What is a service agreement?
A service agreement is an agreement between two parties for the supply of services. Service Agreements are used to hire Service Providers or independent contractors. A Service Agreement is limited to a specific project or time period.
What are the key aspects of a Directors Service Agreement?
DSA contracts are typically more extensive than standard employment contracts
, as Directors are the most senior employees within a company and therefore are likely to have both (i) the most lucrative remuneration and benefits packages, and (ii) also the most obligations, responsibilities and restrictions on post-termination activities. Therefore, in addition to the standard clauses related to such matters as working hours, holidays, sickness pay, pension and place of work etc, one would expect to see additional clauses including:-
- Term of appointment – DSAs can be either fixed duration or ongoing.
- Company car or car allowance
- Detailed bonus provisions including links to personal and company performance
- Company share options
- Authority limits on areas such as spending and decision-making
- Garden leave provisions setting out what the arrangements and restrictions will be during any period of notice.
- Post-termination restrictive covenants, such as restrictions on poaching staff and clients, joining competitors or setting up in competition etc. These clauses are especially important in DSAs to protect the company, since a Director is likely to have privileged access to many of the most important contacts both within and outside of the organisation, and will have a developed understanding of the inner workings of the business.
What are the pros and cons of this contract type?
- From the point of view of the company are that these contracts are intended to provide a suitable framework for setting out the remuneration package complexities, whilst at the same time providing the key protections that are required to ensure that the company is not put at risk.
- For the Director, the DSA provides much needed certainty and clarity which is necessary when entering into a senior appointment.
- From the point of view of the company is that often Directors are awarded Fixed Term DSAs which can create a burdensome contractual liability for the company, but they may be willing to accept this in order to secure the talent the company needs to thrive.
- From the Director’s point of view, the cons are often to be found in the restrictive covenants. They are often very extensive and of a longer duration than for non-Director employees, so it is very common to see 12 month restrictions as opposed to 6 month ones.
Important factors to bear in mind
As DSAs are very comprehensive and technical contracts, it is particularly important to seek expert legal advice on their drafting. It is certainly not advisable to use standard pre-printed forms or any agreement that has not been professionally prepared.
What instances are DSA’s most suitable?
These contracts are suitable for companies that wish to employ senior Directors to manage the business. In some cases these Directors may also have some shares in the business, but this contract type is typically most suited to situations whereby the Director is not a majority shareholder and therefore there has to be a framework in place to set out their rights and liabilities vis-à-vis the company.
The Directors Service Agreement is a vital contract that underpins the board room structure of companies throughout the UK. It provides a central role in helping to ensure good corporate governance and stability, whilst ensuring that senior Directors can move between positions with the contractual peace of mind they need.
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The author of this article is LawBrief Ashley Gurr
. Ashley Gurr is an experienced Solicitor who has represented SME clients for many years in the fields of Employment Law, Commercial Property and General Commercial.