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Director’s Service Agreements

Director’s Service Agreements Lawyers Malton, York and Wetherby

What is a director’s service agreement?

An executive director's service agreement is very similar to a contract of employment. Both documents outline the rights and obligations that govern and underpin the relationship between the director and the company.

There are a number of specific regulatory requirements for directors' service agreements (or "service contracts" as they are referred to in the Companies Act 2006), some of which depend on whether the company is private or listed. They do not need to be in writing because there is no legal requirement for a contract of employment to be in writing (although they usually will be to ensure the terms are certain). However, a copy of the contract (or, if the contract is not in writing, a memorandum of its terms) must be kept at the company's registered office.

As well as including the basics you’d expect in an employment contract (such as date of appointment, place of work, holidays and pay and benefits), a director’s service agreement is usually more detailed and extensive, in view of their specialist role and obligations.

A director is potentially an employee of the business, they may also be a shareholder, and finally their role as director is separate in and of itself. By clearly separating these elements of a director’s role, it makes it much easier to establish boundaries in written documentation so that, if further down the line, a disagreement occurs, the service agreement clearly sets out how the disagreement should be handled.

Even if a director is not a company employee, but is, for example, a non-executive director (who is usually part-time and whose job it is to provide objective independent advice to the company’s board), they can also enter into a director’s service agreement to cover their non-executive duties, although sometimes non-executive directors may agree terms with the company in a letter of appointment.

When directors don’t have formal service agreements there can be a lack of clarity about the scope of their remit and responsibilities so it’s important to make sure that all directors have been validly appointed and the remit of their powers has been documented.

Why does your business need a director’s service agreement?

Some company directors are probably employees of the company, just like the other members of your team. So, it makes sense that they should have a contract of employment setting out the scope of their services as an officer of the company.

The agreement should set out your expectations of them as a company director in the form of warranties, in particular the need for them to state that they will comply with the company’s policies, for example anti-bribery and corruption, anti-discrimination, and data protection and privacy policies. It should also state whether your directors are covered under the company’s directors’ and officers’ insurance.

It should include provisions relating to privacy and confidentiality, monitoring of email and the need for them to keep the company’s information (including any personal data controlled by the company and any commercial sensitive information belonging to or provided by the company) secure including while travelling and using company laptops and USBs.

Other important reasons to have a service agreement in place include compliance, good corporate governance, protecting sensitive commercial information, and ensuring the business is protected when the employment relationship ends by having restrictive covenants and an exit strategy clearly defined.

Compliance: The Companies Act and English common law place certain specific responsibilities on company directors that need to be applied in the context of the services for which they have been appointed. It is important that each director has a service agreement with terms that are in line with company policies and that’s tailored to the specific job they do.  In particular, the service agreement should cover the requirement to comply and provide reasonable assistance with any Companies House or HMRC processes that need to be completed as a result of the appointment or termination of the director as an officer of the company.

Good corporate governance: The director’s service agreement should spell out exactly what’s expected of the director, and in particular the expectations around decision-making, and the need for the director to act in the best interests of the company at all times. Remuneration should be transparent and in line with company policies on management remuneration and with any remuneration reports that may need to be made by the company or agreed with the shareholders.

Protection of sensitive commercial information: Since directors are given privileged access to the business’ confidential information, intellectual property, customer lists and technical information, as well as to personal data, it’ essential to make sure that this information is protected and that they do not disclose any such data or information in a way that could be detrimental to your business.

Restrictive covenants: It’s not uncommon that when a director leaves a business, their ability to go to work for a competitor is limited, at least for a period of time. Restrictive covenants in service contracts help to identify which companies are prohibited employers although there are competition law limitations on the extent to which these restrictions can be imposed and you should take legal advice before incorporating these types of restrictive covenants into your directors’ service contracts to ensure they are no wider than necessary and can be enforced if it comes to it. They can also prevent the director from taking key employees with him/her to set up in competition or from approaching your clients.

Clear exit strategy: Directors may have multiple roles within the company, as directors, shareholders, and employees. Expectations about how the director would be treated if they leave should be clear from the outset, otherwise it can be difficult and disruptive to the business and the departing director to separate themselves from the relationship if things go awry.

The director’s service agreement should cover how their appointment can be terminated and on what grounds and by whom, what happens if there is a dispute between the director and the company, what happens when they leave – whether they are entitled to payment in lieu, how much notice should they give or whether the company can terminate without notice in certain circumstances, obligations on termination such as return of company property and what happens to their shareholding or other share benefits such as employee options or other management share schemes and their social media accounts on termination of their position as officer of the company.

Our employment team can help you draft and review your directors’ service agreements. Tell us more about your situation and get in touch.

Contact Pearsons & Ward Director's Service Agreements Lawyers in Yorkshire

If you are an employer and you need advice and assistance with Director's Service Agreements, get in touch with our team today. For a confidential discussion or for advice on Director's Service Agreements, please contact us on 01653 692247 (Malton), 01937 583210 (Wetherby), 01904 716000 (York), or complete our online enquiry form. We look forward to assisting you.