Director’s Service Agreement

What is a Director’s Service Agreement?

A Director’s Service Agreement is a legally binding contract between a company and a director. It sets out the director’s duties, responsibilities and the terms of their appointment. While directors are often also shareholders, this agreement focuses on their role as an employee or officeholder of the company.

This document is crucial for avoiding misunderstandings and disputes. It ensures that both parties are clear on expectations – from working hours and compensation, to confidentiality and the termination policy. Without a director’s service agreement in place, the company may face legal risks, and the director may lack clarity on their role.

What should a Director’s Service Agreement include?

A well-drafted director’s service agreement should cover all key aspects of the director’s role. Here are the essential elements to include:

• Role and responsibilities: Clearly define the director’s duties, including any specific projects or targets they are expected to manage.
• Compensation and benefits: Outline the director’s salary, bonuses, pension contributions and any other benefits such as health insurance or company cars.
• Working hours and location: Specify whether the director is expected to work full-time or part-time, and if remote work is permitted.
• Confidentiality clause: Protect sensitive company information by including a confidentiality clause that prevents the director from sharing proprietary data.
• Termination policy: Detail the notice period required for termination and any circumstances under which the agreement can be ended immediately and the wider consequences of termination, i.e. potentially in relation to shareholdings.
• Intellectual property rights: Ensure that any work created by the director during their tenure belongs to the company.
• Dispute resolution policy: Include a process for resolving disputes such as mediation or arbitration.
• Restrictive covenants: Place any restrictions on the director regarding activities outside their role.

By covering these areas, the agreement provides a clear framework for the director’s role and protects the company’s interests.

What are restrictive covenants?

Restrictive covenants are clauses included in a director’s service agreement to protect the company’s interests after the director leaves. These clauses restrict the director’s activities for a specified period to prevent them from harming the business. Common types of restrictive covenants include:

• Non-compete clause: Prevents the director from joining a competitor or starting a competing business for a certain period.
• Non-solicitation clause: Stops the director from taking clients, customers, or employees after leaving the company.
• Non-dealing clause: Prohibits the director from doing business with the company’s clients, even if the client initiates contact.
• Confidentiality obligations: Extends the director’s duty to protect confidential information even after their employment ends.

Restrictive covenants must be reasonable in scope, duration and geographic area to be enforceable. Overly restrictive clauses may be deemed unenforceable by a court, so it’s important to tailor them to the specific role and industry.

If you want to discuss drafting a Director’s Service Agreement or talk about how restrictive covenants could help your company, speak to one of our employment law experts today.

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