What are Your Options if the Client Cancels Your Contract Early?

 In Contractors

When you land a new client abroad the last thing on your mind is the possibility of early contract cancellation.  But this is a real possibility and can be a difficult situation to face while contracting in a foreign country.  At first, you will think about the loss of income and the need for a new job search, but you will also have to deal with the consequences inside the country before you leave.

This article will review why contracts are cancelled, the steps you can take, and how to continue working in the country if you wish.

Reasons why the client cancels your contract

A contractor’s contract can be cancelled for a variety of reasons, which may or may not be justified.  Reasons why the client cancels your contract can include:

  • Poor performance or unsuitable skills
  • Company downsizing or change in business focus
  • Your role becomes ‘redundant’ and is eliminated
  • Personal behaviour, extended illness, conflicts within the company

The bottom line is that as a contractor your client can end your contract for any reason, unlike with employees who have statutory rights of justification, notice and severance.  This is a primary difference with being self-employed, as you don’t have any rights other than those spelt out in your contract.  Even those contractual rights can be difficult to enforce in a foreign country by an ex-pat contractor.

What you can do in the event that the client cancels your contract

Working as an international contractor gives you fewer remedies if your contract is cancelled.  Even if you have a contract for a term such as one year, a client can still cancel it at any time.  A contract termination letter to an independent contractor is usually not required unless specified in your original agreement.  The client can give you verbal notice and simply stop paying you, although they are more likely to try to smooth the transition.

You might have legal recourse for early contract termination, but that means filing a case for breach of contract with all the related time and costs.  In most cases, you will probably just walk away with whatever last payment they offer.

There are also a few practical issues to handle in this event:

1. What happens to your work permit?

In some countries, the work permit is tied to a specific client sponsor.  In that case, you would have to leave the country right away or convert to a different visa.  A few countries will let you use the same work permit for different clients, so it’s worth knowing ahead of time the immigration rules.  If your work permit is through an umbrella company, it will probably be valid for a new client.

2. How do you deal with rental leases and other commitments?

If you decide to leave the country, then there will be a few final steps to take.  You may have signed a rental lease or have outstanding bills, so you will want to work with those companies to fulfil the payments.  You might sacrifice rental deposits so it’s best to keep those to a minimum from the outset.

3. What is the notice period in your agreement for contract cancellation?

If you put a notice period in your contract (such as 30 days), then that will give you some time to make all necessary arrangements.  Unless you committed a crime, your client will probably try to honour the notice terms of your contract.  To protect yourself, you can include an early termination severance payment when drafting the agreement.

4. Where should you look for a new client?

The obvious answer may be the country where you are already working, but if the contract termination was due to performance or personal reasons a reference might be difficult.  But if it was due to a change in the client’s business, they might help you find a similar role while your work permit is still valid.

Difference between contract termination for independent contractors and employees

Terminating a contract for an employee is very different than for a contract.  In certain countries, a contractor may be forced to take an employee role due to work permit rules but that does carry advantages.  Except for the US, almost every country in the world favours employee rights over those of the employer.  This means the employer has to meet the statutory thresholds for termination, notice and severance.  The fact they recruited you as a contractor has no effect if they end up hiring you as a legal employee.

On the other hand, as a true contractor, you are more or less on your own when contracting abroad.  Your contract will outline the rights of both parties, but in truth, you are not on an equal footing with the local client.  If they are unhappy for any reason, your contract can be cancelled without notice.  If you want to have an ally when serving foreign clients, you are best off working through a local umbrella company.  The umbrella company will act as an intermediary with your client, facilitate payments and assist if there is an early termination.

How Contractor Taxation can help you if the client cancels your contract

As mentioned, an umbrella company can be invaluable for international contractors.  When a client is terminating a contract early the umbrella company can act on your behalf to ensure the best outcome.  This is a real asset where they can deal with clients at the local level, understanding the business culture and language.  Clients will be less likely to ignore contract terms with another business entity involved.

Other benefits of umbrella companies include:

  • Manages all client payments, tax withholding and any social contributions
  • Issues you a payslip each month, to a local or foreign account
  • Sponsors work permits
  • Helps set up the contract with the client
  • Moderates any disputes with your client
  • Advises on access to totalization and double taxation treaties
  • Negotiates a contract termination agreement with the client

Contractor Taxation has a network of umbrella companies around the world, who are already in place and ready to assist you with international contracting.  Please contact us to learn more about how we help contractors working abroad

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