Why does your business need a director's employment contract? (Incl. a lawyer drafted template)

What is a director's employment contract?

A director's employment contract can be essential to clarify the expectations and obligations of both a company and a director. But what actually is this type of contract? Well, a director’s employment contract is a legally binding contract between a company and an executive director that defines the director’s role and responsibilities, and manages the overall relationship between the director and the company. It will clarify the scope of the director’s engagement by the company, including the compensation and any other benefits that they will receive for the appointment.

Find out more by reading these frequently asked questions.

How can my business benefit from using a director's employment contract template?

1. Clear expectations - putting in place a director’s employment contract between a company and a director sets the stage for how the employment relationship will run on a daily basis, laying out the expectations and obligations of both the director and the employer/company. It can be a crucial document for ensuring everyone is on the same page from the outset of the relationship.

2. Legal protection - a director’s employment contract will also include important legal protections for a company. For example, this could include protecting the company’s intellectual property and confidential information, especially in the event that the director leaves the company.

3. Manage disputes - a director’s employment contract can be a key tool in managing potential disputes with directors by including a clear dispute management process. This will often be linked to the company’s grievance procedure and disciplinary process that are used to manage disputes with employees generally.

4. Clear exit process - unfortunately, relationships between companies and their directors do sometimes break down. A director’s employment contract can be crucial in ensuring that there is a clear exit process in place to remove directors where they do something wrong, and can also be crucial in managing how directors act after the termination by including post-termination restrictions (e.g. to stop the directors from poaching customers or employees).

5. Consistent terms - using a director's employment contract template can ensure that consistent terms are in place for all executive directors in a company.

What are the key clauses to include in a director’s contract of employment?

A director’s employment contract is key for governing the relationship between a company and its directors, but should also contain crucial clauses that can be used to manage potential future disputes. The key clauses to include in a director’s contract of employment are:

1. Role and responsibilities - the director's employment contract should provide details about how the working relationship will work in practice, e.g. who the director will report to (usually this is the rest of the board or directors), whether they are required to travel as part of their duties, where and when they are required to work and any specific tasks or duties that fall within the scope of their role.

2. Termination - a director's employment contract should include terms that deal with termination with notice (e.g. where one party wants the relationship to come to an end) and termination without notice (e.g. where the director has breached the contract or is otherwise at fault). It is also common to include payment in lieu of notice clauses, so the employer can choose to pay the director rather than them working during their notice period, if required.

3. IP ownership - a clause is often included in a director's employment contract to protect the employer’s intellectual property (e.g. ideas, inventions, copyright, brand) and confirm that any intellectual property the director creates during their employment automatically belongs to the employer.

4. Confidentiality - this type of clause is common in order to make it clear that the director must keep the employer’s confidential information secret and confidential, and will explain the limited exceptions in which the director can share confidential information (e.g. where required to do so by law).

5. Post-termination restrictions - a post-termination restriction clause is a contractual term that will apply to the director after their employment ends – it is a legal obligation that prevents what the director can do after their employment ends (e.g. work for a competitor, solicit or poach employees).

Find out more using this handy guide about the top 7 legal terms to include in a director’s employment contract.

What are the differences between executive and non-executive directors?

An executive director is someone who has been employed by a company to carry out, and hold the position of, director in that company. An executive director will be heavily involved in, and often responsible for, the day-to-day management and operation of the company. You would use an executive director employment contract when appointing this type of director.

A non-executive director (sometimes referred to as a NED) is someone who has been appointed to provide strategic oversight and advice to a company. They will sit on the company’s board of directors, but are not employed by the company. They are generally not involved in the day-to-day management of a company, but instead have expertise in a particular area or industry. As NEDs are not employed, you would not use a director's employment contract for a NED, but would use a letter of appointment of a non-executive director instead.

Find out more about executive and non-executive directors by reading this guide.

What else does my company need to do when appointing an executive director?

1. Get approval for the appointment - you should check your company’s articles of association to find out the process for approving the appointment of a new director. Often, the board of directors of the company will have the authority to appoint new directors, in which case the decision of the board should be recorded via board minutes. If shareholders' consent is required for the appointment, the decision of the shareholders can be recorded using written resolutions.

2. Letter of consent to act - UK company law requires that at any time when an officer (i.e. a director or company secretary) is being appointed, a statement is made to the effect that they have consented to act in that capacity. This consent can be recorded via a letter of consent to act from the director.

3. File Form AP01 or AP02 with Companies House - you'll also need to inform Companies House that you have appointed a new director within 14 days of their start date by filing a Form AP01 (or AP02 for corporate directors).

4. Update statutory registers - under company law in the UK (the Companies Act 2006), a company is required to maintain a set of records (also known as 'registers' or 'books'). Companies are also required to make these registers available to shareholders on request. The statutory register will include a register of directors that should be updated when a new director is appointed.

How can Docue help?

Docue’s director's employment contract template has been drafted and is maintained by our UK lawyers. The template is fully customisable to suit your business’s needs. Our smart template builder technology and built-in drafting guidelines will allow you to create a director's contract of employment bespoke to your organisation in a matter of minutes, all by just answering a series of simple questions.

Sign up now to use Docue's director's employment contract template.