When introducing a new employee, it is crucial that they are given an employment contract, as the document defines the employment relationship and outlines regulations and processes. However, when an employee reaches a higher level of seniority and becomes a director, there are some situations where the employment contract will need to be updated to a Director’s Service Agreement. There are several provisions that should be considered in a Director’s Service Agreement that would not be necessary or appropriate in a regular employment contract.

What is a Director’s Service Agreement?

A Director’s Service Agreement is like an employment contract but goes a little further in what it covers. Whilst this is not legally required, it is usually beneficial to you as an employer, to ensure that your director’s responsibilities and benefits are laid out clearly.

There are some key differences between the employment contract and the director’s service agreement, such as:

  • Benefits
  • Duties and Responsibilities
  • Discipline and Dismissal
  • Post-Termination Restrictions
  • Other Provisions

What benefits might a Director have?

It is likely that your directors will have a different remunerative package compared to your employees. As such, details should be included in a Director’s Service Agreement. It is more likely that a director will have access to or participate in more high-level benefits such as share schemes or incentives. They may have a company car or different policy in respect to travel or general expenses.

What is the difference in duties and responsibilities?

As an employee there are responsibilities and duties in relation to the role, when an employee becomes a director, these duties are a lot more onerous and are set out in the Companies Act. It is therefore advisable to ensure these obligations and duties, especially in a situation where the person being made a director has not held a previous directorship, are clearly stated in the agreement. This will prevent the director from accidently breaching any of their duties and responsibilities. It will make it clear that any such breach could result in the company taking appropriate action.

Discipline and Dismissal

If a director does fall foul of their duties and responsibilities, it may be necessary to discipline them. It is possible that due to their seniority, the usual disciplinary process that normal employees are bound by (that can usually be found in a staff handbook), would not be appropriate. As such, the director’s service agreement does give an opportunity to state these different processes.

If a director is found to have committed misconduct, the sanctions are largely the same as those that an employee would face. However, in addition to the usual sanctions, there are some additional considerations for directors.

In some situations, a director can have financial liability to a greater scope than an individual may have. This is because a director can occasionally find themselves personally liable for losses incurred. It is necessary to ensure that the relevant provisions, allowing for the recovery of such sums, are included in the contract.

If your chosen sanction is dismissal, or even if the director should leave for any other reason, it is important that the director’s service agreement states that they shall resign from their position as a director. This is a critical element that is sometimes overlooked. Without its inclusion, you could fall into greater difficulties if it becomes necessary to force a director to resign from their statutory position.

What should be considered regarding Post-Termination Restrictions?

Although there may be post-termination restrictions in place within an employee contract, these restrictive covenants should be reviewed for a director’s agreement as they may need enhancing. It is advisable to ensure that adequate post-termination restrictions are in place to protect business.

Other provisions

There are also several other smaller provisions that you may wish to apply in a director’s service agreement that would not be necessary or appropriate in a regular employment contract. These would mainly be things such as director’s liability insurance and technical points.

For more information on any of the above points, or for assistance in drafting a director’s service agreement, please contact the team at Backhouse who will be more than happy to assist.

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