Terminating an Independent Contractor: How to Do it Compliantly

The gig economy is on the rise.  As of 2023, approximately 36% of U.S. workers engaged in gig work. The gig economy's gross volume was projected to reach $455.2 billion by the end of 2023, illustrating its expanding influence on the workforce. This shift offers workers more flexibility and autonomy, while businesses enjoy cost savings by not needing to offer benefits and training to independent contractors.

But what happens if the relationship doesn’t work out? Can you fire an independent contractor?

The short answer is no. You can’t fire a contractor like you would an employee because they are self-employed, not your employee. But you can terminate your relationship if the worker fails to deliver according to the terms of your contract–if you have one. 

In this guide, we’ll cover what to do when a contractor doesn’t live up to the agreement, what to do if you didn’t sign a contract, and how to terminate your business relationship.

Document and communicate the issue early

If you have concerns about your contractor’s performance, the first step is to have a transparent conversation. Telling the contractor they are underperforming gives them a chance to improve before termination. And even if the contractor does not improve, it’s in your best legal interest to leave a paper trail of your good-faith effort to make the relationship work.

Express your concern in writing first. Be clear about your expectations without accusing them or assuming reasons for underperformance. Some reasons for underperformance are temporary (like an illness) and the solution is simple (like a deadline extension for a specific project). 

DESC is a simple and effective framework for this message:

• Describe the issue you identified
• Explain how it impacted you and your company
• Specify what the contractor can do better next time
• Share Consequences of the behavior going unaddressed

Also, consider offering a follow-up meeting, especially if the issue is not an easy fix. You may need to re-clarify your expectations or provide additional information and resources to set the contractor up for success and receive high-quality deliverables.

Check your contract for termination provisions

Independent contractors do not sign full-time employee contracts and do not receive employee benefits like social security or medicare. But businesses can (and should) sign written agreements for independent contracts that spell out the contractor’s scope of work, the quality of work expected, termination provisions, and notice provisions.

Having a written contract makes this part easier, too. The written agreement should outline the scope of work, required quality of work, termination provisions, and notice provisions.

Check out our guide about independent contractor agreements to learn more.

Termination provisions

Termination provisions are guidelines and conditions under which the contractor or the hiring company can terminate the working relationship. You should clearly state termination provisions in the written contract both parties sign at the beginning of the engagement.

Some common reasons for termination, stated in termination provisions, are that a contractor:

• becomes non-communicative or unresponsive
• delivers poor-quality work (and doesn’t properly implement revisions)
• repeatedly misses deadlines 
• breaches terms of the contract, such as a non-disclosure agreement
• commits intentional misconduct that affects your business
• evades income tax

Notice provisions

Notice provisions specify the number of days of warning each side must provide before terminating a contract. Most notice provisions require 10-14 days notice, but others require a month or more.

If your independent contractor agreement includes notice provision, give the contractual notice of termination to the independent contractor in writing–your contract may even require that you give notice via email.

Notice provisions may also refer to notices requesting a change in work or behavior, before any party decides to terminate the business relationship. Your contract might say, for example, that you’ll give them a 30-day heads up if the quality of work isn’t good.

Adhere to these provisions strictly because if you don't, you may face a breach-of-contract lawsuit.

Exception: Terminate the contract immediately in case of criminal conduct

In case of criminal conduct or fraud, you may skip termination negotiation and notice. If you discover your contractor engages in this type of behavior, you can terminate the contract immediately. Criminal conduct may include damages to company assets or other contractors, employees, or supervisors, harassment, and other illegal behavior.

Pay the contractor for the work completed

Even when you terminate a working relationship, always stay professional and fair. While it is your legal right to terminate a contractual relationship that doesn't work for your company anymore, you have to pay the contractor for all the services and products they delivered to you.

Settling the invoices you have with a contractor is crucial when terminating the relationship, regardless of whether you are happy with the quality of work. To put it shortly - if you received it, you need to pay for it.

If you have a dispute about payment with a contractor, it is best to seek advice from a law firm or legal profession before proceeding with any course of action. An experienced lawyer can help you determine details regarding termination of the contract and necessary payments.

Check out our guide on the best way to pay independent contractors to learn about your options.

How to fire an independent contractor if you don't have a contract?

If you only have a verbal agreement with your contractor, you can terminate it in person or via email. Although you don’t have any contract clauses and notice provisions to honor, it all comes down to operating in good faith, with honest and fair intentions.

Good faith measures include giving the contractor an opportunity to make things right with their work quality and deliverance time. To maximize legal protection for your company, put these arbitration measures in writing. This communication provides a deadline for improvement and a notice that the relationship will be terminated at the deadline if the contractor doesn’t improve.

You’re not legally required to apply these good faith measures, or to provide the contractor with reasons why you want to terminate the verbal contract. But it’s a good business practice and helps maintain fairness, your reputation, and a legal papertrail should the dispute escalate to a legal battle.

Can independent contractors sue for wrongful termination?

Independent contractors can’t sue their clients for wrongful termination because they’re not employees. However, contractors do have the right to sue for breach of contract.

If any of the contract provisions are breached by the hiring company, and a contract is terminated, the contractor can sue. To protect yourself in advance of a lawsuit, pay the contractor for all provided services and adhere to termination provisions strictly. Failing to do any of these could be grounds for a lawsuit in which the contractor may seek damages, even if their work wasn’t satisfactory.

Contractors can sue if the company misclassifies them according to the IRS

Misclassification of employees is disguising an employment relationship as a contractor relationship in order to avoid paying employee benefits and employment taxes. The Internal Revenue Service (IRS) and Department of Labor (DOL) enforce labor laws and usually assign reimbursements to the misclassified employee.

Risks of misclassification with independent contractors

The IRS pays close attention to independent contractor relationships because misclassification is common. Some companies intentionally hire independent contractors and then treat them as employees, because contractors pay for their own taxes and healthcare, while other companies hire independent contractors who slowly start resembling employees.

Independent contractors don’t have employers who pay worker's compensation or health insurance for them, nor do they have the right to minimum wage and overtime since they don't have fixed work hours. These "savings" prompt employers to take the route of misclassifying employees, which can cost them a lot more in the end.

A written agreement with your contractor doesn't shield you from misclassification proceedings. To make sure your contractor is not a disguised employee, make sure to check out the IRS 20 Factor Test, which is helpful to determine the contractor's status. This test considers factors like behavioral control and financial dependency to clarify whether an employment contract should have been signed over an independent contractor agreement.

Employment laws are strict about employee misclassification. Companies deemed guilty of misclassification are liable for massive fines and penalties as well as damages to the employee. The best way to avoid the risks of misclassifying workers is to have a reliable contractor agreement, keep all records, and be careful with the language you use. Always strive to speak with your contractors using appropriate terms that show no signs of employment status.

Simplify independent contractor management with Deel

Are you facing an unexpected increase in workload and need to expand your team quickly? Do you think hiring independent contractors is the best choice?

Deel streamlines your independent contractor hiring process by generating localized contracts, tax form collection, and a wide range of payment methods–no matter their country of residence. 

Schedule a product tour with a specialist to learn more.

Disclaimer: This article is informative only and doesn't constitute legal advice. For specific and individual cases, it is always best to seek legal help.