The terms Directors Service Contract and Directors Service Agreement are interchangeable. It is just another name for an employment contract (or service agreement) that is suitable for a director of a private company.

Often in smaller businesses, the Directors are the same people as the Shareholders.

So do you really need to have a directors service contract in place?

As you probably know, directors are the day to day decision makers in a business. The shareholders appoint directors to run the business. A director is therefore the lynchpin in a business; she or he will have access to all of the businesses confidential information, financial information, clients, suppliers, staff and more beyond. It is therefore imperative that, with such a wide range of responsibilities, that the Company sets out what the directors obligations are as well.

Directors Service Contracts v Employment Contracts? Since April 2020, all employees are entitled to a written statement of particulars of employment. Directors are no different.

But you shouldn’t just give a director a basic statement of terms or employment contract used for the admin assistant, because clearly you’ll want to make sure that the directors service contract is more detailed.

Directors’ service agreements will usually address most of the principal terms of the director’s employment but will often need to be read in conjunction with the company’s employee handbook (which will contain company policies) and any pension plan, executive incentive plan rules and other benefits documentation.

In law, directors have a number of obligations and responsibilities imposed upon them by the Companies Act, but as a company you’ll want to ensure that you have a legally binding contract with the directors covering all of the matters set out below.

In the Companies Act 2006, a director’s “service contract” is defined to include contracts of service (that is, employment contracts), contracts for services and letters of appointment (section 227, CA 2006). Section 227(1)(a) covers any contract under which a director undertakes to perform services for the company or a subsidiary of the company. Section 227(1)(b) covers those services made available to the company through a third party, such as a personal services company. In either case, the contract must require the director personally to perform the service or services in question.

The answer then, is yes; you really should have a directors service contract in place – even if the shareholders are the same people as the directors.

Why?

Well, if the company ever has any issue or disputes with one of the directors, and action needs to be taken, then it’s all documented and a process can be made formal.

Or maybe the business is sold at some point in the future, and the Buyer will want to know on what terms the directors have been employed – particularly if they are being kept on in the business for any period of time.

What terms should be included in a Directors Service Contract?

1.Interpretation

Most contacts include an interpretation clause, in which certain words or phrases used multiple times are defined.

2.Term of appointment

The “Commencement Date” is the date on which the employment commences and its inclusion in the contract is a legal requirement. It is not the date on which the contract is signed. It is important that the right date is used, as it determines the employee’s period of employment for various statutory rights, including unfair dismissal and statutory redundancy payments.

There are four primary types of term in directors service agreements:

a) rolling contracts – whereby the term continues until notice is given by either party or otherwise terminated
b) pure fixed term – the employee is employed for a specified period and cannot be dismissed before the end of that period (except in the event of summary termination)
c) fixed term subject to termination during fixed term – as b above, but can be terminated early during the fixed term period.
d) initial fixed term and then termination on notice – This option is an initial fixed-term that will automatically continue after the expiry of the initial period until terminated by either party on notice. Although notice can be given before the end of the initial fixed-term, it cannot expire until the end of the initial fixed-term.

Within the Term section, you will also usually have a Probation Period and details of whether any previous employment counts towards their length of service.

3.Professional qualifications

These require the employee to hold a professional qualification and will only be relevant where such a qualification is a condition of the employee’s appointment.

4.Employee warranties

These ask the Director to confirm they are eligible to work in the UK and will not be in breach of contract by entering into this contract (i.e. not in breach of previous restrictive covenants at previous employer).

5.Duties

A statement of the employee’s job title or a brief job description is required by law.

It’s important to list general duties expected of directors.

6.Place of work

This clause usually specifies the employee’s normal place of work (the employer is legally obliged to provide this information) and it is best drafted to give the Company the flexibility to move the employee anywhere within a reasonable area.

7.Hours of work

Another legal requirement is to set out hours of work.

If more than 40 hours a week are to be worked, consideration to the working time directive needs to be given.

8.Salary

These details are legally required to be provided to employees & directors.

9.Benefits

Employers must provide employees with details of any benefits offered to them, other than sick pay, pension, holiday pay and other leave which need to be set out elsewhere in the contract. (If no benefits are offered, that fact must be stated, although this is unlikely to apply to a director). Benefits will generally include those which have some kind of economic value, such as a season ticket loan.

10.Expenses

Directors will usually be entitled to repayment of expenses incurred wholly in relation to the business.

11.Relocation expenses

If any.

12.Bonus

Usually, the Company will only want to refer to a non-contractual discretionary bonus, but a bonus can sometimes be part of the directors remuneration package.

13.Permanent health insurance

14.Life assurance

15.Private medical insurance

16.Directors’ and officers’ insurance

17.Car

18.Car allowance

19.Holidays

It is a legal requirement that terms and conditions relating to holidays and holiday pay must be provided to all employees.

20.Incapacity

Deals with Sick Pay – both Statutory Sick Pay and enhanced Company Pay if available.

Also includes terms on what happens if the director is not available to fulfil their role for X weeks in a Y weeks period.

21.Other paid leave

22.Training

Employers are required to list in the contract any training that is compulsory for the employee, and whether it is to be paid for by the Company or the employee themselves.

23.Outside interests

The purpose of the clause is to control the employee’s outside activities during employment and to ensure there are no conflicts of interest.

24.Confidential Information

During the course of employment, there is an implied duty on an employee to keep information and trade secrets confidential. However, there is only a limited implied duty of confidentiality following termination of employment, so it is useful to have an express obligation as in this clause.

25.Intellectual property

At a basic level, this will be a basic intellectual property (IP) clause intended for use in a contract for an employee who is not employed in a technical or creative role but is likely to create some IP in the course of their duties.

26.Ceasing to be a director

Usually, a Director will not be able to resign unless the Board have given consent. Such clauses usually say that if a Director ceases to be a director, they will still be employed under the contract until the whole agreement is terminated.

27.Payment in lieu of notice

28.Termination without notice

29.Change of control

30.Garden Leave

31.Obligations on termination

This clause deals with matters such as resignation of directorship, deletion of confidential information and the transfer of any shares held in the company (or any group company) as nominee or trustee for such a company on termination of employment. It also puts the employee under a contractual obligation to return all company property on termination or at the start of a period of garden leave, although property that is provided for the employee’s benefit, such as a car or mobile phone, may be retained during garden leave

32.Restrictive covenants

This clause sets out restrictions on the employee’s conduct after termination of employment (“restrictive covenants”). Restrictive covenants are only enforceable if they are no wider than necessary to protect the legitimate business interests of the party seeking to enforce them. The only recognised business interests are trade secrets and trade connections (including goodwill and workforce stability), although the court has left open the possibility of arguing other interests.

33.Disciplinary and grievance procedures

Often better to have these in a staff handbook than set out a detailed process in the contract.

34.Pensions

All employers are required to automatically enrol certain eligible workers, known as “jobholders”, into a pension scheme and to pay a minimum level of contributions to the scheme.

35.Data protection

36.Collective agreements

37.Reconstruction and amalgamation

38.Notices

39.Entire agreement

40.Variation

41.Counterparts

42.Third party rights

43.Governing law

44.Jurisdiction

Schedules

1.Benefits

2.Training

Next Steps?

You need to put in place Directors Service Contracts or Agreements, so if you’re looking at this page then do get in touch for a quote.

Typically, for a basic Directors Service Contract, we’ll charge around £850 plus VAT but we’re happy to provide you with an accurate estimate based on your particular requirements.

Contact Us now.