Five top tips when preparing company directors Service Agreements

Ashtons Head of Employment Law, Ross Strowger, gives his five top tips when preparing company directors’ Service Agreements.

Tip 1: Know your director (and your company!)

Understand the director’s employment status. Are they an employee or worker?

Do you, in fact, need a Service Agreement or, perhaps, a Letter of Appointment for a non-executive director? This is fundamental as an executive director who is an employee or worker may benefit from an assortment of employment law rights, including:

• to be provided with a principal statement of employment terms on or before starting employment
• a statutory minimum notice period
• national minimum wage
• a limit on the number of hours which may be worked each week
• entitlement to paid holiday and Statutory Sick Pay
• protection from discrimination on a number of grounds: age, disability, gender reassignment, marital status and civil partnership status, pregnancy and maternity, race, religion or belief, sex and sexual orientation
• protection from unfair dismissal following completion of the requisite period of qualifying service (NB “day one” rights in Employment Rights Bill)
• a statutory redundancy payment, if made redundant, once they have been continuously employed for two years
• entitlement to family-friendly leave rights, such as maternity leave and pay, shared parental leave and pay, paternity leave and pay, adoption leave and pay, unpaid parental leave and time off for dependants
• the right to request flexible working
• being an ‘eligible jobholder’ for auto-enrolment to pensions.

Note that even if they are not an employee or worker, directors may be protected from unlawful discrimination by virtue of their status as officeholders. The vast majority of employers will be private limited companies limited by shares, but check your employer entity.

Tip 2: Raise awareness – Companies Act 2006

This Act sets out the legal duties and obligations that a director owes to the company.

The key statutory directors’ duties under the Act are:

• duty to act within their powers
• duty to promote the success of the company
• duty to exercise independent judgment
• duty to avoid conflicts of interest
• duty to exercise reasonable care, skill, and diligence.

The service agreement should make it a contractual requirement for the director to abide by their legal duties in relation to their directorship.

The Act also requires that a copy of the service agreement is held available for inspection (with potential criminal sanctions for non-compliance).

Tip 3: Look after the family silver – business protection and confidential information

Make sure you are clear about what information is regarded as confidential and has the quality of a “trade secret”. A comprehensive confidentiality clause in a director’s service agreement should cover the use and disclosure of confidential information during the director’s employment and after termination, as well as any obligation to return or destroy confidential information after termination.

Directors also owe a duty of utmost good faith to the company called a “fiduciary duty” which can be breached by departing directors who are looking to move on to another competitor business in some capacity.

It is also possible to prevent unfair competition post-termination for a reasonable period by entering into post-termination restrictions, also known as restrictive covenants (non-competition, non-solicitation, non-dealing, and non-poaching of employees are common clauses). However, these covenants have particular legal rules underpinning their successful enforcement, and they should always be drafted with the particular role/business and relationships in mind. The problem with adopting template wording is that these basic covenants are potentially unenforceable if they are the same for everyone.

Tip 4: Indemnity protection – directors and officers (D&O) insurance

The list of potential personal liabilities for company directors seems endless. There has been an increasing trend of holding directors accountable, whether that is through regulatory enforcement action or creditor/ shareholder action. In the most extreme case, this can lead to imprisonment, but there is also the prospect of disqualification from holding the office of director, not to mention reputational/career damage and irrecoverable legal expenses.

For these reasons, it is important for directors and the company to consider the availability and terms of D&O insurance.

Tip 5: Prepare for the end at the beginning; notice and termination provisions

When setting out notice periods for the majority of the workforce, an employer usually makes an assessment of how much forewarning it needs of the termination of their employment.

In the case of directors, however, it is unlikely that an employer would want a director to work out their notice period when they have no future with the company. Therefore, they will usually allow the director to leave before their notice period expires or put them on garden leave.

Shorter notice periods are usually more desirable so as to limit the employer’s exposure to salary costs on termination. This is also because the director will normally have had access to significant trade secrets and confidential information as well as regular contact with customers and senior employees. If they are looking to join a competitor, this could be extremely damaging to a company’s business interests.

Long notice periods also have cost implications, as the longer the notice period, the bigger the potential pay-off, which could present a cash flow problem for businesses. However, this financial implication needs to be balanced against the fact that longer notice periods (served out on garden leave) will mean that the departing director remains an employee and owes continued duties under their service agreement for longer.

Contact our employment law solicitors today

If you have any questions regarding any of the issues raised in this article, please do not hesitate to contact our specialist Employment Law team by using our online enquiry form or by calling 0330 191 5713.