Directors Service Agreements

What is a Director’s Service Agreement?

A director’s service contract or agreement is an arrangement that goes beyond ordinary employment contracts, for it covers a myriad of issues proper to senior directors and similar roles. If an employee reaches a higher seniority level, their contract must be updated to reflect their new entitlements and liabilities.

Furthermore, these agreements can be signed by people who would fill non-executive director roles. Hence, the nature of the agreement is not necessarily tied to employment.

To properly understand what a director’s service agreement is and what the legal stipulations are for it, it is important to know what UK employment laws define a director to be. We have done so below.

What Is a Director?

The term “Director” is defined by the Companies Act 2006 as any person who occupies a director’s position “by whatever name called”. In this context, the role takes precedence over the title, so this description is not mere wordplay.

To classify an employee as a director, you should assess whether or not the functions that they have within the organisation are consonant with those of a director in accordance with the company’s constitutions, staff handbooks, and other relevant documents.

Directors in all UK companies have a defined set of statutory responsibilities that should be clearly pointed out in the respective directors’ service agreements.

Applicable Regulations for a Company’s Director

Company directors have to abide by a broad number of laws and regulations, many of which transcend the confines of employment law, covering areas like insolvency law and company law, among others.

The Companies Act 2006 sets the legal framework for how the relationship between directors and their companies should play out. It likewise prescribes rules that directors are legally required to comply with. In addition, the Insolvency Act 1986 also stipulates some norms for directors when the company finds itself in a dire financial situation.

Directors with employee status additionally have several employment law benefits, whereas office-holders are not under a contract and may be entitled only to some employment rights.

Types of Directors

Non-Executive Vs. Executive Director

Executive directors distinguish themselves from non-executive directors in that they typically have more managerial responsibilities and are on a higher tier level within the company. Non-executive directors are normally external agents who assist in decision- and policymaking and are exclusively appointed by company shareholders. Non-executive directors are not employees properly speaking.

These distinctions are important when considering how to deal with each category in the event of a dismissal, removal, or resignation.

De Facto Vs. Shadow Director

The Companies Act 2006 also lists other types of directors, such as de facto and shadow directors.

De facto directors are those who act as directors without having been validly appointed to that role. Shadow directors, on the other hand, are those who oftentimes issue instructions that other directors are accustomed to following. Shadow directors could be said to make decisions behind the scenes, while de facto directors fulfil the role in its totality without a formal designation.

De facto and shadow directors can be declared as directors by a court of law and could be held liable for not complying with their statutory duties, even in the absence of a formal director’s service agreement.

Why Would a Business Need a Director’s Service Agreement?

Directors should have a service agreement wherein they may discern their rights, obligations, and the expectations you may have of them. This further aids in fostering good corporate governance, as directors will have a clear notion of what they should and should not do in the exercise of their duties.

You may also produce a written statement containing the basic terms of the agreement. That way, you’ll shield your company against any possible claims that could be brought up in the future. A written service agreement has the force of law between the parties and is a sure way to demonstrate their rights and commitments without having to rely on hearsay.

What Are the Main Differences Between Directors’ Service Contracts and Other Employment Contracts?

Overview

A director’s service contract differs from a normal employment contract in five key areas, namely:

• Responsibilities
• Benefits
• Warranties
• Disciplinary Matters
• Restrictive Covenants

Let’s go over these areas in more detail:

Responsibilities

Company directors, owing to their special roles, carry fiduciary and legal duties that exceed all the burdens given to regular employees.

Many of these responsibilities are laid out in company policies and the Companies Act 2006, as said earlier. Regardless, it’s always advisable to have them transcribed into the senior member’s written statement to remind them of these obligations and dispel any ambiguities that could stem from the text of the different statutory provisions.

Benefits

To counteract the heavy burdens we just described, a senior director is also awarded multiple additional benefits and bonuses that are not normally granted to lower-tiered employees. These benefits come in the form of remunerative packages, and some of them may be related to participation in share schemes or stock options.

Other benefits you can provide a company director include a company car, travel expenses, premium memberships, dividends, pensions, a holiday entitlement, medical insurance, life and disability insurance, and others of a similar vein.

Warranties

Here, you can make provisions relating to the expectations you may have of the senior employee or director and the need for them to express their commitment to abide by the company’s policies in matters such as anti-corruption, anti-bribery, anti-discrimination, data protection, privacy, and confidentiality policies, among many others.

