E107 SERVICE AGREEMENT FOR COMPANY MANAGERS
Please note that these Explanatory Notes are for guidance only and do not form part of the contract
This Agreement written under English law provides part of the employment contract between a senior manager and a company forming part of a group of companies. Where a senior manager is subsequently promoted to board director we advise that this contract be replaced by a fresh contract in the form of a Director’s Service Agreement (see ContractStore document E106).
Please note that there will often be other documents forming part of an employment contract: principally a staff handbook (which, amongst other matters, will deal with disciplinary and grievance procedures, health and life insurance), Health and Safety information, voluntary opt-out from the requirements of the Working Time Regulations, job description, documents setting out the rules and entitlements due under any occupational pension scheme, bonus scheme and the details of any share option scheme. Specialist legal/ accountancy advice is essential before agreeing to the provision of an occupational pension scheme, a bonus scheme or share option scheme. This agreement, as is customary, does not set out in detail individual entitlements to a pension/participation in bonus/share option schemes.
This agreement has been drafted so that it may be used together with the following ContractStore documents: Director’s Service Agreement E106, Employee’s Contract of Employment (full/part time) E101, Staff Handbook E122, various Human Resources documents (including a voluntary opt-out from the Working Time Regulations) E121, email/internet usage policy E113 and a brief guide to the law relating to contracts of employment Z153. However each document may be used on a ‘stand-alone’ basis provided that care is taken to ensure that there are no discrepancies between relevant documents.
Where the company is not part of a group references to “Group Companies” in the agreement should be deleted. Text in italic script and within square brackets must be adapted to conform to the terms agreed between the company and the Manager.
It is essential to seek the advice of a specialist employment lawyer before finalising this Agreement.
Sets out some essential and standard definitions.
Formally records the appointment of the Manager, gives a job title (and specifies that his/her duties may include matters not included in a formal job description), and, on the part of the Manager, confirms that he/she is entitled to work in the UK.
3. DURATION AND CONTINUOUS EMPLOYMENT
This clause states the start date for the Agreement and, at clause 3.2, provides alternative wordings recording when the Manager’s period of continuous employment commenced: if a Manager has been appointed from within the Company the first form of wording should be used and if the Manager was appointed from outside the Company the second form is appropriate. It is important that the parties agree the period of continuous employment as this will affect any entitlement to compensation for “Unfair Dismissal” and redundancy pay (where 2 years’ continuous employment is required). [Note that there is no legal requirement for continuous employment in the case of race, sex, disability, sexual orientation discrimination, age discrimination and discrimination based upon religious faith/personal beliefs (or the absence of such faith/beliefs)]. An employee must, subject to limited exceptions, bring proceedings for compensation within 3 months of termination/an act of discrimination.
Clause 3.3 is an optional probationary clause. This allows the Company to review a new employee during a set period of time. If the Manager is not performing as the role requires, or there are any other issues or concerns (as long as these are not of a discriminatory nature), the Company may terminate the Manager’s employment by giving a shorter period of notice. If the Manager successfully completes the probationary period, notice increases offering the Manager greater job security. The Company also has discretion to extend the probationary period if they wish to give the Manager a longer time frame in which to improve and monitor performance.
Clause 3.4 is a payment in lieu of notice clause. The Company can terminate the Manager’s employment with immediate effect by paying a taxable lump sum equivalent to the notice period. Please note that the Company will still have to have a fair reason for dismissal (if the Manager’s service is longer then 12 months), follow a fair procedure and not dismiss on discriminatory grounds.
This clause provides that the Manager’s duties will be as set out by the Company and not confined to the job description thus giving the Company flexibility. The Manager is expected to devote substantially all of his time to the interests of the Company and owes duties of trust and confidence (see also clause 6.1).
Clause 4.3 sets out in detail a number of prohibitions affecting the Manager including: not competing with the Company and respecting the Company’s trade secrets/confidential information (this is reiterated in greater detail at clause 12).
Clause 4.5 sets out, in broad terms, restrictions on the Manager’s ability to legally bind the Company.
5. NORMAL HOURS
This clause has two options. The first option simply states that the Manager shall work as many hours as are required to fulfil his duties. The Working Time Regulations 1998 which, broadly speaking, limit an employee’s hours to 48 hours per week do not apply to senior executives who are in a position to regulate the flow and pace of their work. However where a senior executive has compulsory core hours (e.g. 9am – 5pm Monday to Friday), this exception will not apply. Therefore it is prudent to request all employees (including senior managers) to sign a waiver of the 48 hours restriction set out in a document separate from the contract of employment.
6. OTHER INTERESTS
This clause reiterates that the Manager is to devote substantially all of his/her time to the interests of the Company and, amongst other matters, must not hold other jobs.
