Businesses that hire independent contractors for projects and work roles need to know how to terminate the contractor if necessary. Although termination of contractors is not covered by most labor laws (as with employees), there are still a few things to keep in mind to avoid potential legal conflict. When you are hiring a contractor, it is a business to business agreement that is defined by commercial contract laws.
Terms regarding Termination of Contract
Not every independent contractor performs as expected, and it may become necessary to end the relationship. Even if your business simply does not have a need for the contractor’s services any longer, termination still must be handled within legal guidelines.
It is tempting to think that this is easier than with employees, but there are pitfalls if not approached correctly. A disgruntled contractor could even make a claim that they were actually an employee, and ask for unpaid overtime or severance. This type of claim can be prevented with a contract that clearly defines the relationship.
The best situation is when you have a written agreement with the contractor, which includes specific contract clauses that outline the termination process.
These terms should include:
- Notice period (typically 30 days)
- Payment for completed work
- Compensation or penalty for early termination of a contract
- Reimbursement for tools or materials purchased for the job
For open ended contracts, the notice period should be followed to give the contractor time to replace the work and income without hardship. If the contract is for fixed period of time such as one year, then there should be some provision of compensation for the unfulfilled work period.
Breach of Contract
Claims for breach of contract can be made by either party for non-performance, non-payment or other defined issues that go to the very heart of the agreement.
Early Termination as Breach
If either party walks away from the agreement prematurely and without a good reason, that could be construed as a breach of the contract termination clause. For that reason, you want to adhere to the notice period and compensation in the contract to avoid being sued by the contractor.
Breach of Other Contract Terms
Breach of other contract terms can be used to terminate an agreement immediately without notice or other compensation. This is usually named a ‘material breach’, meaning some central part of the agreement is going unfulfilled (rather than just a late payment of delay in completion of the job).
If your contractor has breached the agreement in some way be sure to document the reasons, and be prepared to make some type of settlement if they think they are being terminated without cause.
What if there was no termination agreement?
If there was no written contract containing terms for termination, then any oral promises made would define the contractor’s rights. It is a good practice to find an amicable path toward termination, since your reputation as a business is at stake and you may even want to hire the contractor again at some point.
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