up in a tribunal has four identifiable stages, and each one is documented. 

The first stage is informal monitoring with a clear record. Before any formal procedure begins, the manager should be logging the performance concerns, conversations held, and support already offered. This is not a formal stage, but it is evidence that demonstrates the procedure was proportionate rather than reactive. 

The second stage is formal written notification. The employee is written to, told in plain terms that their performance has fallen below the required standard, given a copy of the company's capability procedure, told that the outcome of the process may include dismissal, and invited to a formal meeting with the right to be accompanied by a colleague or trade union representative. 

The third stage is the improvement period. Targets are set in writing. Support is agreed and provided. Review meetings are held and documented. Progress, or the absence of it, is recorded specifically, not in general terms. 

The fourth stage is the outcome. If the employee has not met the required standard after a fair opportunity to do so, the decision to dismiss can be made. That decision must be communicated in writing with the reasons stated, and the employee must be given the right to appeal. 

At every stage, the employee must understand what is expected of them, have the opportunity to make representations, and have access to an appeal against any formal outcome. A capability dismissal that follows this structure is not immune from challenge, but it is defensible. A dismissal that skips stages, lacks documentation, or misidentifies capability as conduct is not. 

When dismissal on capability grounds is the right outcome, and how to get there 

Capability dismissal is sometimes the right outcome. An employee who cannot meet the required standard despite a fair opportunity, genuine support, and a clear process has been given what the law requires. A dismissal in those circumstances is not harsh. It is appropriate. 

The problem is not that employers dismiss on capability grounds. The problem is that they either dismiss too early, before the process is complete, or too late, after tolerating poor performance for so long that running a credible procedure becomes difficult. 

An employee who has been underperforming for eighteen months, where everyone in the team knows it, and nothing formal has been done: that is a case where the procedure will be harder to run convincingly. Tribunals do not look kindly on an employer who tolerated a performance issue for over a year until a cost reduction was needed, and then identified an urgent capability concern. 

The practical answer is to start the process when the concern first becomes serious enough to document. Not to rush to dismissal, but to create a formal record, set clear standards, and give the employee the genuine opportunity to improve that the law requires. Starting early keeps the options open. Waiting until the situation is untenable closes them. 

Capability procedure: questions UK employers ask 

What is the difference between capability and conduct dismissal? 

Conduct dismissal applies where an employee has chosen to act in breach of their obligations: persistent lateness, insubordination, or dishonesty. Capability dismissal applies where an employee is unable to meet the required standard, whether due to lack of skill, qualifications, or ill-health. The two require different procedures, different evidence, and are assessed against different legal tests. Applying the wrong one to the wrong situation is a common cause of unfair dismissal findings. 

How long should a capability procedure take? 

There is no fixed minimum in law, but the procedure must give the employee a genuine opportunity to improve. For most roles, a formal improvement period of four to twelve weeks is typical. A very short improvement period, especially in a senior or complex role, is unlikely to satisfy a tribunal that the employee had a real chance to demonstrate improvement before the decision to dismiss was made. 

Does the Employment Rights Act 2025 change capability procedures? 

The Employment Rights Act 2025 raised the compliance floor across employment law, including strengthening unfair dismissal protections in certain circumstances. Employers running procedures written before the Act came into force should review them. The core structure of a fair capability procedure has not changed, but the Act has raised the standard against which employer conduct is assessed. Pre-2025 documentation carries a risk that has not yet fully surfaced. 

Can you dismiss someone on capability grounds without following a procedure? 

No. Summary dismissal for capability is not available in the way it is for gross misconduct. Even in cases of serious or sustained performance failure, a fair process must be followed. Dismissing an employee without a properly run capability procedure exposes the business to an unfair dismissal claim, regardless of how poor the performance was. 

What if the capability issue relates to a disability? 

Where the capability concern relates to health or a condition that may constitute a disability under the Equality Act 2010, the employer must consider whether reasonable adjustments could allow the employee to meet the required standard before any dismissal decision is made. Failing to consider this, even where the performance failure is genuine, exposes the business to a disability discrimination claim alongside the unfair dismissal. The two heads of claim together carry significantly higher risk than either alone. 

Is your capability procedure fit for purpose? 

If you have a capability case open, or an employee whose performance has been a concern for longer than you'd like to admit, The HR Doctor can help you structure a procedure that is fair, fully documented, and defensible. We work directly with SME owners and managers, not through layers of HR process. 

Book a free 30-minute discovery call: https://assist.hrdr.co.uk/appointment