Contractor Termination
Contractor termination is the act of discontinuing the services of a contractor before the end of their contract period. Much like the termination of an employee, contractor termination may be initiated by either the contractor or the company, depending on the terms of the contract. However, in order to avoid being subject to a damages claim for breach of contract, the company will need to ensure that it terminates the contractor for a legitimate reason that is specifically outlined in the original contractor agreement.
Some of the most common reasons for contractor termination are:
In both instances of termination for cause, regardless of whether it relates to a breach event or conduct issue, the manner in which the contractor is terminated is typically different from that of an employee . Most commonly, an employee is simply escorted from the building and may be able to return to collect their personal belongings after hours or on a holiday. In contrast, an independent contractor will usually have a set termination process set forth in their independent contractor agreement. At times, the independent contractor may also need permission to enter the premises to remove their belongings and/or office equipment. Thus, because of this difference, the need for a detailed termination letter template is crucial.
Termination Letter Essentials
The most important part of a contractor termination letter is the clear communication that it provides. A contractor termination letter, written thoughtfully and professionally, can provide closure for both the client and the contractor. As mentioned earlier, if the contractor is being terminated for breach of contract, his primary concern will be mitigation of damages and his secondary concern will be proving that there was no breach for which he can be held responsible. In order to counter the second concern, he will likely have to remove himself from the jobsite. It is prudent to make sure that he does not take any tools or anything that is the owner’s or one of the other contractors. The contractor termination letter should be as specific as possible with regard to the contract under which the contractor is working and the nature of the breach that is the reason for termination.
Without a doubt, the clearest way to terminate a contractor is to simply terminate the contract for cause. That way the contractor will know exactly what it is he did wrong and how he can rectify it. However, the termination letter should also state the specific section of the contract that permits termination for cause. In doing this, future challenges to that clause will be limited.
The reason for the termination has obviously already been set forth in the contract if it is a termination for cause. If it is a termination for convenience, the reason is usually solely because it is in the best interest of the owner or general contractor. If it is a termination at the end of the work, there need be no reason at all given. Where there might be some ambiguity is where a contractor is not doing his job well but the owner still believes that enough is getting done to justify retention. In this case the owner will often write, "This is a termination for convenience but it is not because you are an incompetent contractor." As indicated before, the termination letter should be sent by certified mail and should indicate the means by which the contractor is to receive his payment. His indemnity obligations, if any, should also be stated specifically.
Legal Considerations and Compliance
When it comes to terminating a contractor’s services, several legal aspects must be considered. The primary concerns should be to determine whether the termination complies with the contract terms and if applicable, labor laws. One common potential legal issue is what constitutes a breach of contract. With no issues present, there may be presumption of mutual agreement to terminate for the agreed-upon compensation. If you are terminating for cause, you should be very aware of the potential for a dispute, as it is likely the terminated party will disagree about what constitutes a breach.
Notice periods are also a consideration, as some agreements dictate that termination must not occur prior to a set period. A termination letter template may include terms for any severance compensation, if applicable. It is not mandatory, but it can be included to help the relationship end on a positive note, or if your contract states a potential for a non-compete clause, to further ensure the contractor doesn’t work with a competitor, for a competitor, unless that is what they are contractually obligated to do.
One contractor may choose a breach of contract argument, which has its own set of legal challenges and associated damages. If they feel they have lost money because you did not honor your end of the agreement, they may seek damages. As a best practice, request a signed termination acknowledgment from the contractor in order to prevent this.
Steps for Drafting the Letter
To craft an effective contractor termination letter template, follow these steps to ensure that you cover all the relevant details in a clear and professional manner:
Begin by writing down an outline of the contents of the letter. Be sure to include the following elements: Once you’ve created your outline, it’s time to draft the letter. Use clear, direct language to explain the reasons for your decision, referring to specific points from your outline. It’s best to keep this section brief, as you should have already discussed the issues with the contractor over email or in person prior to writing the letter. At this point you can reference any final payment or contract details necessary to wrap up the working relationship. If you’re terminating the contractor for reasons that may require them to cease their work mid-project, specifically state what they should do to complete assigned tasks before their final date. Clearly state the date on which the contractor’s employment will conclude. This is likely to be the last day of the current pay period , but it can also be a later date if you need them to wrap up any outstanding matters. It is required that you follow any notification procedures outlined in the contract. This can include a preliminary discussion with the contractor, as well as a notice letter that provides fair warning of their termination. Finally, sign and date the letter, and make sure to keep a copy for your files. This will provide you with an official record of the matter should a dispute arise at a later date, and will be useful for your records in dealing with refunding any deposits or payments for work that was not completed. Keep in mind that even if you’re terminating a contractor for poor performance, or because they are simply not needed anymore, it is important to remain professional. You shouldn’t go into unnecessary detail about the problems you’ve experienced during the working relationship, and you should at the very least thank the contractor for their time and effort, even for a poorly completed job.
Contractor Termination Letter Template
Your name
Your address (line 1)
Your address (line 2)
Your state, zip
Your phone number
Your email
(DATE)
Project name
Project type
Project address (line 1)
Project address (line 2)
Project address (line 3)
Project state, zip
(client’s name)
(client’s title (if applicable))
Company name
Company address (line 1)
Company address (line 2)
Company address (line 3)
Company state, zip
(client’s name)
(client’s title (if applicable))
(client’s name)
(client’s title (if applicable))
I am terminating the services of (your company name). I expect to pay (client’s name) for any completed work during this job. Please be advised that all unpaid balance(s) must be made immediately, either by cash, certified or bank checks. I will not be responsible for any unpaid balances for services rendered after (date X). I will not be responsible for any damages for this project from (date) forward. I will not engage with (client’s name) after (client’s name) is paid in full. I request that you remove my company from this job effective immediately. I will not be responsible for the actions of your employees or subcontractors. Thank you for your prompt attention to this matter.
Sincerely,
(your signature)
(your printed name)
Contractor Termination Letter Tips
Crafting a contract termination template is just one piece of the puzzle when it comes to working with contractors. It’s equally, if not more, important to ensure that the overall termination process goes smoothly, and that long-term problems are avoided. To that end, there are a few guidelines you can follow to ensure that both parties minimize potential disputes: Communication is key The most important element of a termination process is communication — before, during, and after. Through open lines of communication, it’s easier to amicably reach an agreement with the contractor, as well as to prepare for any future questions or concerns they may have. Unfortunately, many contractors fall victim to the misconception that termination letters do not require additional commentary or communication on either side . This is false, and if you desire a positive relationship moving forward, be upfront about your reasons for the termination and follow-up with the contractor to ensure that they were treated fairly throughout the process. Stay fair It’s never a good idea to take advantage of contractors and leave them hurting after a termination. Not only is this bad for business, but it could come back to haunt you in a number of ways. As tempting as it may be to "get a leg up" on an employee, always act in good faith. Keep in mind that contractors have a reputation as well, and a negative review can not only hurt future business, but it can also affect the contractor’s ability to remain employed and maintain good relationships in the field. Overall, it’s in both your best interest to remain cordial during a termination process, as it helps to ensure that no one will suffer undue effects as a result of the termination.