Directors hold the most senior position in the company, and so their contracts are an important function. A directors’ contract takes account of their position and their responsibilities. It also takes into account key legal protections to safeguard the interests of the business.
Why Are They Special?
Most directors are employees, and so work under an employment contract called a ‘Directors Service Contract’ or ‘DSC’. This tends to be longer and more detailed than a standard employment contract. It considers extra responsibilities in terms of finance, strategy and risk. A DSC covers standard clauses related to employee rights and entitlements, but also includes further provisions covering matters specific to the role of the director.
Why Do Directors Need Them?
Directors are the highest-paid and hold more responsibility than any other employees in the company. They are responsible for finances, strategy, and the overall running of the company. Directors are also under the responsibilities detailed in the Companies Act 2006, which separates them from senior employees who are not directors. This is to reassure shareholders and stakeholders that the company’s contractual arrangements with its most senior employees are on a sound, professional footing.
As well as this, these responsibilities protect the detailed workings of the company, including confidential technical and brand knowledge. Directors are obliged to keep confidential information secret from competitors; Even after they have left the company’s employment.
Are They Necessary?
DSC’s are extremely important when the director leaves a company. If a director is not fit for purpose, they may remain a director of the company even after the employment contract has been terminated. As well as this, if a director is also a shareholder of the company, they may still be able to attend shareholder meetings after their employment has been terminated. For this reason, it is vital that a good DSC is drafted to be able to completely sever all ties between the director and the company. This is mainly done in 2 ways:
- Directors are expected to give longer notice periods than regular employees, which can be between six and twelve months.
- When a director gives their notice, garden leave provisions are often included. This is because they may lack motivation when required to stay in office during their notice period.. The company may also want the outgoing director to be excluded from knowing any further key decisions and confidential information.
In addition to the use of garden leave, most DSCs contain ‘post-termination restrictions’, also known as ‘restrictive covenants’. However, these are only usually considered to be enforceable if they protect a legitimate business interest. This means restrictive covenants need to be tailored specifically for the director in question.
So, What’s the Verdict?
In short, DSC’s are invaluable to not only Directors, but also the companies they work for. These contracts offer protection for both parties when the time eventually comes for a director to leave. This includes leaving of their own accord or at the company’s request.
Need advice? If you’re wanting some no-nonsense corporate advice on directors’ contracts or restrictive covenants, get in touch. You can contact us on 0330 400 5490, or on our quick form.
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