Reasons for Sending a Termination Letter
Whether an Independent Contractor has worked on a single project or been employed over the course of many years, there comes a time when the relationship must end. The reasons for this are many. The project is complete. The employer is facing budgetary concerns. The Independent Contractor is over capacity with their workload. Perhaps there is simply a difference of opinion on how the work should be done. Whatever the reason, it is always the best decision to put that separation in writing. Many Independent Contractors do not understand this but not having that separation sometimes opens the door to disputes that could have easily been avoided . An Independent Contractor Termination Letter is beneficial for both the employer and the Independent Contractor. The letter serves as proof that the relationship ended with the agreement of both parties as opposed to a sudden dismissal of business. It also provides a clear understanding that the work no longer needs to continue, which prevents the Independent Contractor from relying on compensation beyond the agreed-upon terms of the relationship. This also protects the employer from having to pay for work that they believe has already concluded.
Essential Components to Include
It is important to keep in mind that just like an employee, an independent contractor also deserves to know the reason for his/her termination. But unlike an employee, unless you have a specific contract provision that states employment is "at will," you must be polite and explain what led to the separation. It is also wise to reference any contractual obligations or compensation that will follow the termination (if any).
The termination letter should contain:
Contractor name and address;
Termination date;
A paragraph detailing any issues leading to the termination;
Contractual obligations (if any);
Compensation/invoice/payment information; and
A polite sign off.
Although it is not a legal requirement, you should also ask the contractor to acknowledge receipt of the termination letter. This will help avoid any disputes over whether he/she was properly notified. The best way to confirm receipt is to require a signature on a separate acknowledgment form that the contractor must return to you. This will give you a court-appealable record of the contractor’s awareness of the termination letter.
Legal Implications of a Termination
Termination of a working relationship with an independent contractor can have legal implications. Employers should therefore consider whether to comply with the termination provisions of their contract with the independent contractor, and what the consequences would be of any failure to do so. Canadian courts have held that wrongful dismissal occurs if the terms of the contract of engagement are not followed when an independent contractor is terminated, but the risk of liability for wrongful dismissal is usually low because a stronger case for a finding of wrongful dismissal can be made out against an employer who improperly dismisses an employee.
The risk of liability in the termination of an independent contractor is much more significant if some other statute applies to the working relationship. For example, in Ontario, the Occupational Health and Safety Act ("OHSA") maintains that workers retain their rights and obligations under the Act even after their independent contractor status has been established.
In Ontario, the case of Harris v. Ontario was a class action where a number of law enforcement officers brought a claim generally alleging that they had obtained employee status after they had been classified as independent contractors. For similar reasons, for those jurisdictions where workers not only retain their OHSA rights but also their statutory workers’ compensation benefits, the termination of an independent contractor could result in liability.
Even if the arrangement between the parties does not involve statutes like the OHSA or applicable workers’ compensation legislation, if the termination clause of any contract of engagement is ambiguous, leading to uncertainty about the compensation owed to the independent contractor, there is a risk that the termination clause will be unenforceable, with the Pages 1-3 entitling the contractor to some common law damages.
It is therefore worthwhile to ensure that the specifics of the business operations have been laid out in detail before protecting yourself legally when dismissing the independent contractor, including drafting contractual termination provisions to cover all potential termination events and providing for compensation in situations involving a termination without cause.
Also, although independent contractors do not receive severance pay under the Employment Standards Act, RSO 2000, c.41 (the "ESA"), the Ministry of Labour’s Guideline #9 provides that when an independent contractor earns income, they are likely an employee, and entitled to statutory entitlements such as vacation pay, public holiday pay, personal emergency leave, notice of termination, and severance pay. The Guideline could be interpreted as setting out a principle of ESA application regardless of whether the parties have agreed on the nature of their relationship when an independent contractor can be considered an employee.
A challenge for employers is how to draft termination letters that do not upset the legal balance of the relationship with the independent contractor and increase the chances of a wrongful dismissal or other lawsuit.
Tips for Delivering the Letter
When communicating a termination to an independent contractor, employers should keep in mind that the individual is not an employee and is not entitled to the same protections as an employee. An employer is not required to provide notice of termination or a termination letter to an independent contractor. However, best practice dictates transparency, professionalism and where possible, maintaining a positive relationship. Below are some tips on how to effectively communicate the termination to the independent contractor: Aim for brevity. Although some situations may require further explanation, the majority of independent contractors will appreciate a brief and straightforward email or phone call. If giving notice, do so in a non-confrontational manner. The independent contractor may be offended that his or her services are no longer required. It is important to leave a good impression, as the independent contractor may be called upon to perform additional work for the employer in the future. For example, if the independent contractor is not performing satisfactorily, you may want to consider letting him or her know the specific tasks that have not been performed to your satisfaction or would have liked to see done differently. If any documents, data or other items must be returned, consider giving the independent contractor ample time to do so. The returning of documents or property may be cited in a termination letter. If the independent contractor will be working for other clients on the same day, advise him or her of the termination at the earliest reasonable opportunity to allow for the individual to make a smooth transition. If the independent contractor has been caused any damages or hardship by the termination, offer to assist in mitigating those damages or hardship. For example, if he or she will be waiting on payments from the now-terminated company, explain the circumstances to others in the company who may be handling those accounts, so the independent contractor does not have difficulties collecting. Should the termination be documented, carefully vet the document for tone, spelling and grammar. Poorly written communication will leave a negative impression that could have been avoided; perhaps even ensuring a negative review if the relationship was soured by the termination.
