Director’s Service Contract – Fixed Salary

Directors’ Service Agreements are referred to as “Directors’ Service Contracts” in the Companies Act 2006. The difference is in name only.

This Director’s Service Contract – Fixed Salary sets out core terms a company may use when engaging a director. Although a director is an officer of the company (not automatically an employee), a director may also be employed in another capacity (for example, as a finance director or managing director). Where the director is also an employee, they are typically an executive director and an employment contract will be required.

Updated for UK GDPR

The data protection provisions in this document have been updated in line with the UK GDPR.

Written statement of main terms

This contract covers the requirements of a Standard Form Section One Statement. It complies with those requirements and must be provided to the employee or worker by day one of employment.

PILON, pensions and restrictive covenants

This contract includes a payment in lieu of notice (PILON) provision. A previous version without a PILON clause has been removed, as with effect from 6 April 2018, all PILONs (regardless of their nature) are treated as earnings subject to income tax and Class 1 NICs. Click here for more information.

The Pensions Act 2014 introduced a new state pension for people reaching state pension age on or after 6 April 2016, replacing the previous basic state pension and additional state pension and ending contracting out for defined-benefit schemes. This contract has been updated accordingly with the removal of the clause referring to the contracting out certificate.

The contract contains three possible restrictive covenants: non-competition, non-solicitation of customers, and non-solicitation of employees.

• The non-competition covenant is intended to prevent the employee competing with the company’s business for a period after termination.
• The customer non-solicitation covenant is intended to prevent the employee dealing with the company’s customers (with whom the employee has had dealings) for a period after termination.
• The employee non-solicitation covenant is intended to prevent the employee from poaching the company’s employees for a period after termination.

It is important that any restrictive covenants are no wider than is necessary to protect your legitimate business interests, otherwise they may be unenforceable. Consider each covenant carefully and remove any that are not relevant to your business or to the individual in question. For those remaining, insert time limits and geographical limits that are appropriate and reasonable for the nature of your business.

Where covenants are tailored to the particular individual, they are 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 them as unreasonable.

Companies Act 2006 compliance requirements

A copy of every Director’s Service Contract must be open to inspection by 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 (and, in the latter case, the company must notify the Registrar of the location of the Service Contracts). Copies must be retained for inspection for at least one year following termination or expiry of the Service Contract.

Under section 188 of the Companies Act 2006, a Director’s Service Contract with a guaranteed term which is (or may be) longer than 2 years must be approved by an ordinary resolution of the company’s shareholders. Determining the length of the guaranteed period is subject to complex rules. The guaranteed term 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
• where the employment can be terminated by the company by notice, the period of notice required to be given.

If there is both a period within the first category and a period within the second category, the aggregate of those periods is 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), the unexpired period of the guaranteed term of the original contract will be added to the guaranteed term of the new contract.

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