Directors Contract: when should I get them?

When the services of a director are engaged by a company, it is vital to set these out in a written contract. Company laws even require that a copy of every director’s contract must be open to inspection for at least a year after the contract has come to an end.

Why is it Important?

Directors are in the privileged position of being able to manage and take day-to-day decisions on behalf of the company. They are technically officers of a company (as opposed to employees) and therefore have no right to be paid unless the company’s regulations allow for this. However, it is often the case that directors are engaged in another capacity (e.g. managing director) and will therefore be labelled an executive director, with a right to remuneration. Either way, you will need a director’s contract in place to govern the terms on which they are employed.

What it is / what should be included?

As a matter of best practice, director’s contracts should always be approved by the executive board and the director should not personally be involved in drafting the terms. Sometimes shareholder approval is mandatory, for example where the contract lasts for a certain length of time. The company’s articles of association should always be checked for their impact on the contract (e.g. any terms limiting the fees payable and the process for removal of directors). Once that has been done, here are some of the main commercial and legal issues to consider when drafting a director’s contract:
  • If the director is taking on an executive director role, what is the job title, description, start date and place of work? Might the director be required to relocate at some point?
  • How long will the contract last? This may be a fixed or indefinite term, or simply as long as it takes to fulfil a specific purpose. Any probation period should also be set out.
  • During what hours is the director expected to work? If the employer wants to keep these flexible and potentially change them, it needs to say so. What salary will be paid and how often? Will this include a bonus and/or commission and, if so, on what terms? Paid overtime will not usually be appropriate for a director’s contract.
  • How much holiday is the director entitled to take? Can they take it all at once or is there a limitation? Are certain holidays mandatory and can any days be carried over to the following year if unused?
  • Will absence due to sickness be paid at full pay? If not, there are laws dictating the minimum amounts that must be paid.
  • What notice periods are required by both parties to terminate the contract? Sometimes companies like the right to terminate immediately if the employee ceases to be a director.
  • Is confidentiality of sensitive company contacts/information a concern on termination? If so, provision should be included for a set period of time after the contract has ended to protect this.
  • Is there a risk that the director may poach the company’s clients or employees, or set up a competing business after termination? If so, restrictions should be included on their activities after employment and must be limited in time to only protect business interests.
  • Is there a pension scheme and, if so, how does it operate? Some are voluntary and some are automatic. Often employers match employee contributions or pay a certain percentage.
  • Does the company offer health/life insurance and medical cover? If so, is the director eligible for this?
  • Is there a retirement age? Bear in mind that automatic retirement is likely to be unlawful unless it can be justified by the company. Is the offer conditions on satisfactory references?
It can also be a good idea to send an offer letter accompanying the contract itself. This confirms details of the job offer and may also request the director to advise the company of any disabilities or medical conditions they have. This enables the employer to make any reasonable adjustments necessary to accommodate the director under equality laws.

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