While these warranties could seem superfluous, they reinforce the notion that the director is wholly aware of their newly-acquired liabilities so that there are no misconceptions that could potentially result in irreversible damages to your company.

Disciplinary Matters

A director’s disciplinary treatment will differ somewhat from that given to normal employees. Even when the sanctions are roughly the same, there are some particular conditions that you should consider when devising their disciplinary rules.

One of them has to do with their financial responsibility, which is significantly greater than that of individual employees. This is because they can be held personally liable for losses incurred by the company due to their actions. Particular provisions to this effect should be explicitly included in the service agreement, including those that deal with the mechanism for recovering these losses.

When explicating the subject of dismissals or resignations, the contract must expressly state that the director shall resign from their position as director. Skipping this important point, as redundant as it may appear, could entail bigger problems. For a director to resign, they need to file a specific form (TM01) with Companies House.

Furthermore, removing an individual’s seniority status is not the same as terminating the employment contract, for, in the former scenario, executive directors can still remain as employees after the fact.

The conditions for removing a director may vary in relation to the company’s articles of association. The Companies Act 2006 states that, unless specified otherwise, removing a director requires the approval of over 50% of shareholders, and such resolution must be issued after giving a “special notice” to the rest of the shareholders and the affected individual. This individual may then formulate written objections, which would be read out loud at the pertinent shareholder meeting.

Restrictive Covenants

The subject of restrictive covenants is one of the most important when analysing these service agreements. These are clauses that can be contained in a contract of employment – or, in this case, a director’s service contract – that restrict the individual from engaging in certain actions after the contract’s termination.

Such covenants are grounded on the fact that senior directors had privileged access to confidential information that could be used against the employer’s best interests, such as personal data, customer lists, trade secrets, and so on. Without these restrictions, your company’s business or market performance could be at stake.

Types of Restrictive Covenants

The most common examples of restrictive covenants are:

Non-competition

You compel former directors to refuse to work for a competing business for a period after the contract’s termination. This period can range from 3 to 12 months, depending on the seniority of the director in question.

Non-solicitation of clients

Also called “non-poaching”, this bars outgoing directors from contacting your clients, contacts, associates, or even employees for a similar period (3-12 months) to do business.

Are restrictive covenants laid out in a service agreement enforceable?

Generally speaking, restrictive covenants are not enforceable in themselves because they’re seen as arbitrary limitations of free trade. By not putting the necessary hedges on your covenants, your business could experience severe vulnerabilities, and you won’t be capable of protecting it as a result.

Valid restrictive covenants include non-competition clauses that address a genuine business concern, albeit in a more restrained manner. Always avoid blanket provisions barring all relevant activity and always give sound reasons for the limitations placed.

Additional Tips for Drafting Directors’ Service Contract

Before designing an executive director’s service agreement document, you ought to be mindful of the following:

• These agreements should contain terms that are also common to employment contracts, such as:
  • Those pertaining to workplace details (where the senior director is supposed to work)
  • Working hours
  • Holidays and other paid leaves they’re entitled to
  • Terms of appointment (the period they’re expected to last as a director if they’re under a rolling or fixed term)
  • and many others.
• You must reassure that the agreement falls in line with the company’s articles of association, policies, staff handbooks, and other agreements of a similar nature. This will guarantee that you will not be charged for unfair treatment.
• The contract must not discriminate against directors with protected characteristics (race, religion, gender, age, etc.)
• You should avoid discriminating between part-time and full-time directors.
• Apart from restrictive covenants, you’d want to stipulate a longer notice period in order to prepare for a transition upon the contract’s termination. This notice period should be a reasonable period and not overly restrictive on the director’s rights.
• The director should agree that the company will hold intellectual property of the developments in which they are involved in the exercise of their work.
• The service agreement should remind senior members about their commitment to not have any kind of involvement in any outside business without your consent or that of the board.

How We Can Help

Directors’ service agreements are essential instruments that can cover your back in the event of a possible dispute, but that could also turn against you if you overlook even the slightest detail.

Our employment law firm can update you with the latest legal insights on the matter and has the necessary expertise to help you devise a director’s service agreement that covers every flank, so your company will not fall vulnerable to onerous legal actions down the road.

Call us on 03334149244 or contact us through our live chat or contact form. We’ll be more than happy to schedule an appointment with you and help you consider your options.