Is It Safe to Terminate An Independent Contractor?
It is a common practice for companies to use independent contractors in the course of conducting their business. As their name suggests, independent contractors are independent, autonomous business entities, proprietorships or agents who, generally, make their own decisions, pay their own wages and carry their own insurance, among other things. Inevitably, companies will be faced with the decision of whether they should terminate an independent contractor. The reasons could range from gross failure of performance to no reason at all. In the course of termination, questions might arise about liability stemming from termination of an independent contractor, even where both parties have agreed that the relationship is terminable “at will” (terminable by either party for any reason).
A recent decision by the intermediate appellate court of the federal court system (United States Court of Appeals for the Third Circuit) suggests that companies will now have to exercise greater care when terminating independent contractors. Fraser v. Nationwide Mut. Ins. Co. (Docket No. 01-2921, decided December 10, 2003) involved Nationwide’s termination of one of its insurance agents who worked as an independent contractor. Fraser argued that Nationwide terminated their relationship because he was his filing complaints with the Pennsylvania Attorney General’s office regarding Nationwide’s allegedly illegal conduct; criticizing Nationwide while acting as an officer of the Nationwide Insurance Independent Contractors Association (the Association); and becoming involved in a legislative effort in Pennsylvania designed to ensure that businesses could only terminate independent insurance agents for “just cause.” Nationwide alleged that Fraser had become disloyal to the company and that he had drafted letters to two competitors expressing the Association’s dissatisfaction with Nationwide and ascertaining whether the competitors would be interested in acquiring the policyholders of the agents in the Association. While the factual situation sounds like one that typically occurs in an employer/employee situation, it was undisputed that the agent was an independent contractor.
In a multi-count complaint, Fraser alleged, among other things, that he had been wrongfully terminated. Nationwide defended on the basis that there was an at-will relationship between the parties meaning they could terminate the contractor for any reason at all.
Pennsylvania recognizes “at-will” employment, which allows an employer to terminate an employee for any reason other than a reason that would violate public policy (for example, termination because employee refused to do something illegal; preventing an employee from complying with a legal duty; or discharging an employee when law specifically prohibits termination). Fraser argued that the “public policy” exception should apply to business/independent contractor relationships in the same way it applies to employer/employee situations. Nationwide urged that the public policy exception was not applicable to a business/independent contractor relationship.
The federal court noted that no Pennsylvania state case has addressed whether there are limitations on a business’s ability to terminate an independent contractor. Thus, the federal court was only predicting how the state court might rule.
In its analysis, the court predicted that the same legal analysis applicable to at-will employment would apply in the business/independent contractor setting, and that the public policy exception would extend to termination of independent contractors. However, the court also held that Fraser failed to prove, through record evidence, that his termination violated public policy, and dismissed his wrongful discharge claim.
While a loss for Fraser, the case predicted that independent, “at-will” contractors have a cause of action for wrongful discharge under the “at-will” public policy exception. While applied in the context of an insurance company and its agent, the case does not limit itself to that factual scenario, raising the question of whether any independent contractor – from a computer consultant to a construction subcontractor – could assert a wrongful termination because of a violation of public policy. The federal court was only predicting what the Pennsylvania Supreme Court might do in a similar situation. Thus, it will be important to see how the law in this area develops in the future.
The case could open the doors to litigation in cases where one business terminates another independent business. Businesses who use independent contractors need to protect themselves against this situation as best they can. The first area is to have an attorney look at your written contract to make sure that termination procedures and grounds are clearly defined. The second area is to be prepared to defend your decision to terminate. Documenting reasons for dissatisfaction, and raising complaints about the work of an independent contractor in a timely fashion only help reinforce a good basis for termination and make it less likely that the contractor will be able to effectively argue that there were “other” reasons behind a business’ decision to terminate. Finally, it is advisable to consult an attorney to go over your decision to terminate. Your attorney may also advise you if you have any other rights to assert against a contractor who performs below standards.