Directors service agreements: Do you need one?

by | Nov 17, 2023 | Blog, Legal Updates

You might have heard of both these terms: Directors Service Agreement and Directors Service Contract.

They are, in fact, interchangeable. Both are names for a contract of employment contract (or service agreement), specifically for a director of a private company.

Directors play a pivotal role in shaping the future of a company; responsibilities include strategic decision-making, governance, and ensuring the business’s long-term success. It’s due to these responsibilities that it’s crucial for both the company and the director to have a clear understanding of their roles and terms of engagement. This is where the Directors Service Agreement (DSA) comes into play.

Serving as a written contract specifying the director’s role, responsibilities, and the terms of their employment, the document provides a clear framework for their working relationship with the company. But, do you really need one?

The answer is a resounding “yes.”

Here’s why:

  1. Since April 2020, all employees are entitled to a written statement of particulars of employment. Directors are no different.
  2. A DSA acts protective measure for both the company and the director. It can include clauses related to confidentiality, non-competition, and intellectual property rights. This ensures that sensitive company information remains secure. Additionally, it can outline the termination process, protecting the director’s rights if their employment is terminated.
  3. A DSA allows for customisation and enables companies to tailor the contract to their specific needs. This ensures that the agreement accurately reflects the director’s role within the business.
  4. In the event of a dispute between the company and the director, a well-drafted DSA can include a dispute resolution clause. Outlining the process for resolving conflicts  potentially avoiding costly and time-consuming legal proceedings.
  5. A DSA can also enhance corporate governance. It demonstrates to shareholders, investors, and regulatory bodies that the company takes its director’s role and responsibilities seriously, which can boost confidence in the company’s management.
  6. As a valuable tool for attracting and retaining top talent, a DSA can encourage potential directors to join a company that offers a clear and comprehensive employment agreement. Likewise, existing directors may be more likely to stay with a company that values their contributions and provides them with a sense of security.
  7. If the business is sold at some point in the future, the Buyer will want to know on what terms the directors have been employed. This is particularly the case if they are being kept on in the business for any period of time.

Directors Service Agreement Terms

There are four primary types of term in directors service agreements:

a) Rolling contracts – whereby the term continues until notice is given by either party or otherwise terminated.

b) Pure fixed term – the employee is employed for a specified period and cannot be dismissed before the end of that period (except in the event of summary termination).

c) Fixed term subject to termination during fixed term – as b above, but can be terminated early during the fixed term period.

d) Initial fixed term and then termination on notice – This option is an initial fixed-term that will automatically continue after the expiry of the initial period until terminated by either party on notice. Although notice can be given before the end of the initial fixed-term, it cannot expire until the end of the initial fixed-term.

Within the Term section, you will also usually have a Probation Period and details of whether any previous employment counts towards their length of service.

Wrapping up

A Directors Service Agreement is not just a legal requirement; it’s a fundamental document that promotes clarity, protection, and professionalism in the relationship between a company and its directors.

While it may seem like a formality, it can play a crucial role in preventing disputes and ensuring the smooth operation of a company. So, if you’re a company director or considering hiring one, investing in a well-drafted Directors Service Agreement is not just a good idea; it’s a necessity.

Get in touch with me today to learn how I can help you in this matter. We’ll be happy to provide you with an accurate estimate based on your particular requirements.

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