Employment Contract or Service agreement?

Is this an employment contract or a service agreement?

This is a question we are often asked!

Essentially they are the same thing. They are both contracts between an employer and an employee which outline the rules which govern the employment relationship (e.g. the hours of work, pay, and holiday provisions).

Contracts usually need to be read alongside the company/employee handbook which often contains all the company procedures and policies (i.e. grievance procedures). The policies and procedures are usually non-contractual which allow the company to depart from them should the circumstances require this.

Employment Contract

An employment contract can be either written or implied and can be drafted for any level of employee. Usually a company will have a standard contract with certain clauses (e.g. restrictive covenants) which can be either be removed or left in depending on the status of the employee and the company needs.

Director’s Service agreement

A Director’s Service Agreement (DSA) on the other hand will be a formal document outlining all the usual details but with greater focus on the performance and service quality required by the company.

Following the economic downturn in 2008 there has been greater emphasis placed upon the exact terms of DSAs following concerns that directors were getting away with too much without any proper governance.

There is a growing body of regulation which affects both private and listed companies which impose a framework within which directors terms need to be agreed. The Companies Act 2006 imposes various duties upon such agreements including:

  1. Any DSA longer than two years in length requires shareholder approval;
  2. A copy of the DSA must be kept at the registered office for at least one year following its termination or expiry;
  3. Termination payments for loss of office made to a director which exceed £200 cannot be made without shareholder permission; and
  4. That any provision which attempts to exempt a director from liability for negligence, default, breach of duty or breach of trust in relation to the company is void.

DSAs are often used to extend further rights than a regular employment contract and can deal with executive share option schemes and annual bonus schemes. DSAs will also likely greatly detail the processes of termination (i.e. the termination events and the compensation schemes in place to deal with the different methods of termination).

It is clear that the provisions surrounding DSAs can be quite onerous and do require special consideration and attention for anyone presented with one to sign.

We would always advise that you seek independent legal advice if you have either been offered a DSA or you are a company considering what type of contract to offer to your employees.

If you would like to discuss employment contracts or a directors service agreement, please give Levi Solicitors specialist employment team a call on 0113 244 9931.

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