7. PLACE OF WORK
The first part of the clause states the Manager’s normal place of work. It also allows that to be reasonably altered within a specific geographical location (e.g. a 5 mile radius or Bristol City Centre). The second part of the clause gives the Company flexibility as to any postings of the Manager within the UK.
It is made clear that there is no automatic entitlement to a salary increase at an annual review.
Clause 8.3 provides for the payment of a discretionary bonus scheme. Although the bonus is described as “discretionary” great care needs to be taken to avoid: (a) allegations that bonuses have been allocated on grounds that are unlawfully discriminatory (race, sex, disability, sexual orientation, age and religion/belief): the restriction of bonus payments to women who have been absent on maternity leave is a particular danger and if in doubt specialist legal advice should be taken; (b) giving informal assurances either at interview of afterwards that payment of a bonus can be “expected”; (c) allowing a “course of dealing” to become established over a number of years such that an employee may reasonably come to expect a bonus payment of a particular size etc.
Clause 8.4 provides for the payment of an occupational pension. It is essential that any contractual obligations in respect of an individual are strictly in accordance with the rules of the occupational pension scheme. Specialist legal/actuarial advice must always be taken before setting up such a scheme to ensure both regulatory compliance and tax effectiveness.
NOTE: The government introduced compulsory workplace pensions from 2012 and vast numbers of employers, from the largest to the smallest, have been affected.
Initially, smaller businesses with fewer staff need not to worry, because the reform will be carried out in stages.
Employers with over 30,000 staff were be forced by law to offer their workers a company pension scheme in 2012.
By 2013 any employer with more than 350 staff on its books was obliged to set up and contribute into workplace plan for its employees.
Between 2014 and 2016, those employers with fewer than 350 staff will be subject to the same rules.
Employees will be auto-enrolled and can expect their company to put a minimum 3% of any earnings between £5,035 and £3,540 into each worker's fund.
To help, the government is introducing NEST – National Employment Savings Trust – which will be provide a state-led alternative for any employer wishing to use it.
Here are some tips for employers to consider as the reform come into effect.
1. Budget now
Consider the cost impact of the compulsory 3% employer contribution or if you offer a higher contribution rate, the cost and sustainability of enrolling all staff on this basis. Consider also whether you will make contributions on the full salary amount or band earnings.
The key is to budget now for the new measures, so that bigger pension contributions will not mean a sudden spike in costs. One solution may be for employers to consider reviewing their total remuneration package to absorb the extra costs and looking at methods such as salary sacrifice as a cost-effective way of increasing pension contributions.
2. Decide which type of pension you want to offer staff
Consider the advantages and disadvantages of an employer pension scheme and the NEST scheme and decide which is more appropriate for your own organisation. It may be that a combination of the two schemes is the best approach in the first instance, with different staff being eligible for different schemes e.g. senior and employed staff being enrolled into an occupational scheme and contract staff being enrolled into a NEST.
3. Consider the impact on retaining and recruiting employees
What do you want your pension to say about your organisation? Consider how you want your pension scheme to fit in with your overall benefits package. While some employers may take this opportunity to reduce their pension contributions, organisations that provide pension schemes above the standard laid out by the Government are likely to be a more attractive proposition for new and existing employees and demonstrate a commitment to their workforce.
Employers who do intend to offer schemes with contribution rates above the statutory minimum may be interested in applying for a pension quality mark to differentiate their scheme from others. (www.pensionqualitymark.org.uk)
4. Does your existing scheme meet the Government's requirements?
Examine any existing pension schemes you have in place to determine if they will meet the minimum requirements set out by the Pensions Act. Also consider the likely cost implications of enrolling all non-members into this scheme. In particular, I would advise employers to review their default funds to ensure that they are appropriate for all staff, taking into account the ages of employees, especially those nearing retirement and any ethical or moral views regarding investment.
5. How will you communicate the changes to your staff?
Consider how you will go about communicating these changes to your staff. It is important to try and engage employees with their pension and there are a variety of methods on hand to do this.
6. Do you have systems in place to deal with the administration?
It is important to ensure that your payroll and HR systems are able to cope with any extra administration. This will be particularly relevant for any organisations that intend to run both an occupational pension scheme and enrol some staff into the NEST system.
7. When do you need to start considering what to do?
Starting to prepare for the reform now is a good idea. Beginning sooner, rather than later, will enable changes to be broken down into smaller, more manageable tasks rather than waiting for the Pensions Regulator to begin contacting employers directly, which was scheduled to start in 2012.
For more information for employers and employees visit:
Clause 8.9 provides for the participation of the Manager in a share option scheme. If no such scheme exists this clause must be deleted. Again any assurances given to the Manager in respect of participation in a share option scheme must be strictly in accordance with the rules of such a scheme. Specialist legal advice must be sought before setting up a share option scheme.
