Last week, it was revealed that the former EastEnders actor had exited the BBC drama, just three days into his new role as PE teacher Jez Diamond.
It was claimed that Nicholls had behaved "erratically" on set, while also being reprimanded for arriving late twice in his three days of filming.
The 32-year-old's alleged behaviour is said to have to come following the death of his grandfather.
The Sun reports that bosses decided to let Nicholls go after he failed to agree to attend a drugs test at a Harley Street Clinic. "Paul refused the test," a source added.
Alex Walkinsaw - best known for his role as Smithy in ITV police drama The Bill - has replaced Nicholls, and is thought to have begun filming alongside ex-Holby City star Jaye Jacobs, who will portray Jez's wife Sian.
The current series of Waterloo Road concludes tomorrow at 7.30pm on BBC One.
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