The Legal Impact of Implementing Employee Performance Evaluation Systems (KPIs) on Termination Decisions in Private Sector Institutions.

Introduction:
Job competency is one of the most crucial pillars sustaining the contractual relationship between the employee and the employer. It forms the cornerstone for maintaining effective productivity within the institution in alignment with its strategic goals and corporate reputation. In light of this principle, the Omani Labour Law issued by Royal Decree No. 53/2023 reorganized the employment relationship and set forth detailed conditions for contract termination, particularly in cases of poor performance, as stated in Article 43(3). This article allows the employer to terminate the contract if the employee fails to achieve the required level of competence, provided the employee is notified of the deficiencies and given a minimum of six months to improve.

With modern institutions increasingly adopting performance evaluation systems based on Key Performance Indicators (KPIs) as a central tool in human resources management, there arises a need to examine the legality of relying on KPI results when making employment termination decisions. In this context, the 2023 Omani Labour Law raises several legal issues regarding the legitimacy of performance-based terminations and imposes precise safeguards that balance the institution’s interest in maintaining efficient human resources and the employee’s right to fair evaluation and a genuine opportunity to improve.

This article discusses these legal safeguards from the perspective of the Omani Labour Law and analyzes the legitimacy of terminating employment based on performance evaluation results and KPIs, in light of international standards and modern HR management practices.

1. Regulation of Competency as a Legitimate Ground for Termination under Omani Law
Article 43(3) of the Omani Labour Law stipulates that an employer may terminate the employment contract if “the employee fails to achieve the required level of competence after being notified of the deficiencies and given a reasonable opportunity of not less than six months to meet such level.” This provision represents a significant shift in the philosophy of Omani legislation, reflecting an increasing awareness of the importance of job performance as an objective standard for sustaining the employment relationship, provided procedural safeguards—such as prior notification, documentation, and a reasonable opportunity to improve—are respected.

This article should be understood within a broader context tied to the institution’s right to preserve the quality of its services and products, especially in highly quality-sensitive environments, such as food or retail businesses that depend on customer satisfaction and loyalty.

2. International Performance Evaluation Standards and Their Legal Impact
Global HR management practices emphasize the necessity of clear and pre-communicated evaluation systems based on measurable and verifiable indicators such as KPIs or mutually agreed-upon performance metrics. These indicators are viewed as fair and objective tools to determine an employee’s efficiency and contribution to achieving institutional goals.

The International Labour Organization (ILO) recommends that dismissals be based on objective and transparent grounds that are reviewable to ensure fairness and to limit employer abuse. Accordingly, the application of Article 43(3) of the Omani Labour Law should not occur in isolation from these international standards. The termination decision must be supported by clear documentation of performance evaluation results, documented improvement plans, and periodic follow-up meetings reflecting efforts made to support and enable the employee to meet the required standard.

3. Procedural Safeguards Required by Law and Modern Practice
Article 43(3) of the Omani Labour Law sets out several substantive requirements before an employment contract may be terminated due to underperformance. These include:

1. Notifying the employee of the deficiencies: This requires formally documenting performance observations and delivering them to the employee.
2. Providing a minimum period of six months for improvement: The employee must be given a chance to improve performance based on a defined performance plan.
3. Requirement to appoint an Omani replacement if the terminated employee is Omani and the job is still needed.

These requirements align with international standards, which call for a genuine opportunity for the employee to improve before termination, including training, professional mentoring, and regular evaluative feedback.

4. The Role of Reports and Evaluations in Supporting the Legal Decision
A decision to terminate employment due to incompetence must be based on objective and professional evaluation. Accordingly, monthly or periodic performance reports prepared by the direct supervisor serve as official documents reflecting the employee’s actual performance, especially when these reports are tied to pre-established performance indicators and discussed with the employee during the evaluation period.

The importance of these documents becomes apparent when a dismissal is challenged in court, as they serve as evidence of the institution’s compliance with legal procedures and employment fairness. This is supported by the jurisprudence of the Supreme Court of Oman, which has emphasized in several rulings that termination must be based on a “legitimate reason, absence of arbitrariness, and adherence to proper legal procedures.”

5. Abuse of Termination and Judicial Oversight Limits
Although the law grants employers the authority to terminate contracts for performance-related reasons, this power is not absolute. The court, as the competent authority, has the discretion to determine the legitimacy of the termination based on the evidence presented. The Omani Supreme Court has affirmed that “the burden of proving abuse lies with the employee if the employer provides a legitimate reason for dismissal.”

Therefore, a decision based on documented performance evaluations, an established improvement plan, and full compliance with Article 43(3) requirements is deemed legitimate and insulated from arbitrariness—unless the employee can prove otherwise.

Conclusion:
The Omani Labour Law issued by Royal Decree 53/2023 represents a significant regulatory advancement, enabling institutions to make objective, performance-based decisions without infringing on employee rights. At the same time, it establishes a finely balanced framework between performance efficiency and the employee’s right to fair evaluation and an opportunity for improvement. Consequently, the adoption of performance evaluation tools such as KPIs—when coupled with adherence to the procedural safeguards in Article 43(3)—provides a solid legal foundation for the legitimacy of employment termination and reflects clear alignment between national legislation and global best practices in human resource management.