Do You Really Need Directors’ Service Agreements?

Last updated: 25 January 2021

Estimated reading time: 8 minutes

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A company’s directors play a large part in steering a growing business. As they are given access to valuable business information, whether that’s your intellectual property, commercial contracts, or supplier and customer information, they are often responsible for supporting your wider strategy and guiding it through to success. With so much resting on a director’s shoulders, you need to be sure that they have your best interests in mind at all times and that you’re covered if they don’t. Having the right employment contracts in place for directors that come on board is a vital part of the process, but do you also have a director’s service agreement in place that’s fit for purpose and compliant with corporate and employment law?

In this guide we answer:

  1. What does the role of a company director cover?
  2. What is a director’s service agreement?
  3. Director’s service agreement vs employment contract
  4. Why does your business need a director’s service agreement?
  5. What should you include in a director’s service agreement?

What does the role of a company director cover?

The term ‘Company directors’ can cover a multitude of roles. One common type of director that is thought of is an individual that holds the office of director by virtue of being legally appointed to a statutory role and have statutory and common law responsibilities. These directors are often called ‘executive directors’ and are usually (although not always) employees of the companies for whom they work. As such, they are entitled to have a written contract of employment, just like other team members.

As company directors have specific duties and responsibilities, both in general and under specific legislation such as the Companies Act 2006 (the ‘Act’), the director’s terms of service are covered in an agreement, known as a director’s service agreement.

What is a director’s service agreement?

As well as including the basics you’d expect in an employment contract, a director’s service agreement can be more detailed and extensive, given their specialist role and onerous obligations.

Even if a director is not a company employee, but is, for example, a non-executive director (who is usually part-time and whose job it is to provide objective independent advice to the company’s board), they can also enter into a director’s service agreement to cover their non-executive duties, although sometimes non-executive directors agree terms with the company in a letter of appointment.

There are also other types of directors under the Act, such as de facto and shadow directors that will still be included in the term ‘director’.

A de facto director is someone who acts as director without being validly appointed by the company to that role.

A shadow director is often thought of as someone who gives directions and instructions that directors follow and act upon without being held out as a director themselves.

Both types of directors may not have formal service agreements which can create more confusion as to the scope of their remit and responsibilities, particularly for the other directors, the company’s employees and any third parties that the company is contracting with (such as customers and suppliers). This is why it is important to make sure that all directors have been validly appointed and the remit of their powers has been documented.

Director’s service agreement vs employment contract

A director’s service agreement is very similar to an employment contract. Both will often include the responsibilities that the director should carry out and the rules under which they should operate.  However, it’s important to recognise that a basic employment contract that you would use for a junior employee or a template agreement may not go into the detail that is required for the complex role and duties of a company director. Think about it this way. A director is potentially an employee of the business, secondly, they may be a shareholder, and finally their role as director is separate in and of itself. By clearly separating these elements of a director’s role, it makes it much easier to establish boundaries in written documentation so that, if further down the line, a disagreement occurs, the employment contract and service agreement clearly set out how the disagreement should be handled.

Why does your business need a director’s service agreement?

It is likely that at least some of your company’s directors are employees of the company, just like the other members of your team. So, it makes sense that they should have a contract of employment setting out the scope of their services while they are an officer of the company.

Compliance: In addition, the Act and English common law place certain specific responsibilities on company directors that will need to be applied in the context of the services for which they have been appointed. It is important that each director has a service agreement with terms that are in line with company policies and that’s tailored to the specific job they do, particularly if your company is listed or has securities that are admitted to trading on a regulated exchange as the key terms of these contracts will more than likely need to be disclosed to shareholders and potentially publicly.

Good corporate governance: Your director’s service agreement should spell out exactly what’s expected of the director, and in particular your expectations around decision-making, and the need for the director to act in the best interests of the company at all times. Remuneration should be transparent and in line with company policies on management remuneration and with any remuneration reports that may need to be made by the company or agreed with the shareholders.

Protection of sensitive commercial information: Since your directors are given privileged access to your business’ confidential information, intellectual property, customer lists and technical information, as well as to personal data, you’ll want to make sure that this information is protected and that they do not disclose any such data or information in a way that could be detrimental to your business.

