I can tell you for a fact that testing people too keep their job is illegal in many countries, especially in the EU. Now, if you're testing people to take on new roles or take on new tasks and it's the result of additional training, it can be done, but it cannot result in firing someone as they could sue for unfair dismissal and would very likely win.

Competency tests are done in software development as well, namely in positions where a certain certification is required to do your job and the certification is about to expire, but that's done by a competent body, not the company. If the employee fails the recertification, then the company has a clear legal case of ending or suspending that person's employment contract.