Contract Termination Letter: What is it and How Do You Write One?

Contract Termination Letter: What is it and How Do You Write One?

Written By
Joy Cunanan
Updated on
May 6, 2024
Reading time:

A contract’s lifecycle will inevitably reach an end, and the only reckoning point is how. In some cases, contracts end because the need for goods or services has ceased. Conversely, a contract may end but can be renewed if the opposite is true. In the case of employment, however, there are various ways an employment contract may end. From the perspective of the employee, a contract termination could be voluntary in the event of a resignation, and involuntary in the case of termination. As unfortunate as it is, there are many reasons why an employment contract is terminated such as incompetency, insubordination, redundancy, and employer bankruptcy.

These grounds for termination are compliant with regulations set by law, protecting the rights of employees against wrongful termination and similar employer abuses. Beyond these valid grounds, companies must also follow a specific set of rules on how to terminate an employee and eventually end their contractual relationship with their employees. Otherwise, they will face penalties and other financial losses to compensate the aggrieved employee.

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What is a Contract Termination Letter?

A termination letter is a document that an employer uses to notify or inform their employee that they are being dismissed from their job. There are many reasons why an employee may have to be let go by the company as mentioned previously. However, termination letters are most often used in cases of employee misconduct.

Here are instances where an employer may validly terminate an employment contract:

Unsatisfactory Performance 

Notice may be required depending on contract terms

The terms of employment contracts vary, but the employer may have the right to terminate employment prior to the completion of an employee’s probationary period by supplying a written notice or paying the employee’s salary instead of notice. 

Contractual Breach by Employee

Notice is not required

If an employee violates the contract's explicit provisions, the employer may end the employment relationship such as when the employee has been absent without approval or notice. 

Employee Misconduct

Notice is not required

If the employee engages in misconduct, the employer may terminate the employment agreement with or without paying compensation instead of a written notice. While the level of wrongdoing that warrants termination is not specified by law, misconduct typically occurs when an employee violates his express or implied work restrictions. These may involve disruptive or immoral behavior at work, egregious carelessness and irresponsibility, disobedience, disclosure of trade secrets, theft of corporate property, and misuse of funds.

The company should investigate the employee's wrongdoing before dismissing the worker for misconduct. This investigation should entail notifying the employee of the wrongdoing and giving him a chance to defend himself in front of a disinterested decision-maker. The employer may terminate the employment contract if the guilt of the employee is ultimately proven.

Employee Transfer 

Notice is required

When an employer decides to transfer a worker to another employer (such as a subsidiary firm), they must inform the worker of the transfer and contract terms, as well as ensure that the working condition is not less favorable to the employee compared to their current one. Only then can the employment contract be terminated and a new contract will be signed by the employee under their new employer.

Employee Retirement

Notice is required

In Singapore, you may only be allowed to retire at 62 years old. Employers may terminate the contracts of employees nearing the retirement age after serving the proper notice as required under the employment contract. Employers are also required to provide re-employment opportunities for qualified employees as old as 67 years old. 

Employee retrenchment

Notice is required

While there is currently no law on employee retrenchment, the employee must still serve a notice for the contract termination as provided under the employment contract. As a general rule, the employer is not obliged to prove a legitimate business reason for said termination (e.g. redundancy or bankruptcy). The employer must however provide the information for termination to the concerned authorities, and notice must be provided to the employees within the duration as stated in the employment contract. In the absence of said period, the Employment Act requires that the notice be served according to the below periods:

Employment Tenure | Period of Notice

Less than 26 weeks | 1 day

26 weeks to 2 years | 1 week

2 to 5 years | 2 weeks

More than 5 years | 4 weeks

Why Are Contract Termination Letters Important?

A contract termination letter is important as it provides evidence that your company has acted both fairly and in compliance with requirements set by law for employment termination.

