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Directors’ Service Agreement: Protect Your Business

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Directors have specific statutory duties and responsibilities in relation to the organisation, which should be addressed within a directors’ service agreement. More than a compliance requirement, the agreement can also be used by the business to protect its interests in the event of the director’s exit.

 

What is a directors’ service agreement?

In many cases, company directors are also employees of the companies where they work, and as such, are entitled to a written contract of employment. Aside from containing standard terms found in a general contract of employment, a directors’ service agreement contains further detailed and extensive provisions concerning their specialist position and obligations under the Companies Act 2006.

Even in cases where the director is not an employee but is a non-executive director (someone who usually works part-time and provides objective and independent advice to the company’s board), a directors’ service agreement can still cover their non-executive duties and their terms of engagement. Although it should be noted non-executive directors can sometimes agree terms with the company within their letter of appointment.

Other types of director include:

  • A de facto director acts as a director without being validly appointed by the company to the role.
  • A shadow director usually gives directions and instructions that other directors follow and act upon without being held out as directors themselves.

 

Both types of director may not have formal service agreements in place, which can cause confusion surrounding the scope of their duties and their responsibilities. This is why it is important to stress that all directors must be validly appointed, and the scope of their powers documented accordingly.

 

Differences between a directors’ service agreement and contract of employment

Both documents are very similar and will often include the responsibilities the director should undertake and the rules under which they operate. However, a basic employment contract that would be used for a less senior employee or a template agreement is unlikely to go into sufficient detail that is needed for the complexity of the role and duties of a company director.

A director can wear several hats, they are potentially an employee, but may also be a shareholder too. Finally, their role as a company director is separate again. It is essential that these, sometimes conflicting elements, be separated and written documentation acknowledges this situation. Making it easier to establish and maintain boundaries so that, in the event a disagreement occurs going forward, the employment contract and directors’ service agreement provide clarity as to how the disagreement should be handled.

 

Reasons your business needs a directors’ service agreement

Compliance

The Companies Act 2006 and English common law places specific duties and responsibilities upon directors that must be applied in the services for which they have been appointed. It is an important factor to bear in mind that each director has a service agreement in place in line with company policies and tailored to their specific role they are there to do. This is particularly relevant for listed companies or those with securities that are admitted to trading on a regulated exchange. This is because the terms of these contracts are more likely to be disclosed to shareholders and published in the wider public.

Good corporate governance

The directors’ service agreement must explicitly detail what is expected of the director, particularly the company’s expectations around decision-making, and the requirement for the director to act in the best interests of the company at all times. Remuneration must be transparent and align with company policies on management remuneration and any remuneration reports.

Protection of sensitive commercial information

Most directors are given privileged access to the business’s confidential information, intellectual property, technical information, and customer lists, to name but a few. You will need to ensure this information is protected and any such data or information is not disclosed in a way that could be detrimental to the business.

Restrictive covenants

If a director wishes to leave the business, you may want to ensure their ability to work for a competitor (or themselves) is restricted, at least for a stipulated timeframe. Although such clauses are commonplace in service agreements, there are competition law limitations as to the extent you are able to impose such restrictions. It may be sensible to seek legal advice before incorporating a restrictive covenant into your directors’ service agreements.

Clear exit strategy

Because directors have multiple roles within an organisation, e.g., employees, shareholders, and directors, unless you agree upfront and highlight your expectations as to how the director is to be treated if they decide to leave, it can create a complicated and disruptive environment if the relationship turns sour during the exit process.

 

What should a directors’ service agreement include?

A well-written directors’ service agreement should include:

