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Explanatory Notes
Director's Service Agreement
This agreement written under English law provides part of the employment contract between a director and a company forming part of a group of companies. It is customary and highly advisable to provide a contract of employment for a director in addition to appointment to the board in accordance with the requirements of company law. 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, the provision of a company car), job description, a Health and Safety booklet, a record of any voluntary opt-out from some requirements of the Working Time Regulations, documents setting out the rules and entitlements due under any occupational pension scheme, directors' bonus scheme and the details of any directors' 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: 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. If the company is part of a Group, our document E106 can be used. Text in italic script and within square brackets must be adapted to conform to the terms agreed between the company and the director. It is advisable to seek the advice of a specialist employment lawyer before finalising this agreement. Clause 1: DEFINITIONS This sets out some essential and standard definitions. Clause 2: APPOINTMENT This formally records the appointment of the director, gives a job title and specifies that his/her duties may include matters not included in a formal job description.
Clause 3: DURATION AND CONTINUOUS EMPLOYMENT This clause states the start date for the agreement and, at clause 2.1, provides alternative wordings recording when the director's period of continuous employment commenced: if a director has been appointed from within the company the first form of wording should be used and if the director 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" (where 12 months continuous employment is essential) and redundancy (where 2 years continuous employment is required). Clause 3.3 provides for a retirement age of 65: it is generally unlawful to specify an earlier age in the light of age discrimination law. At present employers are obliged to consider an employee's request to continue working past 65 but are not obliged to agree to such a request. Clause 4: DUTIES This clause provides that the Director's duties will be as set out by the Board and not confined to the job description thus giving the Company flexibility. The Director is expected to devote his/her time to the interests of the Company (save in respect of illness, holiday entitlement, maternity/paternity/adoption leave, unpaid time off in respect of childcare/dependant relatives) and owes duties of trust and confidence (see also clause 6.1). Clause 5: NORMAL HOURS This simply states that the Director shall work as many hours as are required to fulfil his/her 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. Nonetheless it is prudent to request all employees (including directors) to sign a waiver of the 48 hours restriction set out in a document separate from the contract of employment. Clause 6: OTHER INTERESTS This clause reiterates that the Director is to devote his/her time to the interests of the Company and, amongst other matters, must not hold other jobs. Clause 7: PLACE OF WORK This is drafted to give the Company flexibility as to any postings of the Director within the UK.
Clause 8: REMUNERATION 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 discrimination based upon religious faith/personal beliefs (or the absence of such faith/beliefs), 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 8.5 provides for the payment of an occupational pension. Often company directors will participate in a self-contained scheme. Note the alternative text in square brackets dealing with situations where the Director is promoted from within the Company and where the Director is recruited from outside the Company. 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. If this clause does not apply, it should be deleted. Clause 8.6 provides for the participation of the Director in a share option scheme. If no such scheme exists this clause must be deleted. Again any assurances given to the Director 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. Clause 9: EXPENSES [AND COMPANY CAR] Clauses 9.1/9.2 set out in broad terms the obligations of the Director to account for his/her expenses in accordance with company rules and to take care of any company credit card issued to him/her. Clause 9.3-9.6 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 Director. 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. Clause 10: HOLIDAYS The Director's entitlement is set out at clause 10.1 with provision for allocation of additional days dependant upon length of service. The minimum number of days holiday to which the Director is entitled is 24 (including Bank and Public Holidays). This will increase to 28 days (including Bank and Public Holidays) in April 2009. Clause 10.2 makes it clear that holiday entitlement can only be carried through to a future holiday year with the Board's consent and that the Director is not entitled to payment in lieu of holidays due but not taken. 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 Director in respect of any holidays taken in excess of that pro-rated entitlement). Clause 11: ABSENCE This clause sets out the Director's obligations to inform the Company of any illness/complete self-certification forms/obtain medical certificates. The right to receive sick pay at clause 11.2 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). Clause 12: CONFIDENTIAL INFORMATION AND RETURN OF COMPANY PROPERTY Clause 12 sets out in broad terms the Company's right to protect its confidential information/trade secrets.
Clause 13: INTELLECTUAL PROPERTY This clause, written from the perspective of the Company, provides that all intellectual property rights acquired by the Director during and as a result of his/her employment shall automatically vest in the Company. Clause 14: STATEMENTS Note that at clause 14.2 the Director is prohibited from holding him/herself out after termination as being connected with the Company unless the Company has given prior written approval. Clause 15: TERMINATION 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 Director 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 Director 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 director should 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/her contractual obligations apply as if he/she was working "normally". Clause 16: RESTRICTIVE COVENANTS 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-Director 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 important 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 always sensible to set out the restrictions as discrete provisions (as at clauses 16.1 and 16.2) so that if one or more restrictions are held to be legally ineffective, there is an increased likelihood the remainder are still binding. Clause 17: DEDUCTIONS This is a standard clause allowing the Company to recover from the Director any sums due to it both during his/her employment and at termination. Clause 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/she 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 Director 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. Clause 19: DELIVERY OF DOCUMENTS AND PROPERTY This is a standard clause providing that on termination the Director must return all Company property including documents and copies of documents. Clause 20: RESIGNATION AS DIRECTOR Again a standard clause making it clear that on termination of his/her employment the Director must automatically resign all positions held within the Company including directorships and, where applicable, trusteeship of a company pension scheme. Clause 21: DISCIPLINARY AND GRIEVANCE PROCEDURES This clause confirms that the details of such procedures are set out in the Staff Handbook. Clause 22: DATA PROTECTION The primary purpose of this clause is to set out the reasons/justifications for the Company processing personal data of the Director 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. Clause 23: WARRANTY The Director confirms that there are no legal/regulatory impediments restricting his/her ability to enter into the Agreement. Clause 24: 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 Director have been superseded by this Agreement. Clause 25: 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 exclude the provisions of this act in their entirety as here. Clause 26: 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 27: EXECUTION This provides for the Agreement to be executed as a deed, and therefore being signed in the presence of a witness, rather than by a simple signature.
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