9. EXPENSES [AND COMPANY CAR]
Clauses 9.1/9.2 set out in broad terms the obligations of the Manager to account for his expenses in accordance with company rules and to take care of any company credit card issued to him/her.
Clause 9.3 (in square brackets) provides for the allocation of a company car and makes it clear that any increase in employees’ income tax or NI contributions arising from the allocation of a company car are for the account of the Manager. Again it is prudent to take specialist accountancy advice before setting up a company car scheme to safeguard the Company’s tax position. Provision is made for the payment of a non-pensionable cash alternative. This entire clause should be deleted if a company car is not to be offered.
The Manager’s entitlement is set out at clause 10.1. All full time employees are currently eligible for 28 days holiday entitlement per year. This can include bank and public holidays, or they can be an additional entitlement. There is no automatic right to take bank and public holidays as leave, but in practice most senior managers are granted bank and public holidays as additional leave. There is also provision for allocation of additional days dependant upon length of service.
Clause 10.2 makes it clear that holiday entitlement can only be carried through to a future holiday year with the Company’s consent and that the Manager is not entitled to payment in lieu of holidays due but not taken (contrast the position in respect of accrued holiday entitlement at termination: clause 10.4). Employers should be aware of the rules of minimum statutory holiday entitlement and of 28 days and the need to encourage employees preferably to take at least all these 28 in each holiday year. Care must also be taken to ensure that this policy is applied consistently and in a non-discriminatory manner.
Clause 10.3 in square brackets gives the Company the right to insist that holiday entitlement must be taken during a notice period. This is a fairly onerous provision from an employee’s perspective and may be deleted.
Clause 10.4 provides for payment in lieu of pro-rated holiday entitlement outstanding at termination (with a corresponding right for the Company to recover payment from the Manager in respect of any holidays taken in excess of that pro-rated entitlement).
This clause sets out the Manager’s obligations to inform the Company of any illness/complete self-certification forms/obtain medical certificates. The right to receive sick pay at clause 11.3 needs careful consideration: for how long and at what percentage rate of normal salary is sick pay due?
Care needs to be taken to avoid liability under the Disability Discrimination Act 1995 (broadly where an employee suffers from a substantial long-term illness/incapacity an employer is under an obligation to consider making a “reasonable adjustment” to both its premises and working practices so as to accommodate the employee: “reasonableness” will depend upon practicality, the resources of the employer and the nature of the employee’s job. It is always prudent to take specialist legal advice if in any doubt as to whether an employee may fall within the protections offered by that act).
12. CONFIDENTIAL INFORMATION
Clause 12.1 sets out in broad terms the Company’s right to protect its confidential information/trade secrets. Clause 12.2 provides a non-exhaustive list of examples of such confidential information.
Clauses 12.4/12.5 set out limited exceptions (e.g. where disclosure is made as a result of legal/regulatory obligations or is protected under the Public Interest Disclosure Act 1998 [also known as “whistle-blowing” by an employee in respect of corporate wrong-doing where there is no private gain and no reasonable expectation that the Company will heed reported concerns]).
13. INTELLECTUAL PROPERTY
This clause, written from the perspective of the Company, provides that all intellectual property rights acquired by the Manager during and as a result of his/her employment shall automatically vest in the Company.
Note that at clause 14.2 the Manager is prohibited from holding him/herself out after termination as being connected with the Company unless the Company has given prior written approval.
Legally effective termination may be on the grounds of: incapacity (i.e. inability to do the job), misconduct, redundancy or “some other substantial reason” (e.g. a breakdown in working relationships) provided always that the employer has acted fairly in both the procedural manner of dismissal and the assessment of the substantive reason for dismissal. Please note the qualifying time limits applicable in respect of an employee’s rights to claim compensation set out under the notes applicable to clause 3.
Clause 15.1 sets out those circumstances where the Company is entitled to summarily dismiss the Manager (after following a fair procedure) without payment in lieu of his/her contractual notice period: these circumstances may be broadly described as “gross misconduct”.
Clause 15.2 gives the Company the right to suspend the Manager on full pay pending an investigation into any alleged misconduct: it is important that this power is sparingly used and is not seen as a disciplinary sanction in itself.
Dismissal of a senior manager should, as a rule, be undertaken only after having obtained specialist legal advice. Disciplinary proceedings must always be carried out in strict accordance with the relevant provisions of the Staff Handbook.
Clause 15.4 deals with “garden leave”: i.e. where an employee is serving his/her notice period at home and makes it clear that his contractual obligations apply as if he/she was working “normally”.
16. POST TERMINATION OBLIGATIONS
Clause 16.1 provides protection to the Company in respect of any competing business of the Manager pursued after termination. Great care needs to be taken to ensure that there is a balance between the protection of the legitimate concerns of the Company and the right of the ex-Manager to pursue a career post-termination. There is a clear risk of a court striking out any such restrictions that are held to be unduly onerous.