  • Terms of Appointment and basic provisions – includes the date the director started work and the date of their appointment as a director (if different), whether the contract is rolling or fixed-term – there are different options depending upon if the company is private or public.
  • Place of work – Their hours of work, travel, expenses and where you expect them to work.
  • Holiday and other paid leave entitlements – Holiday entitlement, incapacity, and sick leave, maternity and any other types of paid or unpaid leave. You may wish to insert provisions relating to the right to request the director to undergo a medical examination (such as alcohol or drug testing) and share any results with the company.
  • Benefits – Salary, bonuses, share options, life insurance, pensions, dividends, company car, and any other benefits, including provision for withdrawal in the case of poor performance or other stated reason.
  • Duties and responsibilities – includes their duties, responsibilities, and obligations both as an employee and a director, perhaps mentioning their legal duties under the Companies Act 2006 (and any industry standards/regulations such as the Listing Rules and any other codes of practice and principles of corporate governance if the company is listed. In addition, you may also offer the director insurance cover under the company’s directors’ and officers’ policies, and this should be included within the service agreement if this is the case.
  • Warranties – This is where you can make provisions for your expectations of the individual as a company director, which can be given through warranties within the service agreement. You will need to stipulate the need for their compliance with company policies, e.g., anti-bribery and corruption, money laundering, anti-discrimination, data protection, and privacy policies. Or any other policies relevant to your industry or sector.
  • Restrictive Covenants – if you want to place any restrictions on the director regarding activities outside their role, including working for or soliciting competitors and restrictions on soliciting other members of staff to join them (whilst also taking the anti-competitive limitations into account).
  • Confidential information – includes the monitoring of emails and the need to keep the company’s information confidential (including personal data controlled or held by the company and any commercially sensitive information belonging to or provided by the company), secure including while travelling and using company equipment such as laptops or mobile phones, and USBs outside business premises.
  • Company policies and procedures – these could also be listed within the company handbook, but generally should include copies of the company’s policies and procedures which the director must follow.
  • Grounds for termination – explains how the director’s appointment can be terminated, on what grounds, and by whom, following the company’s disciplinary and grievance procedures set out in the company handbook. It should also detail what happens in the event of a dispute between the company and the director, what happens when the director leaves (whether they are entitled to any payment in lieu, notice periods or if the company can terminate without notice and in what circumstances that can happen, obligations on termination such as returning company property, what happens to the director’s shareholding or other share benefits such as employee options or management share schemes). You may also need to consider what happens to the director’s social media accounts on termination of their appointment and when/whether gardening leave is appropriate.
  • Severability – the service agreement should explicitly state that if any clause, or part of a clause within the agreement is determined as unreasonable or unlawful by a court, it will not invalidate other aspects of either the clause or the service agreement as a whole.
  • Corporate responsibilities – compliance requirements, and duties to provide reasonable assistance with Companies House or HMRC processes that must be completed as part of either their appointment or termination as a director of the company.

 

It is important to distinguish directors’ service agreements and contracts for services. For non-executive directors who are also employees, a director service agreement will be appropriate. As mentioned above, a service agreement will need to incorporate all the usual elements of a contract of employment but also involve inclusion of policies, provisions, procedures, and terms that generally require more thought, and which tend not to be included within such employment contracts for those staff members who are not directors. A well-drafted directors’ service agreement is essential to highlight an executive director’s rights and obligations to the company as a director, but also those arising as an employee.

 

Need assistance?

DavidsonMorris’ employment lawyers work with employers on all aspects of workforce management, including all matters relating to senior executive recruitment and exits, as well as reviewing and drafting documentation relating to director-level engagement. Working closely with our team human resource specialists, we offer a holistic solution to support with legal risk management while protecting the best interests of the organisation in finding and onboarding best talent. For advice on a specific issue, speak to our experts today.

 

Directors Service Agreement FAQs

What is a director's service agreement?

A directors’ service agreement is an important document setting out a variety of rights, obligations, and responsibilities arising as a result of being appointed as a director. Having such an agreement is not a legal requirement, however it does create certainty for both the director and the company, ensuring all parties are protected in the event of disagreements or disputes.

Is a directors’ service agreement an employment contract?

A directors’ service agreement is very similar to a contract of employment. Both often include the responsibilities that the director should carry out and the rules under which they should operate. Because a director has greater legislative and company responsibility and obligations, a service agreement details those things (and more) in greater depth than a simple contract of employment or template agreement.

What is the difference between a directors’ service agreement and a contract?

Although both documents are very similar, a basic employment contract used for a less senior employee or perhaps a template agreement, is unlikely to go into sufficient detail needed for the complexity of the role and duties of a company director. And broadly speaking, most contracts of employment lack sufficient detail as to the duties, responsibilities, and obligations that directors perform and will also omit their legal responsibilities under the Companies Act 2006.

Can a director vote on their own service contract?

Sometimes a director is prohibited from voting on a matter, this is because they are not considered to be an ‘eligible director’. A director is not eligible to vote for their own proposed service contract with the company because it is considered to be a conflict of interest.

Does a director have to take a salary?

A director does not have to pay themselves a wage as a director, and they are exempt from National Minimum Wage legislation unless there is a written contract of employment.

Last updated: 8 February 2021

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