What is a Directors Service Agreement?
The directors of a company are the people who manage the company, take business decisions and make business contracts on the company’s behalf. The Companies Act 2006 defines a director as any person occupying the position of a director, by whatever name called. In practice, it is necessary to examine the function of the individual, the constitution of the company and the terms of any contract between the company and the individual to decide whether he is occupying the position of director. In all businesses, directors have specific, well defined statutory duties and responsibilities, which should be addressed within a directors’ service agreement.
Commonly, directors are also employees of the companies where they work, and as such, are entitled to a written contract of employment. Aside from containing standard terms found in a general contract of employment, a directors’ service agreement contains further detailed and extensive provisions concerning their specialist position and responsibilities under the Companies Act 2006.
Directors have specific statutory duties and responsibilities in relation to the business, which should be addressed within a Directors Service Agreement, which differ from standard employment contracts. External investors want to see the directors’ service contract as part of due diligence. The agreement would serve as an example of how business is well organised and would show how steps have been taken to ensure that the company is prepared to make emergencies. In this post, we explore in more detail, what is a directors service agreement?
What is a Directors Service Agreement?
A Directors Service Agreement (DSA) is typically more complex than a standard employment contract due to the different nature of a directors role within an organisation. Directors are, generally speaking, the most senior positions within a business and therefore hold the most obligations, responsibilities, and restrictions on post-termination activities within the business, and are likely to have the most lucrative remuneration and benefits packages, all of which will be detailed within the DSA.
In its essence, a DSA is a comprehensive employment contract that sets out an individual’s rights and obligations as a director and employee of a company. It plays a crucial role in resolving workplace disputes and protecting a business. Find out more about Directors Services Agreements here.
An executive Director’s Service Agreement is very similar to a contract of employment. Both documents outline the rules, duties and obligations that govern the relationship between the director and the company. By accepting the terms of the agreement, both director and company will be entering into a legally binding contract.
A Directors Service Agreement will usually include the following:
- Basic Provisions, i.e. hours and place of work, salary, holiday entitlement, etc.
- Bonus or Reward Schemes
- Defined Duties
- External Appointments, i.e clarity on whether a director is permitted to work with other companies and if any restrictions apply to this entitlement
- Notice Period
- Termination and Resignation
- Restrictive Covenants and Confidentiality
What is the difference between a contract and a service agreement?
The difference between an employment contact and a service agreement is that the service agreement is more detailed and complex. It covers the basic employment provision as well as other provisions, such as termination and resigning as a director.
What powers do company directors have?
A directors service agreement will, in most cases, have to be approved by the Board. In awarding a service agreement, the Board members must act in the interests of the company. Directors can award themselves service agreements for a fixed term of up to two years without the consent of the shareholders. Fixed-term contracts for periods exceeding two years require shareholders’ approval by ordinary resolution of the company in general meeting. Approval is not required by the members of a company that is either a non-UK company or a wholly-owned subsidiary.
Copies of all directors’ service agreements must be kept at the company’s registered office, where they are open to inspection by the members. This contrasts with an ordinary employee’s contract of employment, which is kept on the personnel file and is confidential. Further, the service agreement/memoranda must be kept for a period of at least one year from the date of termination or expiry of the agreement. This obligation applies regardless of the length of any service contract and whether or not it is terminable within 12 months. Find out more about negotiating employment contracts here.
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