Examples of Termination Letters
To better understand how to write the termination letter, below are a few sample letters.
Termination For Cause
Dear [IC NAME/CONTRACTOR NAME]:
We are terminating the Services Agreement effective [DATE] because your performance of the services has fallen below acceptable standards. As you know, your performance has failed to meet the terms detailed in the Services Agreement.
We have discussed your performance and have given you opportunities to improve, but unfortunately , we have not seen any significant improvement. Your last invoice was dated [DATE] and will be your last payment.
Termination of the Services Agreement will take effect [DATE].
This letter constitutes a notice of termination of the Services Agreement.
Termination For Contract Expiration
Dear [IC NAME/CONTRACTOR NAME]:
Please be advised that your Services Agreement with us terminates on the expiration date of [DATE].
Your last invoice was dated [DATE] and will be your last payment. All pending matters must be completed by [DATE] for any wind down.
This letter constitutes a notice of termination of the Services Agreement.
Termination For Convenience
Dear [IC NAME/CONTRACTOR NAME]:
Please treat this as notice of termination under paragraph/section number: [PAR/SEC NUMBER] of the Services Agreement with [CLIENT NAME] dated [DATE].
Your last invoice was dated [DATE] and will be your last payment. Further, you must cease all further activity concerning this matter and terminate any employees or agents who were assisting you in any matter related to the Services Agreement.
Please acknowledge receipt of this notice and confirm your understanding of the issues and queries herein no later than [DATE].
This letter constitutes a notice of termination of the Services Agreement.
Steps to Take After Termination
After sending a termination letter, there are a number of follow-up actions employers must take before the relationship is completely severed. If in the course of the termination letter process you were able to arrange for the contractor’s return of any company property, it is a good idea to follow up via e-mail or additional letter to document that the property has been returned and received. This can provide an additional layer of protection if issues arise, such as the contractor trying to claim later that they returned the property even if the company has no record of receiving it.
If any pay was owed to the contractor at the time of termination, it would be a good idea to review the company policy regarding pay to ensure that any accrued but unpaid pay is paid out to the contractor prior to the termination date or shortly thereafter. Again, this can be documented by providing the contractor with a copy of the check or the payment advice showing the payment in full.
If for any reason there are amounts owed by the contractor to the company, you should investigate whether you can recoup those amounts by deducting them from future payments that might be due to the contractor, or whether a separate action might be required to recover those amounts. Speaking with an attorney on the matter is recommended to review the options appropriately.
Notifications to Stakeholders. In addition to notifying the contractor, if needed notifications are to be sent to company management or human resources personnel, or it might be appropriate to send a notice to clients of the company if services were terminated, such as a consultant or similar role. This letter should be carefully crafted and reviewed prior to release so that you can ensure the company response will appear professional and leave a lasting positive impression.
Termination Pitfalls to Avoid
A common mistake when issuing a termination letter to an independent contractor is failing to give sufficient notice of termination under their existing agreement or, conversely, terminating without cause after the notice period has elapsed. In Alabama, unless a statute or a contract provision requires otherwise, a party may terminate an independent contractor for any reason not prohibited by law or the applicable agreement. Nonetheless, the overall principles of fairness and duty to perform in good faith should, at minimum, be considered. Typically, independent contractor agreements will set notice periods for termination (30 days is standard). However, if the notice period has expired and the agreement has not been renewed, it may be defensible to terminate a separate, but similar , agreement on the grounds of "disobeying a direct order." The Code of Alabama provides that employers have the authority to "discharge an employee for refusing to obey instructions or perform work as directed by an employer." Of course, that only works if the independent contractor is actually doing something that might lead a reasonable person to believe that he was "disobeying a direct order."
To that end, it’s also imperative that a termination letter adequately explains the rationale for termination and that the rationale is consistent with the manner used to treat similar independent contractors. Unreasonable reasons for termination can lead to legal action against the principal, as can animus towards the independent contractor, which can lead to claims for retaliatory discharge of whistleblowers or jury trials to gage the validity of your business decision to terminate.