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 – Including Bonus & Share Option
Arrangements contains the basic terms and conditions which may be used by a
company in retaining a director who is entitled to a bonus and to
participate in the company’s share option scheme. Officially, a director is
an officer of the company and not an employee. As such, he or she has no
right to 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.
The data protection provisions in this document have been updated in line
with the UK GDPR.
This Employment Contract covers the requirements of a Standard Form
Section One Statement. This contract complies with these requirements
and must be provided to the employee or worker by day one of
This contract includes a payment in lieu of notice (PILON) provision.
Previously, a version of this employment contract was available without a
PILON clause. This version has now been removed, as with effect from 6
April 2018, all PILONs, regardless of their nature, are to be treated as
earnings subject to income tax and Class 1 NICs. Click here
for more information.
This director’s contract has been updated to provide for enhanced bonus
provisions. This includes an operative clause within the body of the
contract entitling the director to be paid a bonus with the detail attached
as a schedule at the back of the contract. This bonus provision has been
drafted on the basis that the director has a contractual entitlement to
receive a bonus but that this is qualified by the director having to
achieve certain personal performance targets each financial year before the
bonus will be paid. This means that the bonus scheme itself forms part of
the contract but that the company has reserved itself some flexibility by
providing a framework to benchmark the payment of the bonus against.
Note that in this contract, the entitlement to a bonus has been carved out
of the PILON clause, so that both within the main body of the contract and
within the attached bonus schedule, the PILON clause only covers basic
salary and there will be no liability for the employer to include any
element of the director’s bonus within it.
The director also has a contractual entitlement to participate in the
company’s share option scheme. This has been included but drafted
deliberately broadly, because a company should avoid binding itself to
provide a share benefits plan which it may not be able to deliver in
future. In addition, if employees have a contractual right to a particular
share plan, they may need to consent to any changes the company may
subsequently wish to make to that plan.
This contract contains three possible restrictive covenants;
non-competition, non-solicitation of customers and non-solicitation of
employees. The non-competition clause provides that for a period of time
after termination of employment the employee will not compete with the
company’s business. The non-solicitation clauses provide that for a period
of time after termination of employment the employee will not deal with the
company’s customers (with whom the employee has had dealings) and can’t
poach employees of the company.
It is important that the restrictive covenants are no wider than is
necessary to protect your “legitimate business interests”, otherwise they
may be unenforceable. Please consider each restrictive covenant carefully,
and remove any that are not relevant to your particular business and to the
individual in question. For those remaining, insert time limits and
geographical limits that are appropriate and reasonable to the nature of
Please note that if the schedule is tailored to match the particular
individual it is more likely to be deemed reasonable and therefore more
likely to be enforceable. Using identically worded restrictive covenants
for different employees without tailoring them to the individual may
encourage a court to interpret the restrictive covenants as unreasonable.
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:
(a) 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
(b) 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.
Clauses with optional and alternative phrases:
Options and alternatives appear in blue font. The way in which this
document is designed ensures that it will make sense with or without the
optional clauses. Tailor this contract by removing all phrases and clauses
which are not relevant to your business. Once you have finished, please
remember to highlight the whole document and switch the font colour to
This Director’s Service Contract – Including Bonus & Share Option
Arrangement is in open format. Fields should be completed where indicated.