What is a director’s service contract?
A director's service contract (sometimes called an executive employment agreement or director's employment contract), is a legally binding contract that outlines the terms and conditions of employment for an individual who holds the position of director within a company. This type of contract is used to set out the terms of employment of executive directors - for more information about the differences between executive and non-executive directors, read this guide.
Find out more about director’s service contracts by reading this comprehensive guide.
What are the top 7 clauses to include in a director’s service contract?
Director's service contracts are essential for clarifying the rights and responsibilities of both the company and the director, as well as protecting the interests of both parties. But what clauses do they typically include?
1. Written particulars of employment
Executive directors are employed by the company and are therefore the company’s employees. UK employment law requires that all employees are provided with a “written statement of employment”. This must include:
the employer’s name;
the employee’s name, job title or a description of work and start date;
how much and how often the employee will get paid;
hours and days of work and if and how they may vary;
holiday entitlement (and if that includes public holidays);
where the employee will be working and whether they might have to relocate;
if an employee works in different places, where these will be and what the employer’s address is;
how long a job is expected to last (and what the end date is if it’s a fixed-term contract);
how long any probation period is and what its conditions are;
any other benefits (for example, childcare vouchers and lunch); and
obligatory training, and whether or not this is paid for by the employer.
Although the written particulars can be provided separately from the employment contract, it's often more efficient to include them in the contract itself. This way, all the essential terms are in one place which is easy for everyone to find.
2. Role and responsibilities
The director’s service 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 of directors), whether they are required to travel as part of their duties, where and when they are required to work and any specific tasks that fall within the scope of their role.
3. Salary and other benefits
A director’s service contract should set out how much and how frequently the director will be paid, as well as when the director can expect to receive their pay. By clearly setting this information out in the director’s contract, it reduces the scope for disputes over pay in the future. In addition, the director’s service contract should set out whether the director is entitled to any other benefits, and what those benefits are (e.g. health insurance).
4. Termination with notice
It is common practice to include a clause in a director’s service contract that allows either party to bring the relationship to an end for any reason, provided that sufficient notice is provided (a no-fault termination). UK employment law includes statutory notice periods, which are as follows:
at least one week's notice if employed between one month and two years;
one week's notice for each year if employed between two and 12 years; and
12 weeks' notice if employed for 12 years or more.
It is possible to contractually agree to a longer notice period, but not a shorter one. The notice period is usually agreed to be longer the higher the employee's position is, so for directors, it is common to have a longer notice period to allow for sufficient time to do a diligent handover and ensure the role is replaced.
It is also common to include a clause that allows the employer to pay the director a sum of money instead of the employee continuing to work during their notice period (payment in lieu of notice). This may be useful:
where the employment relationship has broken down and it is preferable not to have that person attend the workplace;
where it is a redundancy situation and there is no work to perform; or
where an employee has access to the employer's client/confidential information and the employer would prefer they leave immediately rather than work their notice.
5. Termination without notice
There will unfortunately be times when relationships between a company and a director break down due to a fault of the director (a fault termination). A clause should be included in the director’s service contract that allows the company to bring the relationship to an end without notice where the director is at fault, and it is therefore reasonable for no notice period to be provided to the director before their employment comes to an end. This could include where the following circumstances occur:
the director commits gross misconduct;
the director resigns as a director of the company without permission to do so;
the director is in serious or repeated breach of the terms of the director’s service contract;
the director becomes bankrupt;
the director becomes physically or mentally incapable of performing their duties;
the director is found guilty of committing a criminal offence;
the director is disqualified as a director;
the director ceases to be eligible to work in the UK; or
the director is guilty of fraud or dishonesty.
6. Confidentiality and IP
A clause should be included in the director’s service contract that makes it clear that the director must keep the employer’s confidential information secret and confidential, and explains the limited exceptions in which they can share confidential information (e.g. where required to do so by law).
Similarly, a clause is often included in a director’s 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.
7. Post-termination restrictions
A post-termination restriction 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). The restrictions could include:
Non-competition - this restriction prevents the director from working for, or otherwise being involved with, a competitor for the specified period after their employment ends – i.e. protecting the employer against the risk that their ex-director’s skills or knowledge could be used to take business away from them.
Non-solicitation of customers - this restriction prevents the director from approaching, or otherwise working with, the employer’s customers for the specified period after their employment ends – i.e. protecting the employer against the risk that their ex-director's existing relationship or knowledge of their customers could be used to take their customers away from them.
Non-solicitation of employees - also known as “non-poaching”, this restriction prevents the director from recruiting or otherwise encouraging other employees to work for a competitor for the specified period after their employment ends – i.e. protecting the employer against the risk that their ex-directors existing relationship with their colleagues and insight into the working arrangement could be used to take their staff away from them.
Obligation not to represent to be connected to the company - This restriction protects the employer against the risk that their ex-director suggests they continue to be employed, or have authority to act or speak on behalf of the business.
In the UK post-termination restrictions will only be enforceable if they go no further than is necessary to protect your company's legitimate business interests. If a shorter restriction is sufficient to protect the business then you should specify a shorter period to give the provisions the best chance of being enforceable. The restrictions don't all have to be the same length and often it is appropriate to have a shorter period for the non-compete.
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