First, there is no legal requirement that a company must have a performance appraisal system. No law compels an organization to review the performance of its members, just as no law requires a company to produce annual budgets or provide good customer service. Conducting performance reviews, creating budgets, and giving good service are simply accepted management practices and very good ideas.
If a company does choose to have a performance appraisal system, it must be sure that the system complies with the laws. In the eyes of the law a performance appraisal is an employment test. It is thus scrutinized in a manner similar to that of other aspects of the employment process: initial recruitment, selection and hiring, promotion, compensation, and termination. As a result, the legal requirements for performance appraisal systems are similar to those for other selection tests.