I’ve learned to deal with this kind of employee. The root cause is often insecurity so that’s what needs to be dealt with. Everything else may be a red herring.
1. Active listen to everything they say, even if it’s their unique perception of things. Do not challenge them, repeat what they said sometimes to make them feel smart, laugh at all the jokes, make them feel heard. You can acknowledge what they say and still not agree with them. Say “that must feel hard”, “that sounds disappointing”, “I can see you’re putting in a lot of effort” — acknowledge the feelings and generally true things (most people put effort into their work), not the minute facts if you think they could be wrong.
2. Give them a lot of praise and thanks, but be genuine. Don't make up praise, just turn up the positive feedback and turn down the negative. Basically, give this person 10% of the most important negative feedback only and 90% of the most important positive feedback.
3. Give them autonomy and trust. Take them off the critical path so they don’t have any real deadlines if you are worried about their performance, there is always backlog. Give them a simple project and trust them completely with the execution. Have 1:1s sometimes to give very very gentle guidance - “what do you think about X?” “What are some alternatives to Y?” “I read this article about Z, why don’t you have a look?”
4. Be friendly to them. Communicate a lot and informally, don’t be formal or involve many people in the communication. Focus on the frequency of the communication. There are some other tips in a book about building professional friendships called The Like Switch.
5. Increase bus factor, these people sometimes still leave unexpectedly. Someone might say something about them publicly or privately, or there will be some perceived slight against them and they will feel victimized.
6. Over time, you can gradually bring such a person back to the critical path and show them “the way” of being secure in the workplace by example.
7. Don’t talk negatively about this person behind their back, even if you usually share your work frustrations with work friends and even the small stuff (“X never washes his mug in the sink, I’m constantly washing up after him” — not even benign remarks like that). If it comes out, that will undo all of your hard work building up this employee. If it doesn’t, but other people learn about this person’s traits, then they might say something and that could turn into a significant problem, even leading to this person leaving because of a perceived slight.
Also, protect yourself. Speak to your own manager (but only them) about this person candidly when you are asked. Say that they tend to view themselves as a victim and they’re not very responsive to feedback, but that you are taking steps A, B, C and D, and that hopefully you’re seeing progress, like that they are less timid with you, they have fewer conflicts in the team, etc. Such a person may go to your manager and stir things up if they feel like they’re victimized by you. While it may be true that this person is victimized by basically everyone from time to time, some headaches can still come to you. So make sure your manager can back you up. The truth and a little bit of time is the best antidote to this type of person if they mean harm to you.
Anyways, they are not bad people, they just slipped into the victim mentality or maybe were raised that way. You can help them rebuild their self-esteem and stop seeing themselves as a victim if you must or want to. It’s probably the most challenging employee to manage though, so expect turbulence. But sometimes we don’t choose who we manage, and also, this person probably has many other great qualities which may make them very successful if they can overcome the victimhood.
This works in my own practice, but it’s definitely a delicate situation.