Director Service Agreements – Why Bother?
Firstly, what is a director service agreement? It’s a comprehensive employment contract which should be issued to executive company directors, namely those statutory directors named at Companies House who are also full or part-time employees.
While a director service agreement is not a legal requirement (albeit all employees, whether directors or not, must be provided with a statement of terms on or before their first day of employment), it is certainly good practice and creates certainty and ensures clarity which is vital, particularly in the event that disputes or disagreements arise subsequently.
A director service agreement should set out a director’s duties in connection with their employment and their office as statutory director. Furthermore, it should contain clear provisions determining what happens in the event of termination, whether of employment, directorship or both.
In addition to the standard clauses found in most employment contracts, such as hours of work, pay and benefits and holiday entitlement, the following additional clauses should be included in a director service agreement:
- Ceasing to be a Director: Such a clause should confirm that an executive director is not permitted to resign from office without having received prior consent from the Board of Directors. It should also clarify the effect on the employment relationship of termination of a directorship. In the absence of a clear contractual provision to the contrary, an executive director’s employment may well continue despite them ceasing to hold the office of director, a situation many companies may wish to avoid.
- Notice Periods: Generally, directors are subject to longer notice periods than other employees given their seniority and their significance to a Company’s operation. If there is no written agreement in place confirming a longer notice period, a director will however, only be required to give the statutory minimum one week’s notice if they decided to leave their employment. Quite understandably, this is not, in most cases, anywhere near enough.
- Obligations on Termination: Such a clause will set out a director’s obligations on termination of employment, including the transfer of shares (if they’re also a shareholder) and the return of all confidential information. This is particularly important given that directors are often entrusted with or party to a Company’s most confidential information.
- Post Termination Restrictions: These restrict a director’s actions post-termination by limiting who they can work for, which staff they can try to poach and which clients they can approach for business, for a specific period and can be crucial in the battle to safeguard a business following the exit of an influential director. Unless explicitly set out in a director service agreement, an existing director will not be subject to any such restrictions.
- Confidential Information: In the absence of a contractual provision, an employee is only prohibited from disclosing an ex-employer’s trade secrets (the most confidential of all confidential information – quite a high bar). In practice however, an employer will want to ensure that an outgoing executive director is prohibited from disclosing any and all confidential information. This can be achieved by including a detailed definition of ‘confidential information’ in a director service agreement with specific wording confirming what an ex-director is and is not permitted to do with such information on leaving their employment.
With the above in mind, it’s worth considering whether your statutory directors are signed up to employment contracts that are fit for purpose and protective your business sufficiently and, if not, putting them in place as and when you can.