A contract termination letter should include all the company’s efforts to provide opportunities for performance improvement, and how the employee failed to meet these leading to his or her termination. Of note, it can protect your company from possible wrongful termination lawsuits that the employee may initiate. Here are a few other benefits of using a contract termination letter:

  1. Maintains a professional and positive relationship - Writing a contract termination letter is an excellent way to show respect to the employee that you are letting go. It helps conclude an employment relationship on a positive note while maintaining professionalism.
  1. Great way to say “Thank you” - On the same note, a contract termination letter doesn’t have to be written in a negative or disappointing tone. You can write a contract termination letter that expresses how grateful you are to have had the opportunity to work together, and then you can wish them all the best in their new endeavors. 
  1. Helps the other party prepare - Contract termination letters allow you to give a heads up to your employee so they can make the necessary arrangements. Depending on the period of notice required by contract or law, a notice can give them sufficient time to plan and prepare for their departure and find new work elsewhere.
  1. Keeps a written record - Since a contract termination letter is a formal document that declares your decision to terminate or cancel a contract, it also acts as official proof that you are terminating the contract and the valid grounds for doing so.

What Do You Need To Include in a Contract Termination Letter?

Generally speaking, contract termination letters will contain the following vital pieces of information:

  • Names, contact information, and relationships of all the parties involved in both the original contract and the termination
  • Terms and conditions of the original contract as they associate with contract termination
  • Basis on which the contract is being terminated, such as fraud, mistake, misrepresentation, impossibility, prior agreement, etc.
  • Issues involving monetary compensation or penalties for early termination of a contract
  • Confirmation that all parties were notified of the termination
  • Important dates, such as the date of the original contract, dates for performance, and dates associated with the termination agreement

How to Create a Contract Termination Letter? 

You can write a contract termination letter by following these steps:

  1.  Use a Proper Business Letter Format

One of the ways to maintain professionalism is by using a standard business letter format, indicating your earnest effort to reach the decision to terminate but still wish to keep everything proper and formal.

  1. Make an Official Statement of Termination

Start your letter by stating that you are officially terminating the employee’s contract. This should be done at the very beginning of the letter without sugarcoating or ambiguity to avoid misinterpretation.

Here are a few examples of how you can start your sentence:

  • We regret to inform you that our company (insert company name)  is terminating the contract…
  • As per the conditions of our business contract, please allow this letter to serve as a termination of the contract…
  • This letter is to formally notify you that the company has decided to terminate the contract…
  1. Mention the Date of Termination

After you have made the official statement of the termination, you will need to specify the date from which the termination will come into effect. Be as particular as possible and put the exact date you wish to terminate the contract. 

  1. State the Reasons for the Contract Termination

Next you’ll want to list the reasons that led to the termination of the contract. As much as practicable, support these reasons with recorded evidence and documents.

  1. Explain the Settlement Details

One of the final, but most important, steps you’ll have to do now is to explain the settlement information to your employee. This will detail how you plan to clear off any payments with the employee for the work he or she has completed, how to arrange a compensation amount, and other particulars. 

  1. Express Gratitude

Last but not least, you should try to express your appreciation and gratitude to your employee. The end of a contract, especially in cases of involuntary termination on the part of the employee, is often a difficult process and a simple thank you may help ease the burden of having to start over.

Here is an example of what a contract termination letter can look like:

Example of Contract Termination Letter from Workable

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Contracts are at the core of every business, and with that, comes contract termination letters as well. In every process, whether it is hiring a new employee, contracting a supplier or anything in between there is always a contract involved. Although simple contracts are one of the easiest contracts to draft up, we can make it even easier for you. 

At Lexagle, we provide a modern, holistic platform that empowers organisations to drive contracts. With a focus on users and boosting simplicity, we’ll help you see immediate value in your investment with our contract management platform. Check out our features from drafting a contract to storage and retrieval here.

If your business is ready for the next step forward in this digital age, do not hesitate  to contact us for a free demo today. 

Contract Termination Letter: What is it and How Do You Write One?
Joy Cunanan
Joy is the Digital Transformation Manager at Lexagle. As a marketing professional in the Tech and B2B industry for over seven years, she is always on the lookout for the next best solution in the ever-changing online world. With a passion for helping businesses thrive and optimize operations, she shares her expertise in the power of contract lifecycle management and its capacity of easing the contracting process for busy organizations worldwide.

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