Director’s service agreement

Any director who is also an employee of the company should always be given a service contract. As well as ensuring there are no arguments over their status it should also minimise the possibility of any other misunderstandings arising. The enclosed agreement is all encompassing and addresses all the major issues that you’ll need to consider.

Key areas to address

A director is capable of having up to three different interests in a company - director, employee and shareholder. Sometimes, a director can assume all three interests at the same time. When a director is also an employee, it’s important to be as precise as possible regarding their terms and conditions of employment. The name for this important document is a “service agreement”.

The following key areas must always be addressed:

•         is the contract to be for a fixed period or one that can be ended by notice? Companies are not allowed to offer contracts to directors that are longer than two years without getting this approved beforehand by the shareholders in a general meeting. If this isn’t done, the fixed term is void and the contract can just be brought to an end on reasonable notice. Once a director has two years’ service, they’re able to claim unfair dismissal just like any other employee

•         draft the duties and place of work clause as widely as you can to give yourself maximum flexibility

•         if there’s an intention to pay a bonus, always ensure that it’s worded to give the company a complete discretion as to whether one is payable. Failure to do this could mean that the director may be able to argue that it’s a contractual entitlement to always be paid

•         to try and minimise a key director leaving to join a rival company and perhaps trying to poach your staff and customers into the bargain, always look to incorporate a restrictive covenant in the agreement. However, don’t go over the top otherwise your clause will fail. You’re only allowed to include what’s reasonably necessary to protect the business interests that are being threatened

•         make sure you specify the length of notice in order to terminate the agreement. It’s not unusual to have at least three months’ notice from either party. Notice periods are not to be ignored unless you want to be on the receiving end of a breach of contract claim

•         don’t forget to always incorporate all the provisions required by law to be included in a written statement of employment particulars.

Duties

Directors’ duties are set out in the Companies Act 2006. It’s advisable to highlight and draw their attention to this in the contract.