While letting contractors go isn’t always easy, there are ways to make the termination process smooth and respectful for everyone involved. We’ll walk you through the steps of firing an independent contractor (IC), all of the legal aspects involved, and how to stay transparent and helpful throughout the entire process.
Here are the main factors to consider
Legal considerations for firing a contractor
Before terminating an independent contractor, make sure you classify the employee correctly and understand the legal implications of ending the contract. It’s helpful to start with understanding the difference between a 1099 and W-2 employee (independent contractor and salaried employee).
Review your independent contractor agreement
It’s important to review the contractor’s contract because you can confirm whether there are any terms, clauses, or notice provisions that prohibit or limit termination. These define when and how you can terminate a contractor. If the independent contractor doesn’t meet the contract stipulations, you can terminate the relationship without worrying about unemployment claims or severance packages.
Communicate the situation
Communicate and document the situation and reasons for termination including any previous issues you experienced. You’ll likely need evidence and any relevant documentation to support the decision, such as notes on previous conversations around the issue, the impact it had on your company, suggested improvements, and consequences of maintaining the status quo.
Follow the termination process
Follow the process that’s outlined in the contract or in the company policy to avoid termination pitfalls. Tip: practicing certain soft skills throughout the process such as empathy or active listening can keep your business’s positive reputation intact, save your HR team time, and create a smooth process when terminating the contractor agreement.
Make the final payment
Pay the contractor for any work completed before their termination and fulfill any other financial obligations outlined in the contract, such as making a payment by a certain date. Your global payroll platform can help prevent any payroll leakages during this step.
Be prepared to be a reference
If the contractor wants to work with other businesses in the future, they may ask for a reference from your company. Decide how you would want to approach this situation and how your response could impact the contractor’s future opportunities.
These steps for firing an independent contractor are referring to the scenario in which you have a signed agreement with the contractor. If you don’t have a written agreement with the contractor, you can still terminate their business with you while remaining above board.
How to fire a contractor if you don’t have a contract
Even if you only have a verbal agreement with the contractor, you can still terminate the contractor agreement either in person or in an email. You don’t need to follow any clauses, but it’s always a good idea to operate in good faith and stay transparent and fair throughout the process.
Pay the contractor for any completed work on time and document the process in writing to protect your company in case there are any legal disputes later on.
If you don’t have a section in your contract for how and when to terminate an independent contractor, you still have options.
What if your contract does not have a termination clause?
According to experts, you can still terminate an agreement with an independent contractor if you give reasonable notice. There’s no set amount of dates that are required, but depending on the circumstances, you can give two weeks or up to 90 days notice. One exception to the notice period is if the contractor engages in any criminal activity. If that’s the case, you may terminate the agreement immediately.
Can the independent contractor sue for wrongful termination?
Contractors aren’t considered employees, so as long as you follow the agreed upon contract, you can let them go as needed and they cannot sue for wrongful termination. 1099 employees, however, can sue for breach of contract, if you don’t respect the contract terms and conditions.
When hiring independent contractors, there’s always the risk of misclassification—listing people as contractors when they’re actually regular employees. Contractor misclassification can result in lawsuits, fines, and reimbursements of unpaid benefits. Contractors and employees have different tax laws so ensure you’re following the process for firing a 1099 employee and not a salaried employee.
To avoid disputes or extra tension, you can write a clear and respectful termination letter that outlines why the agreement is coming to an end. Writing a letter will protect you from wrongful termination, which is when an employer ends a working contract and violates the legal rights of the agreement or public policy such as 1099 that protects workers’ rights.
When terminating a contractor, be sure you’re not falling into one of these three illegal scenarios:
- Violation of contractual terms – If you defy the contract and cause financial damage to the contractor
- Employer retaliation – If the contractor feels you’re dictating how and when they should work and you retaliate, you could face legal ramifications
- Constructive termination – If you knowingly create intolerable or unacceptable working conditions and fire the contractor for not abiding by your conditions, the contractor can sue you for wrongful termination
What should a contractor termination letter include?
The purpose of the termination letter is so that you have a record of why you’re ending your agreement with the contractor and so they understand the reasoning and can find other opportunities in the future. The letter can include:
- The contractor’s name
- Your company’s name
- The name of the manager overseeing the termination or communicating with the contractor
- Date of the letter
- The termination date
- The reason for the termination
- Details about the notice period
- Any final payments
Despite the letter of termination, you can’t actually “fire” an independent contractor because they’re not an employee.
How is ending a contractor relationship different from firing an employee?
When you decide not to work with an independent contractor anymore, you’re not firing them like you would an employee. You’re actually terminating the relationship if they don’t meet the terms of the contract. It’s a subtle difference, but it’s significant, especially when it comes to taxes.
When firing a W2 employee, they’re entitled to retirement plans, severance, and any other benefits legally required or outlined in the contract. The U.S. Chamber of Commerce states that you’ll need to provide the employee with this information to avoid breaking any laws.
Contractors aren’t protected under certain labor laws, but you will need to live up to any written agreements you have with them.
Consequences of wrongfully firing an independent contractor
Alongside getting sued, you can also face other consequences for wrongfully firing an IC. Here are some repercussions your company may face for wrongful termination:
- Paying back lost wages – If you wrongfully fire a contractor, you may need to pay lawsuit charges and wage losses from the termination date or even future lost wages
- Paying lost benefits – If you misclassify an employee as an IC, you will need to pay their benefits from the start of their employment through their termination
- Legal fees – If you’re sued by an independent contractor, you’ll need to cover the legal costs
All of the above can add up and drain your company’s financial resources as well as harm your reputation. That’s why it’s often best to err on the safe side of hiring and firing contractors and refer to the experts.
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How can you fire an independent contractor in a nice way?
First, you’ll want to understand all of the legal risks and best HR practices. This can include giving the contractor plenty of notice, following the agreement terms, and paying them for their work on time. Finally, clearly and professionally, outline the reasons why you’re ending your agreement.
What do you say when terminating a contractor?
It’s important to conduct a termination in writing for your legal protection. When documenting the process on paper, you can address the contractor and provide the date, date of termination, reasons for ending the contract and commitment to honoring the agreement and payment for any deliverables. To end on a positive note, you can wish them luck with future projects.
Can a contractor sue for non-payment without a contract?
Even without a written contract, the contractor can sue you if you miss a payment. Consult local and federal laws regarding contractor rights or use a global payroll platform such as Papaya Global to make sure you remain compliant.
Can I refuse to pay a contractor for bad work?
This depends on the contract you have with the contractor and whether they have a warranty or guarantee. If the contractor doesn’t live up to the contract, they are in breach of the contract and you can break the agreement. Be prepared for the contractor to pursue legal action, however, and the court may not rule in your favor for withholding payment.
Can an independent contractor quit?
Some contracts between independent contractors and businesses or clients give both parties the option to end the contract at any time. If a contract includes a specific project timeline, contractors are obligated to fulfill the requirements and complete the job on time, unless employers violate the terms.
To get positive recommendations or referrals from clients, independent contractors should consider giving timely notice and make sure they’ve fulfilled the contract.