Directors' Service Agreement
Directors' Service Agreements are referred to as "Directors' Service Contracts" in the Companies Act 2006 but the difference is in name only. This Director's Service Contract includes a payment in lieu of notice provision. Officially, a director is an officer of the company and not an employee. As such, he or she has no right of remuneration unless the company's articles state otherwise.
In theory, therefore, he or she will not need an employment contract or agreement. However, the director may also be employed in another capacity - e.g. as a finance or managing director. In that instance, he or she will be considered an executive director and will require an employment contract.
A copy of every Director's Service Contract must be open to inspection with the company under section 228 of the Companies Act 2006 either at the company's registered office or at the single alternative inspection location permitted under the Act (in the latter case, the company must notify the Company Registrar of the location of the Service Contracts). The copies must be retained by the company for inspection for at least one year following the date of termination or expiry of the Service Contract.
Under section 188 of the Companies Act 2006, Directors' Service Contracts with a guaranteed term which is (or may be) longer than 2 years must be approved by an ordinary resolution of the shareholders of the company. Determining the length of the guaranteed period is subject to complex rules. The guaranteed term of a director's employment is either:
- The period (if any) during which the director's employment continues (or may be continued) except at the option of the company (whether under the original agreement or under a new agreement entered into in pursuance of the original agreement), and it cannot be terminated by the company by notice, or it can be terminated only in specified circumstances, or
- In the case of employment which can be terminated by the company by notice, the period of notice required to be given. If the employment has a period within paragraph (a) and a period within paragraph (b), the aggregate of those periods will be the guaranteed term.
If the company enters into a further service contract more than six months before the end of the guaranteed term of a director's employment (except where the original contract gives the other party that right), then the unexpired period of the guaranteed term of the original contract will be added to the guaranteed term of the new contract.