Restrictive covenants: You may also want to ensure that should a director leave your business, their ability to go to work for a competitor is limited, at least for a period of time. Although these clauses are commonly placed in service contracts, there are competition law limitations on the extent to which you can impose these restrictions and you should take legal advice before incorporating these types of restrictive covenants into your directors’ service contracts.

Clear exit strategy: There’s another good reason why you need a service agreement for your directors and that’s because your directors may have multiple roles within the company, as directors, shareholders, and employees. Unless you agree upfront your expectations about how the director would be treated if they leave, it can be difficult and disruptive to separate yourselves from the relationship if it turns sour.

For example:

  • Your director may decide they no longer want to be an employee, but still want to hang onto their shareholding and continue as a director. Clearly, this wouldn’t be acceptable, as they no longer have a role in the company, and you wouldn’t want them to be able to have an input into or prevent strategic decision-making that may be necessary for the growth of the business.
  • You may want to keep an employee on-board but remove their directorship. For the sake of the smooth running of the company, you’d want this process to be as smooth as possible to avoid disputes.
  • Directors are likely to be senior members of staff, performing key business and management roles. You may want specific provisions that cover key performance indicators that they have to reach regardless of their other roles, and a longer notice period if they decide to leave.
  • You’ll want to limit your director’s ability to go to work for a competitor, or to approach your clients if they set up a competing business (provided these restrictions work within the permitted framework established by competition law).

What should you include in a director’s service agreement?

A well-drafted director’s service agreement will include the following:

Clause or section of the agreement:To include more details on:
Terms of appointmentThe date they started work, the date of their appointment as a director and the term of their appointment (whether it is a rolling or fixed term – there are different options available to a company depending on whether the company is private or public).
Place of workWhere they are expected to work, hours of work, travel, expenses.
Holiday and other paid leave entitlementsHoliday entitlement, sick leave and incapacity, maternity and other types of paid and unpaid leave, and particular provisions relating to a company’s right to ask for a medical examination (such as drugs or alcohol testing) the results of which can be shared with the company.
BenefitsPay, bonuses, share option schemes, pensions and life insurance, company car, dividends, and any other benefits, including the terms on which these might be restricted or withdrawn in the case of poor performance.
Duties and responsibilitiesTheir duties, both as an employee and in regard to their duties as a director, possibly mentioning their legal duties under the Act (and any additional industry standards or regulations such as the Listing Rules and other codes of practice and principles of corporate governance if you are a listed company). You may also offer your directors cover under the company’s directors’ and officers’ insurance.
WarrantiesYour expectations of them as a company director (which can be given to the company by the director through warranties in the service agreement), in particular the need for them to state that they will comply with the company’s policies, for example anti-bribery and corruption, anti-discrimination, and data protection and privacy policies.
Restrictive covenantsAny restrictions you want to place on them in respect of their other activities outside of the role, including working for or soliciting competitors and restrictions on soliciting other company staff members (taking into account any anti-competitive limitations).
Confidential informationPrivacy and confidentiality provisions, monitoring of email and the need for them to keep the company’s information (including any personal data controlled by the company and any commercial sensitive information belonging to or provided by the company) secure including while travelling and using company laptops and USBs.
Company policies and procedures (could also be detailed separately in staff handbook)Copies of the company’s policies and procedures which they must agree to follow.
Grounds for terminationHow their appointment can be terminated and on what grounds and by whom (disciplinary and grievance procedures), what happens if there is a dispute between the director and the company, what happens when they leave – whether they are entitled to payment in lieu, how much notice should they give or whether the company can terminate without notice in certain circumstances, obligations on termination such as return of company property and what happens to their shareholding or other share benefits such as employee options or other management share schemes and their social media accounts on termination of their position as officer of the company.
Corporate responsibilitiesRequirement to comply and provide reasonable assistance with any Companies House or HMRC processes that need to be completed as a result of the appointment or termination of the director as an officer of the company.
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What next?

Our corporate governance specialists can help draft and review your directors’ service agreements. Tell us more about your situation and get in touch on 0800 689 1700, email us at enquiries@hjsolicitors.co.uk, or fill out the short form below with your enquiry.

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