Why Every Executive Director Needs a Director’s Service Agreement
A Director’s Service Agreement is the contract between a company and one of its executive directors. It sets out the terms of that director’s employment, their duties, their pay, and what happens when the relationship ends. If you are a founder and a director, if you are appointing a director to run your business, or you are joining a company in an executive capacity, this document matters.
Is a Director an Employee?
This is one of the most common questions we hear, and the answer is: it depends.
A director holds office by virtue of their appointment under company law. That is a separate legal status from being an employee. However, most executive directors, meaning those who work full-time in the business, are also employees. They hold both positions simultaneously.
A non-executive director, by contrast, typically holds office only and is not an employee. They attend board meetings and provide strategic input, but they do not run day-to-day operations.
The distinction matters because employment law rights, including unfair dismissal protection and statutory notice periods, apply to employees. A Director’s Service Agreement addresses both the office and the employment relationship in a single, carefully structured document.
Director’s Service Agreements and Terms of Appointment
A well-drafted Director’s Service Agreement will deal with the key terms of the role clearly and without ambiguity.
- Duties and responsibilities. The scope of the director’s role and their obligations to the company.
- Remuneration. Salary, bonus structures, pension, and benefits.
- Working hours and location. Particularly relevant for businesses operating hybrid or flexible models.
- Notice periods. How long either side must give to terminate the arrangement. This is often longer than for a standard employee.
- Restrictive covenants. Post-termination restrictions that prevent a departing director from immediately working for a competitor, poaching clients, or soliciting staff. These need to be drafted carefully to be enforceable.
- Confidentiality. Protecting sensitive business information both during and after the director’s time with the company.
- Intellectual property. Ensuring the company has sufficient rights to protect work created by the director in the course of their role.
- Garden leave. A provision allowing the company to place a director on paid leave during their notice period while preventing them from working elsewhere.
When You Need a Director’s Service Agreement
You should put a Director’s Service Agreement in place whenever you appoint an executive director to your business. That applies whether you are a startup making your first senior hire, a growing SME bringing in new leadership, or an established company replacing a departing director.
For startups in particular, getting this document right early avoids significant problems later. A startup lawyer will recognise that founder shareholders who also serve as directors need agreements that reflect both their equity position and their employment terms. Without a clear agreement, disputes about pay, duties, and departure terms (particularly departure terms) are far harder to resolve.
The company’s shareholders’ agreement, any founders’ agreement and the articles of association need to work together. If you are also putting a shareholders’ agreement in place, it makes sense to deal with any service agreements for the directors at the same time.
Why the Detail in the Document Matters
Directors have access to commercially sensitive information. They make decisions that shape the direction of the business. Therefore, the protections you build into a Director’s Service Agreement carry more weight than those in a standard employment contract.
Restrictive covenants are a good example. Courts will not enforce covenants that go further than is reasonably necessary to protect legitimate business interests. That means the drafting needs to be precise. A clause that is too broad will fail. One that is too narrow may leave you exposed. Getting the balance right requires experience.
In addition, garden leave provisions and post-termination restrictions must be consistent with each other. Inconsistencies between clauses can undermine the agreement as a whole.
How JPP Law Can Help
We draft Director’s Service Agreements for businesses of all sizes, from founder-led startups appointing their first external director to larger organisations refreshing existing arrangements. Our lawyers are former City solicitors, so they bring the same level of expertise you would expect from a London firm, at a structure designed to be more accessible.
As a virtual firm, we work entirely online and remotely. That means you can instruct us quickly, communicate easily, and get the document you need without the delays that come with traditional firms.
We take the time to understand your business before drafting. A Director’s Service Agreement is not a template exercise. The terms need to fit the role, the company, and the commercial context. When a director leaves outside the terms of their agreement, we can also advise on director exit agreements.
If you are appointing a director, reviewing an existing agreement, or building out your governance documents, we are ready to help. Book a call to discuss with one of our commercial solicitors.
FAQs
Does a director need a separate contract to their standard employment contract?
Yes. A Director’s Service Agreement replaces, rather than sits alongside, a standard employment contract. It combines the terms of the director’s employment with the specific obligations and protections that attach to the director’s role. Because directors operate at a different level of responsibility and have access to significantly more sensitive information than most employees, the agreement needs to reflect that. A standard employment contract is not sufficient.
What happens if a director has no service agreement in place?
Without a Director’s Service Agreement, the terms of the director’s appointment are unclear. Disputes about notice periods, duties, and post-termination restrictions become much harder to resolve. In some cases, a director may be able to claim employment rights based on the conduct of the parties rather than any written agreement, which creates uncertainty for both sides. It is far better to document the arrangement properly from the start. If your company has directors serving without a formal agreement, that is worth addressing sooner rather than later.
