When you appoint a director, you are putting serious trust in one person. They will help shape strategy, lead your team, and influence the future of your business. So, it makes sense to be clear from day one about what’s expected of them and what they can expect in return.
In this guide we will walk you through what a director’s service agreement actually does, why it matters as your business grows, and the key areas you should not overlook. Whether you are bringing in your first non founder director, preparing for investment, or simply tightening up governance, this will help you spot the gaps before they turn into problems.
If you would like a clearly drafted director’s service agreement that protects your business, our employment lawyers can help.
In this guide we answer:
When is a director’s service agreement needed?
A director’s service agreement is most commonly used when someone is appointed as an executive director and will be working in the business day to day. It helps avoid uncertainty by setting out the director’s role, remuneration and benefits, and how notice and termination will work.
It is particularly useful where the director will have access to confidential information, responsibility for key customers, or influence over senior staff. In those situations, clear provisions on confidentiality, handover, garden leave and post employment restrictions can be important for protecting the business.
Do all directors need a director’s service agreement?
Director’s service agreements are most common for executive directors because they are usually employed in the business and need detailed terms covering both the working relationship and protections on exit.
Non executive directors are often appointed under a letter of appointment instead, because their role is typically supervisory or advisory, they are usually paid fees rather than a salary, and the terms are different. All directors should have written terms in place that match their role and responsibilities, even if that document is not a full director’s service agreement.
What is the difference between a director’s service agreement and a contract of employment?
A contract of employment is the standard agreement used for employees and focuses mainly on the employment relationship, for example pay, holiday, notice and workplace rules.
A director’s service agreement is usually used for executive directors and covers many of the same basics, but it is drafted with the director’s seniority and position as a company office-holder in mind. It often deals with director-specific issues such as board governance, what happens if the person is removed from office as a director, and stronger protections for the business (including confidentiality, garden leave and post-termination restrictions).
What should a director’s service agreement include?
A well drafted director’s service agreement should clearly set out the director’s role and responsibilities, reporting lines and authority (including any limits on what they can approve or sign), and the time commitment expected. It should cover pay and benefits, including how bonuses and expenses work.
It should also explain how the agreement can end, including notice, payment in lieu of notice (PILON), and when the company can terminate without notice. Many agreements also include a garden leave clause, plus post termination restrictions designed to protect customers, staff and confidential information.
Finally, it should deal with confidentiality, intellectual property ownership, return of company property, and practical exit arrangements such as handover and communications.
Can you amend a director’s service agreement?
Most agreements require amendments to be agreed in writing (often via a short variation letter) and approved in line with the company’s governance arrangements. Some changes should be signed and witnessed as a deed, to make sure they are enforceable. If you are not sure whether that is necessary in a particular case, you should take legal advice from an employment solicitor before signing.
It is also important to check the amended terms remain consistent with related documents, such as the company’s articles of association, any shareholders’ agreement, and bonus or share plan rules. In practice, it is sensible to review and update a director’s service agreement when the director’s role, pay, reporting line or incentive arrangements change. It’s very common for employers to overlook a regular review of a director’s service agreement, which can mean that key areas such as post-employment restrictive covenants are not updated and become irrelevant or unenforceable. It might be too late to amend those clauses if a dispute has already arisen, so regular reviews and updates are necessary.
Summary
A director’s service agreement is the go to document for appointing an executive director. It sets the rules on role, pay, authority and exit, and protects the business with confidentiality, garden leave and post termination restrictions. Non executive directors will usually have a letter of appointment instead, but every director should have clear written terms that match the role, and updates should be agreed in writing and aligned with the articles, shareholders’ agreement and any incentive plans.
If you would like a second pair of eyes on your director’s service agreement or a board ready approach, our employment law solicitors can help.
