This is one of the toughest jobs managers face. Usually, it's best to be very clear with an employee. Don't use euphemisms or beat around the bush: To avoid confusion, state clearly that the employee's job is being terminated. Once you've broken the news, give a brief explanation of your reasons. Don't go into detail or feel you have to justify the decision. For example, if you are firing an employee for ongoing performance problems, you can simply say, "As we've discussed before, your performance has not been up to the standards we require." For more information on how to plan a termination meeting and how to break the news, see Nolo's article What to Say When You Fire an Employee.
For legal advice, you'll need to talk to a lawyer.