Director's service agreement

An executive director holds two positions at once. They are an employee, with a contract of employment and the statutory rights that go with it. And they are an officer of the company, with duties under the Companies Act 2006 owed to the company itself. A service agreement covers both, which is why it is not simply a senior version of a contract of employment.

The practical consequence shows up at the end. Removing someone as a director does not end their employment, and dismissing them as an employee does not remove them from the register at Companies House. The template deals with both, including the obligation to resign from office on termination, which avoids a departing director remaining on the public record and, worse, retaining the powers that go with the appointment.

This is not for a non-executive

A non-executive director is normally appointed by a letter of appointment and is not an employee. Using a service agreement for a NED creates employment rights nobody intended to grant.

Two Companies Act requirements that are easy to miss

Under section 188, if the agreement guarantees employment for more than two years without the company being able to end it on notice, the shareholders must approve it before it is entered into. Without that approval the term is void and the company may terminate on reasonable notice, which is not what a director negotiating a long term believes they have secured.

Under section 228, the company must keep a copy of the agreement, or a written memorandum of its terms, available for inspection by members, and for a year after it ends. That is a standing obligation rather than a one-off filing, and it means the terms are not as private as the parties often assume.

The clauses that get negotiated

Clauses 2 and 6 offer alternatives, and probation, benefits, share dealing, pay in lieu of notice, garden leave and the post-termination restrictions are all optional. Garden leave and restrictive covenants are the two that are actually argued over, because they determine what a departing director can do next and for how long. A covenant drafted for the role rather than copied from the standard contract is the one that survives a challenge, and for a director the legitimate interests are usually broader, so a longer period is easier to justify than it would be further down the business.

Bonus and share awards

Whether a bonus is contractual or discretionary, and what happens to it on termination, is worth stating rather than leaving to be argued. Share awards usually sit in a separate plan, and the interaction between the leaver terms there and the termination terms here should be checked in both directions.

Board pay, bonus and covenants are high value and frequently disputed. Our employment law and HR solicitors draft and negotiate these on both sides.