Overview of a Director’s Service Contract

What is a Director’s Service Contract?

A Director’s Service Contract is a contract by which a company hires a director as an employee.

The Director’s Service Contract is a long-form contract with detailed provisions on various aspects of employment.

When drafting a Director’s Service Contract, the employer should be aware of certain statutory provisions in determining the terms of employment, for example, the amount of minimum wage (if applicable), rest days, paid annual leave, statutory holidays, or maximum working hours (if applicable).

Do directors need employment contracts?

A director’s service contract is basically an employment contract between a company and director. It sets out the roles and responsibilities of the director within an organization. So, legally every company needs a service contract to hire a director.

What is included in a service contract?

A director’s service contract is required to appoint a new director to a company. There are some important things to be mentioned in the service contract. I.e.;

Roles and responsibilities: A well-written role and responsibilities in a service contract will help both an organization and the director to abide by their duties in a legal and fair manner.

Term of appointment: Normally a director is hired for a certain term in an organization. So, it is very important to mention these details in a service contract to avoid confusion and disputes.

Director’s remuneration and benefits: A clear breakdown of the director’s remuneration and benefits are required to make both parties aware about the expenses and cost incurred in an organization.

Retirement benefits and pension: A director is entitled to retirement benefits and pension after serving their tenure. A well-written detail about retirement benefits and pension will make a director’s life secure after retirement.

Holiday details: Every director is entitled to certain holidays like sick leave, casual leave, and privilege leave. So, a clear detail about this leave should be mentioned in a service contract.

Non-disclosure agreement: As a director of any company, one has the access to companies’ documents & records including financial statements. So, it’s very crucial to maintain confidentiality for the success of any organization and hence a non-disclosure clause will help an organization to protect its confidential information.

Governing law and jurisdiction: Another important thing to include in a service contract is governing law and jurisdiction of that country. This will help an organization to clarify under which jurisdiction a director is hired.

What are the restrictions on the appointment of directors?

There are different restrictions on the appointment of directors according to the nature of the company. If it is a public company there should be a minimum of 3 directors, if it’s private there should be a minimum of 2 directors. A company can have a maximum of 15 directors according to the company Act, 2013.

Why is a director’s service contract important?

A director’s service contract is a pivotal document that sets out the duties and obligations of the directors and protects the legal rights of both director and the company. These are the various reasons why a director’s service contract is important:

Resolution of disputes: A well-drafted service agreement helps in the resolution of disputes if arise in the future. This will save a lot of time and money for the organization and directors.

Due diligence exercise: It is very crucial to practice due diligence in any organization to assure their employees that the terms are fixed for all staff. This will also help to attract new investors by setting a paradigm of well-organized business processes.

Conclusion

A director’s service contract is a crucial document that demonstrates the roles and responsibilities of a director towards an organization. It can also act as a dispute resolution mechanism in case of any conflict between the director and the business.

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