A director of a company is one of the most senior members of the organisation. They are entrusted with key decision-making power and exercise substantial control over how the business operates. They have access to all the most sensitive information about the business.

There are various types of director positions within a private limited company and this will affect the type of contract they may have. Directors are responsible for the success and the legal compliance of the business.

The difference between Executive Directors and Non-Executive Directors

Directors can either be executive or non-executive.

Executive directors are those that fulfil a service role within the business and generally will have a contract of employment alongside – and separate to – their role of director. For those who are employed within the business, a service agreement is an essential contract in order to protect the interests of the company. In these scenarios, failing to clearly set out the relationship between a director and a company – their duties and liabilities – at the time of their appointment could leave the company vulnerable in the case of a breakdown in relationship further down the line.

Non-executive directors are on the board of directors but do not work within the company on a day-to-day basis. Their legal rights and responsibilities are still equivalent to an executive director with regards to their position as director.

Executive Director’s service agreement vs employment contract?

As with employment contracts for other members of staff, a contract should be drawn up between an executive director and the company in the form of a director’s service agreement. This will include all the contractual terms of employment, ensuring both company and director alike are aware of their mutual responsibilities.

Why is an Executive Director’s Service Agreement so important?

In situations where a director is also the majority shareholder and not an employee, there will be an intrinsic tie between the interests of the company and the interests of the director. This affords a level of protection for both parties.

However, when directors are brought in as employees to manage the running of the business, a director’s service agreement provides a framework for this relationship. It underpins the structure of management within the business, to avoid misunderstandings or conflicts of interest, in case the director does not perform their job role as required. 

Director, Employee or Shareholder?

In many cases directors are also shareholders within the company (and/or may receive share options as part of their overall compensation package), which can add to the complexity of their position. If there is a breakdown in relationship and a director leaves the company, it can be difficult to separate these different roles.

Without setting out provisions for unforeseen circumstances, a company could be left with the director continuing as a statutory director and/or shareholder after the termination of employment, giving them continued decision making power or influence even after a dispute. A director’s service agreement would define their duties as an employee, as well as setting out how termination of employment might affect their position as director or even their shares.

Protecting the company’s future

With regards to the restrictive covenants of a director’s service agreement vs an employment contract, the former are likely to be more onerous. Typically directors would be subject to longer notice periods and non-compete periods.

Since the director is an integral part of the business, their departure would have greater implications than that of an ordinary employee. It may take longer to find an adequate replacement and the impact of them working for a competitor in future would be more problematic, due to the access to information about the business that they will have had. Hence the importance of having adequate restrictions in place to safeguard the future of the business.

What does Director’s Service Agreement typically contain?

Like employment contracts, director’s service agreements cover all the basic provisions of the obligations of both the company and the director towards one another. Typically a service agreement may include the following:

Terms of employment:

The basic provisions including working hours, holiday and sick pay, pension scheme, place of work etc.

Remuneration and bonuses:

As well as salary, the director may be part of a bonus scheme or be entitled to share options, all of which should be outlined in the agreement.

Role and responsibilities:

Details of the scope of their role, including their duties and responsibilities as well as their areas of authority. A precise job description gives a standard against which the director can be held to account if they are not fulfilling their role as required. It can also set the limits for their decision-making powers, to avoid conflict with other directors.

Termination and notice period:

Provisions for how a termination of employment will be handled are vital to ensure a smooth transition. As mentioned above, an appropriate notice period will allow time for adequate hand over areas of responsibility.

Intellectual property

As with all service agreements, the contract will typically set out that any IP rights created by the director will be the property of the employer. This could protect essential elements of the business from being claimed and taken elsewhere by an individual within the business.

External engagements

There may be restrictions on whether a director is permitted to work for an external company whilst in their role, particularly in relation to any competing business.

Confidentiality and Non-compete:

The service agreement should include restrictive covenants around non-disclosure, confidentiality and not working for competitors. Due to the level of access a director has, this is a particularly important aspect to have a legally binding agreement over. It would also restrict them from poaching clients or employees if they were to leave.

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