We often get asked the difference between these and essentially a service agreement is a type of contract.
A contract of service can be express or implied and oral or in writing between an employer and an employee. An employment contract is a contract of service. Someone working under a contract is entitled to certain statutory rights, such as statutory redundancy and maternity payments and protection against unfair dismissal. Alternatively a contract for services is where the parties are not employer / employee, such as a contract between a company and a self employed consultant.
For a contract of employment to arise there must at least exist the elements of personal service / mutuality of obligations / control (For a full breakdown of these factors please see here)
Typically, a contract is the legal document outlining the services provided, duration, cost, resources etc for an individual’s employment. A contract can be drafted for any level of employee, including juniors as well as directors; however where senior directors are concerned it is becoming increasingly popular to put them on a service agreement.
A service agreement can focus more on the performance metrics and service quality agreed to by both parties, and in that respect is often much more onerous than a general contract. Over the last few years directors service agreements have received a lot of attention on the basis that litigation between company’s and exiting directors tend to depend on the drafting of them.
A fundamental principle of English law is that parties to a contract are free to agree whatever terms they decide between them are appropriate. However, where directors’ service agreements are concerned, there is a growing body of regulation for both private and listed companies which imposes a framework within which a director’s terms need to be agreed.
Similarly to a contract, a directors’ service agreement will usually address most of the main terms of the director’s employment but will often need to be read alongside the company’s staff handbook (which should contain all company policies and procedures). Any pension plan, executive incentive plan rules, life insurance and other benefits documentation will be included.
A service agreement will usually refer to the duties owed by the director to the company. The common law imposes fiduciary duties and a duty of care and skill on all directors. The Companies Act 2006 also now imposes statutory duties on directors as well. Directors of listed companies are also subject to further restrictions with regard to dealing in the company’s securities and rules with regard to disclosure of transactions in the company’s shares.
Directors’ service agreements often extend further rights than contracts as they deal with executive share option schemes and annual bonus schemes. All these rights must be dealt with on termination of the agreement. There are two approaches to termination of such an agreement; it will either provide that on termination all the directors rights automatically lapse, or will provide different exit strategies for a ‘good leaver’ or ‘bad leaver’ (which would be defined but will usually be by reason of gross misconduct).
If you are unsure whether your employees should be on contracts or service agreements do not hesitate to contact Levi Solicitors Employment Department as we can advise you and assist with drafting.
Alternatively we can assist you if you have been offered a contract or service agreement and would like advice on the terms and obligations within it.
Author: Crystal Bolton, Levi Solicitors LLP