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Directors’ Service Agreements – Cover All Bases

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Andrew Egan, an employment lawyer with Charles Lucas & Marshall explains why directors’ service agreements and contracts of employment need to be detailed and fair.

Andrew Egan

Andrew Egan

I see a number of company directors and senior executives in relation to disputes concerning their employment contract terms, redundancy or disputes at the employer company. When such matters arise, the first place to look for an answer is their director’s service contract or employment contract.

An executive director or senior employee will usually have a written contract of employment, commonly known as a service agreement. This will often need to be read in conjunction with the company’s employee handbook, the rules of any pension plan and the terms of any variable incentive-based remuneration schemes such as share option plans or long term incentive plans.

Often, such contracts have not been well drafted or do not cover all of the contractual benefits of the director or senior employee eg eligibility for and payment of bonus and commission, expense claims, participation in share or incentive schemes, restrictions on employment following termination of employment, confidentiality and intellectual property issues etc.

Some of these may make up a large proportion of a director’s total remuneration, whilst the others greatly impact the director’s future employment options once he leaves the company.

The absence of a written employment contract (including a director’s service agreement) may mean an individual is not an employee or a worker and may have no enforceable employment rights under either contract or statute, regardless of any verbal agreements which the individual and the organisation he works for may believe have been reached.

In the case of Ajar-Tec Limited v Stack the Employment Appeals Tribunal (EAT) had to consider whether a shareholder and director, who provided work to a company under no formal employment arrangement and who received no remuneration, was an employee, a worker or neither under the Employment Rights Act 1996.

The EAT remitted the case to be heard by a different tribunal, as it was unsure whether it was possible to imply a contract on the facts before it. The case is a firm reminder of the importance of formalising employment relationships.

Employers should provide proper and detailed service agreements for directors and other senior employees at the outset, to ensure they comply with their statutory company obligations and their legal obligations to that director or manager.

Employees should also take independent legal advice on their service agreements to ensure, for example, there are no unfair terms, that they will receive the correct bonus commission or shares and that any restrictive covenants are fair and enforceable.

For further information please contact Andrew Egan on 01635 521212 or andrew.egan@clmlaw.co.uk

Written by Andrew Egan

September 16th, 2014 at 8:10 am