A director’s service agreement is an employment contract for a senior employee who is also a director on the company’s board (ie an executive director).
It’s not a legal requirement for an executive director to have a director’s service agreement but, as an employee, they have the right to receive a written statement of specified terms of their employment including their salary, hours of work, holidays and notice period. It’s also a good idea to spell out their broader rights and responsibilities. The best way to do all of this is in a director’s service agreement.
What to include in a director’s service agreement
To find what to include in a director’s service agreement, you can use Service Agreement for a director, which can be tailored to your business’s requirements. The template doesn’t include a probation period because these are not typically used for executive directors.
Please note that:
- There are some terms that an executive director’s contract must include or which will automatically be included by law, even if you try to exclude them, eg terms relating to minimum notice periods for dismissal and your obligations to provide a safe place and system of work.
- This template includes all the information that you are legally required to provide in writing to executive directors as employees, as well as various extra provisions to help the smooth running of your business.
- This template is designed to work with the template Staff handbook and policies. Some matters are addressed in the handbook rather than the contract. These include your disciplinary and grievance procedures. This is because it is more difficult to change such procedures if they are included in your employment contracts, and an employee could theoretically sue you if you do not follow exactly what the procedures say in their contract.
- You must ensure your contract does not discriminate against those with protected characteristics. This will include treating all comparable employees equally and not discriminating indirectly against by offering different terms to different groups, to the disadvantage of one group.
- If your director will be part-time, bear in mind that part-time staff must be treated equally to full-time staff. Except in very limited circumstances, a director’s service agreement for a director working part-time must be just as favourable a contract as that offered to a full-time executive director.
- The Service Agreement for a Director includes specific obligations for a director, including to:
- comply with your company’s articles of association and the legal duties of a director;
- resign as a director if their employment comes to an end;
- agree that their employment automatically terminates if they are disqualified from acting as a director of any company;
- spend all of their time on your company’s business, not have any involvement in any other business without the consent of your board, and act in your company’s best interests; and
- disclose to your board any other business interests and any actual or potential conflict of interest.
Matters to consider in the agreement
Given your director’s seniority, you should consider the following before completing the template contract (there is space within the template for the below information to be included):
- You will typically want to have a longer notice period for a senior employee so that you will have time to prepare for a transition if they leave your business. You will therefore need to factor this into the terms offered to the director.
- You will typically want to agree that any intellectual property that the director develops or helps to develop in the course of their work belongs to your company. The template contains an example of such a provision.
- If the director leaves your business you will want to do what you can to protect your business interests (including confidential information and business contacts). You should consider including a confidentiality clause so as to maintain the director’s obligation of confidentiality after they leave the company. You may also wish to consider including restrictive covenants, which will prevent your director from doing certain things (such as working for a competitor) for a period of time after leaving the company.
You will need to ensure the director’s service agreement is properly approved by your company. The procedure for doing so will usually be set out in your company’s articles. If your articles are silent on this topic you will have to seek shareholder approval.
The content in this article is up to date at the date of publishing. The information provided is intended only for information purposes, and is not for the purpose of providing legal advice. Sparqa Legal’s Terms of Use apply.
Marion joined Sparqa Legal as a Senior Legal Editor in 2018. She previously worked as a corporate/commercial lawyer for five years at one of New Zealand’s leading law firms, Kensington Swan (now Dentons Kensington Swan), and as an in-house legal consultant for a UK tech company. Marion regularly writes for Sparqa’s blog, contributing across its commercial, IP and health and safety law content.