Director’s Service Contract – Fixed Salary

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 – Fixed Salary contains the basic terms and conditions which may be used by a company in employing a director. It includes a payment in lieu of notice (PILON) provision.

Section One Statement requirements (day one)

This 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 employment.

Data protection clause

This employment contract has a General Data Protection Regulation (GDPR) compliant data processing clause.

After 25 May 2018, employers must use this clause, as employers will not be able to rely on existing generic consent clauses.

PILON and tax/NIC treatment

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.

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When a director needs an employment contract

An executive director, for example, a finance director or a managing director is both an officer of the company and an employee. As such, he or she will require an employment contract.

What this contract covers

This Director’s Service Contract – Fixed Salary sets out the core terms of employment for an executive director, including:

• appointment, duties, remuneration, pension and benefits;
• holidays, other paid leave, training, sickness and medical examination, and family leave (maternity and paternity);
• company car (where applicable) and relevant collective agreements;
• confidentiality and intellectual property;
• termination provisions, including PILON, gardening leave and consequences of termination;
• restrictive covenants (non-competition, non-solicitation of customers and non-solicitation of employees);
• staff handbook and employment policies, notices, data protection and right to work in the UK; and
• grievance and disciplinary procedures, and the related schedules (including the data protection policy and privacy notice).

Restrictive covenants and enforceability

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 your business.

Please note that if the clause 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.

Inspection and shareholder approval under the Companies Act 2006 (s.228 and s.188)

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:

• 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
• 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 the first category and a period within the second category, 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.

Fixed salary contract and alternative template

This contract includes terms relating to the retention of the Director on a fixed salary.

Where a contract with remuneration on a bonus scale scheme is required, please use “Director’s Service Contract - Including Bonus Share Option”.

Director’s Service Contract – Fixed Salary is part of Corporate. Just £38.50 + VAT provides unlimited downloads from Corporate for 1 year.