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What is a Director’s Service Agreement?
A Director’s Service Agreement or Contract is a contract by which a company hires a director as an employee. It 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 specific 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).
It’s more detailed than a director’s appointment letter and includes comprehensive information regarding the director’s responsibilities, term of service, compensation, benefits, and grounds for termination.
It may also include clauses related to confidentiality, non-competition, and non-solicitation.
Do directors need employment contracts?
A director’s service contract is an employment contract between a company and a director. It sets out the roles and responsibilities of the director within an organisation.
Legally every company needs a service contract to hire a director.
What is included in a service contract?
Roles and responsibilities
A well-written role and responsibilities in a service contract will help an organisation and the director abide by their duties legally and fairly.
Term of appointment
Normally, an organisation hires a director for a specific term, so it’s important to mention these details to avoid confusion and disputes.
Director’s remuneration and benefits
A clear breakdown of the director’s remuneration and benefits is required to inform both parties about the expenses and costs incurred in an organisation.
Retirement benefits and pension
A director is entitled to retirement benefits and pension after serving their tenure.
Holiday details
Every director is entitled to certain holidays like sick, casual, and privilege leave. A clear breakdown of the leave should be mentioned in the contract.
Non-disclosure agreement
A director of any company has access to company documents and records, including financial statements. It’s crucial to maintain confidentiality for the success of any organisation, and a non-disclosure agreement (NDA) will help protect confidential information.
Governing law and jurisdiction
Another essential thing to include in a service contract is the country’s governing law and jurisdiction, which will help an organisation clarify why a director is hired.
What are the restrictions on the appointment of directors?
There are different restrictions on appointing directors according to the company’s nature.
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.
A director must be over 18 years old.
Why is a director’s service contract important?
A director’s service contract is a crucial document that sets out the duties and obligations of the directors and protects the legal rights of both director and the company.
There are various reasons why a director’s service contract is important:
Resolution of disputes
A well-drafted service agreement helps resolve disputes if they arise in the future, saving a lot of time and money for the organisation and directors.
Due diligence exercise
Practising due diligence in any organisation is crucial to assure employees and attract new investors by setting a paradigm of well-organised business processes.
What to include in a Director’s Service Agreement
- Job Title and Duties: Describe the director’s role, responsibilities, and authority within the company.
- Term of Service: Specify the start date of the director’s appointment and the length of their term.
- Remuneration and Benefits: Details of the director’s salary, bonuses, expense allowances, and other benefits should be clearly stated.
- Termination: Define the circumstances under which the director’s service may be terminated and any notice period that must be given.
- Restrictive Covenants: These are clauses that restrict the director’s activities both during and after their tenure to protect the company’s interests. This could include confidentiality, non-competition, and non-solicitation clauses.
- Board Meetings and Commitments: Details about the frequency of board meetings, attendance expectations, and other commitments can also be specified.
- Conflict of Interest: Clauses that require the director to disclose any potential conflicts of interest.
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