Director's Contract of Employment: Key Terms in the UK

As your small business grows, appointing a director is a big step - you’re handing someone the steering wheel for day‑to‑day leadership and strategic decisions. That makes the director’s contract one of the most important documents you’ll put in place.

Get this right, and you’ll set clear expectations, reduce disputes, and protect your company from day one. Get it wrong (or skip it), and you could face expensive disagreements about duties, pay, and how to part ways if things don’t work out.

In this guide, we break down what a director’s contract actually is, when you need a directors contract of employment, and the key clauses UK companies should include to stay compliant and protected.

What Is A Director’s Contract?

A director’s contract is the written agreement that sets out the terms on which a director provides services to your company. In most SMEs, this is called a Directors Service Agreement. It covers the director’s role and responsibilities, working hours and exclusivity, pay and bonus arrangements, confidentiality and IP ownership, conflict of interest rules, and how the relationship can end.

It sits alongside your company’s constitutional documents (for example, your Articles of Association) and any shareholder arrangements (such as a Shareholders Agreement). Together, these documents govern how the company is run, how decisions are made, and how disputes are resolved.

Why does the contract matter? Because directors owe legal duties to the company under the Companies Act 2006, and their decisions can bind your business. A tailored written agreement turns those high‑level duties into practical, everyday rules - making it much easier to manage performance, avoid conflicts, and act quickly if the relationship breaks down.

For executive directors (those involved in day‑to‑day management), the director’s contract usually also serves as an employment contract, spelling out employment terms and employment law protections. For non‑executive directors (NEDs), you’ll typically use a letter of appointment with a more limited scope - but it should still cover conflicts, confidentiality, and removal.

Do You Need A Directors Contract Or A Directors Contract Of Employment?

Whether you need a directors contract of employment depends on the nature of the role:

• Executive director: Usually an employee. You’ll want a full Directors Service Agreement with employment terms (hours, holidays, sick pay, notice, disciplinary processes) plus director‑specific obligations (fiduciary duties, conflicts, company property, confidentiality, restrictive covenants).
• Non‑executive director (NED): Usually not an employee. Use a letter of appointment covering scope, time commitment, fees, independence, conflicts, confidentiality, and termination on short notice. NEDs shouldn’t normally receive employee benefits or bonuses linked to day‑to‑day performance.
• Chair: Often a variant of a NED appointment. The contract should set out additional responsibilities (agenda‑setting, board leadership) and how the chair interfaces with the CEO/MD.

In many SMEs, a founder wears multiple hats as a director and employee (and sometimes a shareholder). That’s fine, but each hat comes with different rights and duties. The service agreement should acknowledge this and point to the correct processes for each capacity (for example, employment law for performance issues, board process for director matters, and shareholder rules for equity decisions).

Finally, remember the Companies Act 2006 imposes a specific rule for long service agreements. If a director’s guaranteed term is longer than two years, section 188 requires shareholder approval. Many SMEs therefore use rolling fixed terms or ongoing contracts with a notice period to avoid locking in and to stay compliant.

Key Clauses To Include In A Director’s Service Contract

A good director’s contract is bespoke to your business. However, most UK companies will want to cover the following areas.

1) Role, Authority And Reporting

• Title and duties: Summarise responsibilities, including any regulated functions. Reference a job description that can be updated by the board as the business evolves.
• Authority limits: Set monetary limits for spending, hiring, and signing contracts without further approval. Link to your internal board resolutions for delegated authority.
• Reporting: State who the director reports to (e.g., the board or chair) and the cadence of reporting.

2) Working Time, Exclusivity And Outside Interests

• Hours and location: Clarify working pattern, travel expectations, and remote work parameters.
• Exclusivity: Restrict competing roles and set a process to disclose and approve other directorships or advisory positions.
• Conflicts of interest: Require prompt disclosure of any conflict and outline the approval process consistent with the Companies Act 2006 and your Articles of Association.

3) Pay, Bonus And Benefits

• Salary and fees: Spell out base pay, how and when it’s reviewed, and who approves changes (often the board or remuneration committee).
• Bonus: If you offer a discretionary bonus, set clear performance metrics, discretion wording, and any malus/clawback rights.
• Equity: If relevant, set out share options or vesting separately and align with your Shareholders Agreement. Keep contractual promises consistent with scheme rules.
• Benefits: List applicable benefits (pension, private medical, car allowance) and confirm they’re subject to provider rules and change.
• Pay governance: Be mindful of disclosure and governance around directors’ remuneration - even unlisted SMEs should keep decisions well‑documented.

