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From a psychological perspective, work stress influences employees’ psychological states, which, in turn, affects their effort levels at work (Lu, 1997; Richardson and Rothstein, 2008; Lai et al., 2022). Employee performance is the result of the individual’s efforts at work (Robbins, 2005) and thus is significantly impacted by work stress. However, previous research has provided no consistent conclusion regarding the relationship between work stress and employee performance. One view is that a significant positive relationship exists between work stress and employee performance (Ismail et al., 2015; Soomro et al., 2019), suggesting that stress is a motivational force that encourages employees to work hard and improve work efficiency. Another view is that work stress negatively impacts employee performance (Yunus et al., 2018; Nawaz Kalyar et al., 2019; Purnomo et al., 2021), suggesting that employees need to spend time and energy to cope with stress, which increases their burden and decreases their work efficiency. A third view is that the impact of work stress on employee performance is non-linear and may exhibit an inverted U-shaped relationship (McClenahan et al., 2007; Hamidi and Eivazi, 2010); reportedly, when work stress is relatively low or high, employee performance is low. Hence, if work stress reaches a moderate level, employee performance will peak. However, this conclusion is derived from theoretical analyses and is not supported by empirical data. Finally, another view suggests that no relationship exists between them (Tănăsescu and Ramona-Diana, 2019). Indubitably, it presupposes that employees are rational beings (Lebesby and Benders, 2020). Per this view, work stress cannot motivate employees or influence their psychology and thus cannot impact their performance.

To further explain the aforementioned diverse views, positive psychology proposes that work stress includes two main categories: challenge stress and hindrance stress (Cavanaugh et al., 2000; LePine et al., 2005). Based on their views, challenge stress represents stress that positively affects employees’ work attitudes and behaviors, which improves employee performance by increasing work responsibility; by contrast, hindrance stress negatively affects employees’ work attitudes and behaviors, which reduces employee performance by increasing role ambiguity (Hon and Chan, 2013; Deng et al., 2019).

During the COVID-19 pandemic, SMEs have faced a relatively higher risk of salary reductions, layoffs, or corporate bankruptcy (Adam and Alarifi, 2021). Hence, the competition among enterprises has intensified; managers may transfer some stress to employees, who, in turn, need to bear this to maintain and seek current and future career prospects, respectively (Lai et al., 2015). In this context, employee work stress stems from increased survival problems of SMEs, and such an external shock precipitates greater stress among employees than ever before (Gao, 2021). Stress more frequently manifests as hindrance stress (LePine et al., 2004), which negatively affects employees’ wellbeing and quality of life (Orfei et al., 2022). It imposes a burden on employees, who need to spend time and energy coping with the stress. From the perspective of stressors, SMEs have faced serious survival problems during the COVID-19 pandemic, and consequently, employees have faced greater hindrance stress, thereby decreasing their performance. Hence, we propose the following hypothesis:

H1. Work stress negatively influences employee performance in SMEs during the COVID-19 pandemic.

Work stress and mental health

According to the demand–control–support (DCS) model (Karasek and Theorell, 1990), high-stress work—such as high job demands, low job control, and low social support at work—may trigger health problems in employees over time (e.g., mental health problems; Chou et al., 2015; Park et al., 2016; Lu et al., 2020). The DCS model considers stress as an individual’s response to perceiving high-intensity work (Houtman et al., 2007), which precipitates a change in the employee’s cognitive, physical, mental, and emotional status. Of these, mental health problems including irritability, nervousness, aggressive behavior, inattention, sleep, and memory disturbances are a typical response to work stress (Mayerl et al., 2016; Neupane and Nygard, 2017). If the response persists for a considerable period, mental health problems such as anxiety or depression may occur (Bhui et al., 2012; Eskilsson et al., 2017). As coping with work stress requires an employee to exert continuous effort and apply relevant skills, it may be closely related to certain psychological problems (Poms et al., 2016; Harrison and Stephens, 2019).

The COVID-19 pandemic has disrupted the normal operating order of enterprises as well as employees’ work rhythm. Consequently, employees might have faced greater challenges during this period (Piccarozzi et al., 2021). In this context, work stress includes stress related to health and safety risk, impaired performance, work adjustment, and negative emotions, for instance, such work stress can lead to unhealthy mental problems. Hence, we propose the following hypothesis:

H2. Work stress negatively influences mental health in SMEs during the COVID-19 pandemic.

Mediating role of mental health

Previous research has found that employees’ mental health status significantly affects their performance (Bubonya et al., 2017; Cohen et al., 2019; Soeker et al., 2019), the main reasons of which are as follows: First, mental health problems reduce employees’ focus on their work, which is potentially detrimental to their performance (Hennekam et al., 2020). Second, mental health problems may render employees unable to work (Heffernan and Pilkington, 2011), which indirectly reduces work efficiency owing to increased sick leaves (Levinson et al., 2010). Finally, in the stress context, employees need to exert additional effort to adapt to the environment, which, consequently, make them feel emotionally exhausted. Hence, as their demands remain unfulfilled, their work satisfaction and performance decrease (Khamisa et al., 2016).

Hence, we propose that work stress negatively impacts mental health, which, in turn, positively affects employee performance. In other words, we argue that mental health mediates the relationship between work stress and employee performance. During the COVID-19 pandemic, work stress—owing to changes in the external environment—might have caused nervous and anxious psychological states in employees (Tan et al., 2020). Consequently, it might have rendered employees unable to devote their full attention to their work, and hence, their work performance might have decreased. Meanwhile, due to the pandemic, employees have faced the challenges of unclear job prospects and reduced income. Therefore, mental health problems manifest as moods characterized by depression and worry (Karatepe et al., 2020). Negative emotions negatively impact employee performance. Per the aforementioned arguments and hypothesis 2, we propose the following hypothesis:

H3. Mental health mediates the relationship between work stress and employee performance in SMEs during the COVID-19 pandemic.