Gareth Walls, Partner at A&L Goodbody, outlines practical steps to reduce risk on 'The Director’s Service Agreement'.

Gareth writes:

Most employers appreciate the value in having clear terms and conditions, with substantial policies in place for employees. However, many have no such equivalent for themselves, or their director level team. Given their seniority, access to business sensitive information and therefore greater responsibility, it is of course imperative to have a comprehensive, relevant and enforceable document or Service Agreement, in place.

Although there is a common law duty of confidentiality, this should always be reinforced by express terms within a contract of employment, especially with regards to a senior employee in whom the company has presumably placed a high degree of trust and confidence. Traditionally, these terms were drafted widely, with the intention being that a 'shotgun' or 'catch-all' approach would best serve a prudent employer. Recent case law suggests otherwise, and prudent employers would better protect the business by drafting bespoke terms which are clearly relevant to the confidential products, know-how and strategies of the business.

The agreement should also stipulate agreed hours of work, but should be drafted in such a manner that requires the employee to work such other hours as may be required for the proper performance of his or her duties under the agreement.

It is common for directors and other senior employees to hold certain qualifications for the role they have been assigned and in many cases, further training and professional development is needed. Therefore, it is advisable to include a clause that ensures that there is continued professional development as and when required, and that all qualifications needed for the employee to effectively perform their role are met. Further, consider whether the irretrievable loss of a qualification or professional membership should impact the employment, and link that to the disciplinary process.

Bear in mind generally that many directors and senior employees have 'progressed' through the ranks, and while they may have a contract, that contract may be still relevant for junior staff, and will be obsolete for more senior staff as it will probably not deal with confidentiality, working hours, restrictive covenants adequately, or at all.

It is advisable to draft the employee's duties and job title as widely as possible to give the employer maximum flexibility. General duties of a director or senior employee should include acting in the company's best interests, promoting and developing the business of the company, compliance with the Articles of Association and not doing anything that would cause him or her to be disqualified from acting as a director. Statutory duties of directors are quite onerous, and should provide some comfort for employers where properly understood. Given the changes to the Companies Act, and the re-organisation of the Articles, ensure that these still reflect business needs.

If the company has an expenses policy it may be beneficial to refer to this within the Director's Service Agreement, although commonly more latitude is given to senior employees in this regard. The same applies to any health insurance policies, car allowance schemes, bonus schemes, pension schemes etc., such schemes often forming part of a senior employee's contractual benefits. The company should also ensure a robust disciplinary and grievance procedure is in place for directors, which is appropriate for their level of seniority, i.e. perhaps with one level of Appeal as opposed to numerous, which would be practicably unworkable given seniority.

As a director has an impact on the day-to-day management of the company, it is important to have a clause which deals with directors on long-term sick absence. Employers must consider during what period it will continue to pay to the employee full salary, and at what stage it may be reduced to Statutory Sick Pay.

It is advisable for a Director's Service Agreement to include a clause restricting the outside interests of the director during employment due to the demanding and often time consuming nature of such roles as well as the more obvious conflict of interest piece. This may in certain circumstances be extended to family members, especially where there is the potential for 'insider dealing' and abuse of market knowledge. Examples of such restrictions include prohibiting an interest (financial or otherwise) in any other business, trade, profession or occupation.

Of particular importance to the technology industry, but nevertheless beneficial to all types of business, is a clause to ensure that any inventions, processes, designs or products discovered or produced by a director or senior employee is intellectual property belonging to the company.

Traditional protection is governed through 'Restrictive Covenants' which protect non-solicitation of key employees and non-competition with the business post termination. The enforceability of covenants is critical, and bespoke drafting is essential to give any employer some hope of relying on these. They generally operate on grounds of geographic area or length of time post termination. Caselaw on these two concepts is commonplace, but look also at the detail of the wording - frequently the clauses include 'non-dealing with' provisions, which are exclusively onerous, yet are often overlooked (even by lawyers)!

In the event of termination of employment, as well as enforcing a non-compete clause, it would be advisable to include an option to place the director on garden leave, which will effectively ensure that he or she is bound by their duties to the company during this period. A garden leave clause can be drafted in such a way as to require the director not to contact or deal with any clients, agents, or other business contacts of the company, and has the added benefit of elongating the effective period of the employee's restricted period, given that the restrictive covenants do not, or should not run concurrently with the notice period.