Member Article

The importance of service agreements

After many years in practice it is no longer a surprise when I hear that directors don’t have a Contract of Employment or a Service Agreement.

Usually this is a result of a single director setting up a company initially which then grows and employees are promoted to being directors without any thought process of the need to stipulate their duties, responsibilities and remit. Alternatively it is as a result of believing that director’s fiduciary duties are covered by the Companies Act and that no other protection is required for the company.

However, companies need to be aware that other than non-executive directors, executive directors are usually full time or part time employees and therefore have the same rights as any other employees, including; pursuing claims as well as having the potential of placing a company’s viability at risk during or after they have gone their separate ways.

Companies should ensure they have adequately drafted Service Agreements for their directors stipulating their duties and making sure there are specific clauses dealing with:

• Hours they are expected to work. Are they expected to work in excess of 48 hours per week? If so, have they signed an opt-out clause under the Working Time Regulations.
• Confidentiality and intellectual property rights. Do you have a specific need to protect the company?
• Bonus schemes. Many directors’ pay involve a bonus element/incentive scheme. Companies need to clarify whether their bonus is discretionary and the basis on which any bonus will be paid. Will it be calculated, for example, on “net profit”? Unless conditions are set out clearly, bonus payments could be held to be a contractual payment which the company will then be obliged to pay and failure to do could amount to breach of contract.
• Circumstances in which a company may want to be able to terminate the services of the director.
• What happens to executive share options schemes on termination? What rights will a director have in these circumstances?
• Notice period. How long will it take for the company to find a suitable replacement? Is there a skill shortage which will require a longer notice period to protect the interests of the company.
• Protecting business interests. Does the company need restrictive covenants to prevent departing directors from poaching, soliciting or dealing with your existing suppliers or customers. Will it harm your business if they poach your key staff?
• Garden Leave. Will a specific director be a risk if they remain in post during their notice period?

The assumption that directors by their unique position will not pursue a claim against a company or cause a fuss is a dangerous one. Unfortunate as it is, directors of companies do fall out, terminations do take place, and claims are pursued. By having a well drafted Service Agreement setting out all the Terms and Conditions of a director’s engagement, will go a long way to help the parties future relationship, reduce any disputes from arising and protect the interests of the company.

Shiva Shadi is head of the Employment team at Davis Blank Furniss.

www.dbf-law.co.uk

This was posted in Bdaily's Members' News section by Shiva Shadi .