It is essential that an employer both takes specialist legal advice and carefully considers, so far as is possible, what commercial interests it must protect before finalising such restrictive covenants. Please note that the restrictions set out here (and especially the provisions set out in square brackets) are suggestions only: there is no general “legally acceptable” guidance: what is reasonable and thus legally effective will depend upon the individual circumstances of both employer and employee.
It is also worthwhile reviewing/updating these restrictions when the Manager changes job description or has a promotion.
It is always sensible to set out the restrictions as discrete provisions (as at clause 16.1) so that if one or more restrictions are held to be legally ineffective the remainder are still binding (see the text at clause 16.2).
Clause 16.3 makes it clear that the Manager must inform any future employer of any relevant restrictions before entering into a contract of employment.
This is a standard clause allowing the Company to recover from the Manager any sums due to it both during his employment and at termination.
18. SALE OR RECONSTRUCTION OF THE COMPANY
Under the Transfer of Undertakings (Protection of Employment) Regulations 2006 where an employee is transferred as part of the sale of a business or part of a business to another employer he/she is entitled to transfer on broadly the same terms and conditions as he enjoyed immediately before the transfer (including limited rights in respect of occupational pension rights). This clause makes it clear that these rights do not apply where a transfer takes place simply because a company has undergone restructuring. Note however that the Manager may have a right to claim redundancy if he/she transfers under inferior conditions. Again it is prudent to take specialist legal advice prior to undertaking such a corporate restructuring.
19. DELIVERY OF DOCUMENTS AND PROPERTY
This is a standard clause providing that on termination the Manager must return all Company property including documents and copies of documents.
20. RESIGNATION AS DIRECTOR/TRUSTEE
Again a standard clause making it clear that on termination of his/her employment the Manager must automatically resign all positions held within the Company including directorships of group/subsidiary companies and, where applicable, trusteeship of a company pension scheme. If the Manager fails to do so, clause 20.2 allows the Company to appoint someone to effect these resignations. This amounts to a power of attorney provision, which means the employment contract must be executed as a deed.
21. DISCIPLINARY AND GRIEVANCE PROCEDURES
This clause confirms that the details of such procedures are set out in the Staff Handbook.
22. DATA PROTECTION
The primary purpose of this clause is to set out the reasons/justifications for the Company processing personal data of the Manager and specifies that such processing may take place outside the European Economic Area (defined as the countries of the European Union, Norway, Iceland and Liechtenstein). It is important that where processing takes place outside the EEA the Company has taken all reasonable steps to ensure that both the country where processing takes place and the individual processing agent have robust policies in place to protect the integrity and privacy of an employee’s personal data.
This is a standard provision found in most contracts specifying the manner in which formal notices are to be given by the parties to the Agreement.
The Manager confirms that there are no legal/regulatory impediments restricting his/her ability to enter into the Agreement.
25. PRIOR AGREEMENTS
Again this is a standard clause for most contracts making it clear that any prior arrangements/agreements relating to the employment of the Manager have been superseded by this Agreement.
26. CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999
Unless specifically excluded/restricted this act allows any third party who can reasonably claim to benefit from the terms of a contract to enforce/amend the terms of that contract even though that third party was not a party to the contract. To eliminate the uncertainty that such rights would bring it is customary to either exclude the provisions of this act in their entirety or, as here, to carefully set out the specific rights that specified third parties (i.e. Group Companies) may enforce. If there are no Group Companies the clause should be re-worded to simply exclude all third parties from enforcing any rights.
27. COLLECTIVE AGREEMENTS
This clause confirms that there are no collective agreements which affect the Manager’s employment.
28. GOVERNING LAW AND JURISDICTION
This clause states that the Agreement is subject to English law and that the courts and employment tribunals of England and Wales have exclusive jurisdiction to hear any claims arising from the Agreement.
Clause 28.3 makes it clear that the Company is not prohibited from taking legal proceedings against the Manager where the Company has, in the past, chosen not to pursue its rights in similar circumstances.
ANNEXURE: JOB DESCRIPTION
This forms part of the contract of employment and records, as at the start of the Manager’s employment, matters such as his/her grade, job title, reporting hierarchy, starting salary and principal responsibilities.
There is no retirement age specified in this contract because from 6 April 2011, retirement ceased to be a potentially fair reason for dismissal. Employers in the UK are prohibited from issuing new notifications of retirement using the statutory retirement procedure. If an employer does prescribe a compulsory retirement age, he will have to justify it. Employers that do not prescribe a compulsory retirement age must rely on one of the designated fair reasons for dismissal set out in Section 98 of the Employment Rights Act 1996 to achieve a fair dismissal (e.g. redundancy).
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