How Performance Reviews Can Create Legal Risk for Your Business

Imagine giving an employee a positive annual review because their manager wanted to avoid an uncomfortable conversation. Three months later, you decide to terminate that employee for ongoing performance problems.

If the employee challenges the decision, your most recent written evaluation says they were doing well.

That does not automatically make the termination unlawful. But it creates an important credibility question: what changed, and can your business explain it?

Performance review legal risks often arise when the written record conflicts with the employer's explanation for a decision. If an employee alleges discrimination or retaliation, inconsistent evaluations may become evidence used to question whether poor

performance was the real reason.

For small business owners, the concern is not simply completing a review incorrectly. It is making employment decisions that your own records do not clearly support.

1. Positive reviews contradict the reason for discipline or termination

Managers sometimes soften ratings to keep the peace. They mark an employee as meeting expectations while privately telling the owner that the employee has struggled for months.

Later, the business cites those same longstanding problems as the reason for termination.

The legal risk: The employee may argue that the performance explanation is not credible, particularly if other facts suggest discrimination or retaliation. A recent positive review can make that explanation harder to support when the business cannot identify what changed.

What business owners should do: Require honest ratings supported by examples. Address concerns when they arise. When performance genuinely declines after a positive review, document the new issues and the feedback provided. A past positive rating does not prevent legitimate corrective action.

2. Different employees are evaluated under different standards

Two employees perform comparable work. One receives coaching for missed deadlines, while another receives a low rating that costs them a promotion. The manager cannot explain the difference.

The legal risk: Unequal treatment may support a discrimination claim when connected to a protected characteristic, such as race, sex, disability, or age covered by applicable law. Review records can show how the standards were applied and how ratings affected pay, advancement, or continued employment.

Not every difference is discrimination. Responsibilities, the seriousness of an issue, and relevant performance history may justify different outcomes. The reasons need to be legitimate and supported by the facts.

What business owners should do: Define job-related criteria, review comparable situations, and check unexplained rating differences before using evaluations to make employment decisions.

3. Ratings drop after an employee raises a protected concern

An employee reports suspected discrimination. Soon afterward, their evaluation becomes sharply negative, even though the manager had not previously raised significant concerns.

The legal risk: A lower evaluation may support a retaliation claim if it was imposed because of protected activity. The EEOC identifies unjustifiably lowered performance evaluations as a potential form of retaliation.

For employers covered by California's Fair Employment and Housing Act, the Civil Rights Department similarly lists undeserved negative evaluations among potentially adverse actions. Timing, comparisons with other employees, and the actual reason for the action matter.

A complaint does not shield an employee from legitimate performance management. However, a sudden change in treatment deserves careful review.

What business owners should do: Have HR or another appropriate, impartial reviewer examine the concerns and supporting records. Obtain employment counsel's advice when the circumstances warrant it. Preserve earlier records and make sure the complaint itself is not influencing the rating.

4. Accommodation requests are dismissed during the review

During a performance discussion, an employee explains that a medical condition is affecting a task and asks for a workplace adjustment. The manager dismisses the request because the review is already underway.

The legal risk: Under applicable disability law, failing to address a reasonable accommodation request can create a separate legal issue. EEOC guidance explains that a performance discussion may continue while the employer begins the interactive accommodation process. An employer cannot refuse to consider a request simply as punishment for poor performance.

This does not automatically require erasing a warranted evaluation or excusing past performance problems.

What business owners should do: Train managers to recognize requests and involve HR promptly. Review the accommodation obligations and any relevant protected leave before deciding how performance should be assessed or what action is appropriate.

5. The business creates a paper trail to support a predetermined outcome

An owner decides someone needs to leave, then asks a manager to write up past problems. The notes exaggerate events, omit conflicting information, or suggest coaching occurred when it did not.

The legal risk: An inaccurate or misleading record can undermine the business's credibility. In a retaliation dispute, evidence that the employer's explanation is false may support an inference of retaliation.

Starting documentation late is not automatically unlawful. Misrepresenting what happened creates a different problem.

What business owners should do: Record facts accurately, identify when a note was prepared, and distinguish past events from current observations. Preserve original records. Do not backdate documents or invent conversations. If earlier documentation is missing, acknowledge the gap and obtain guidance on the next step.

Review the risk before making the decision

Before using a performance review to support a warning, denied promotion, pay decision, or termination, check:

• Does the rating match the evidence? Compare it with earlier reviews, feedback, and relevant work records.

• Can you explain the standard? Identify the job-related expectation and how it was communicated.

• Were comparable situations handled consistently? Document legitimate reasons for meaningful differences.

• Is there a protected activity or accommodation issue? Examine the circumstances without treating the employee's exercise of rights as a performance problem.

• Has someone checked the decision objectively? Seek HR support and legal review where appropriate.

  
  

These checks cannot guarantee that a claim will never arise. They can help you identify inconsistencies before relying on them in an employment decision.

When small businesses should bring in HR

If a manager's proposed action conflicts with the employee's recent reviews, or a negative evaluation follows a complaint, accommodation request, or protected leave, involve HR before moving forward.

L.A. Confidential HR Solutions helps small businesses and nonprofits review performance management practices, improve documentation, and coach managers through difficult employee conversations. Our fractional and on-call HR support helps owners assess concerns early and coordinate with employment counsel when legal advice is needed.

If you are unsure whether your performance reviews support the decisions you are making, we are happy to help you take a closer look. An HR Audit might be a good start.

This article provides general HR education, not legal advice. Applicable laws and employer coverage vary. Consult employment counsel about specific legal risks or employment decisions.