It is a legal requirement that all employees must have at least basic written terms of employment. Directors can also be employees (known as executive directors) and therefore must also have written terms of employment. However, a director will often have greater power and responsibility than other employees and so it is even more important that their rights and duties are properly documented. Employment contracts for directors are usually known as service contracts.
At Farleys, our team of experienced Company and Employment Law solicitors will work together to ensure that your director’s service agreement is comprehensive and covers as many of the potential pitfalls as possible. Whether you are a company looking for a new form of agreement or a director being asked to sign one, our experienced solicitors will be able to provide you with clear, straightforward advice on your requirements and, where required, we can help negotiate the terms of the service contract with the other party.
Contractual Employment for Directors
A director’s service contract will usually address the principal terms of the director’s employment – including job title, salary, hours, benefits etc – but will often need to be read in conjunction with the company’s employee handbook (which will contain company policies among other things) and any pension plan or other documentation generally applicable to the company’s employees.
Additionally a director will have actual and ostensible authority to bind the Company to contractual arrangements and obligations and to incur liabilities on its behalf provided that the director complies with his director’s duties under the Companies Act 2006 in making such decision so that he can demonstrate that he thought it would be in the best interests of the Company to proceed. If you require to place any limits on the level of authority which your directors may individually have, this needs to be dealt with on a contractual basis in their director’s service contract, or alternatively, if they are also a shareholder of your company, in a shareholders agreement.
Duties Owed by Directors
A director owes certain duties to the company under the Companies Act 2006. The director’s service contract may refer to those duties and might say that breach of one or more of them is a reason for dismissal. The seven general duties owed by directors under the Companies Act 2006 are:
• To act within his or her powers
• To promote the success of the company
• To exercise independent judgment
• To exercise reasonable care, skill and diligence
• To avoid conflicts of interest
• Not to accept benefits from third parties
• To declare all interests in a proposed transaction or arrangement
In addition to these general duties, the company is likely to want to impose other duties on the director and these should also be included in the service agreement together with the consequences of failure to comply.
Potential Impact on Shareholders Agreement
It is also important to remember that, for many SMEs, directors may also hold shares in the company. It is important that any shareholders’ agreement does not contradict the service contract. The two documents should work alongside each other and deal with the consequences for breach of either document in a coordinated way. For example, a majority shareholder might not want a director that has been dismissed for gross misconduct continuing to hold shares in the company. Your solicitor can discuss with you how any shareholders’ agreement might need to be changed to accommodate your particular set of circumstances.