4) Confidentiality, IP And Company Property

• Confidentiality: Make confidentiality obligations clear, with no time limit for trade secrets.
• Intellectual property (IP): Ensure all IP created by the director in the course of their duties is owned by the company, with moral rights waivers if appropriate.
• Data protection: Require compliance with UK GDPR and company policies when handling personal data.
• Property and IT: Set rules for company devices, security, and return of property on exit.

5) Restrictive Covenants

• Non‑compete: Tailored, reasonable in scope, duration and geography. Typically six to twelve months for senior roles, depending on risk.
• Non‑solicitation and non‑dealing: Prevent poaching or dealing with key clients, suppliers and staff for a defined period.
• Non‑disparagement: Protect brand reputation post‑exit.

6) Term, Notice, Garden Leave And Termination

• Term and notice: Ongoing contract with a clear notice period on both sides, avoiding guaranteed terms longer than two years without shareholder approval.
• Garden leave: Enable the company to keep the director away from the business (and systems) during notice to protect relationships and confidential information.
• Gross misconduct: Set out summary termination triggers to end without notice (e.g., serious breach, dishonesty, regulatory disqualification).
• Post‑termination obligations: Reiterate confidentiality, IP, and restrictive covenants.

7) D&O Protection, Indemnities And Access

• D&O insurance: Confirm your intention to maintain appropriate directors’ and officers’ insurance while the director serves and for a run‑off period.
• Access and indemnity: Consider a separate Deed of Access and Indemnity to provide document access and permitted indemnities within Companies Act limits.

Legal Duties And Compliance To Reflect In The Contract

Directors owe statutory duties to the company under the Companies Act 2006. Your contract should reflect and reinforce these, in plain English, so everyone understands what’s expected day‑to‑day.

• Act within powers: Follow the company’s constitution, including the Articles of Association and board decisions.
• Promote the success of the company: Take into account long‑term consequences, employees’ interests, relationships with suppliers and customers, community and environment, reputation, and fairness between members.
• Exercise independent judgment and reasonable care, skill and diligence: Good governance provisions (clear agendas, papers, and assurance processes) help directors comply.
• Avoid conflicts of interest and declare interests: The contract should require prompt disclosure and abstention or board approval where appropriate.
• Not accept benefits from third parties: Include an anti‑bribery and gifts/hospitality clause and link to your policies.

If the director is also an employee, employment law applies in parallel - think working time rules, holiday pay, discrimination protections, and fair process around performance. Make sure your director’s employment terms sit consistently with your senior Employment Contract standards and staff policies to avoid contradictions.

Finally, data protection is non‑negotiable. If your director will process personal data, the contract should reference GDPR‑compliant behaviours, mandatory policies, and co‑operation with Subject Access Requests and breach procedures.

Appointment, Pay And Termination: Processes To Get Right

Beyond the wording of the contract itself, small companies should pay close attention to process. Good process equals good protection.

Appointing A Director

• Board decision: The board approves the appointment following your constitution. Record the decision and effective date accurately.
• Companies House: File the appointment within the statutory timeframe and keep your register of directors up to date.
• Conflicts check: Ask the incoming director to disclose interests up front and keep your register of interests current.
• Service agreement: Have your Directors Service Agreement signed before any start date or announcement.

Pay And Reward Governance

• Documentation: Link bonuses to measurable company/individual objectives, and record decisions with clear approvals.
• Share incentives: Align option terms with shareholder protections in your Shareholders Agreement and cap table assumptions.
• Disclosure and approvals: Keep careful minutes and follow any consent requirements in your constitution and the Companies Act. This is especially key for service terms longer than two years, which may require shareholder approval under section 188.

Ending The Relationship

• Removing a director: Removal as a director is a Companies Act process (often by shareholder resolution), separate from ending employment. Your contract should explain this split to avoid confusion.
• Notice vs summary dismissal: Use garden leave and company property return provisions to secure a smooth and safe exit.
• Post‑termination restrictions: Confirm the covenants that continue after termination and any carve‑outs or waivers that may apply.
• Documentation: Ensure Companies House filings, internal registers and banking/IT permissions are updated promptly.

Practical Steps And Common Mistakes To Avoid

Here’s a simple, practical checklist to help you implement a robust director contracting process in your small business.

Director Contract Checklist

• Decide whether the role is executive (employment) or non‑executive (appointment) - and use the right agreement for each.
• Map the interaction between the contract, your Articles of Association, any Shareholders Agreement, and your board delegation framework.
• Set authority limits for spending and signing, and document them in board minutes or policy.
• Build in robust confidentiality, IP assignment and data protection obligations.
• Draft proportionate restrictive covenants tailored to your sector, territories, and key relationships.
• Design a sensible notice period and include garden leave and property return clauses.
• Put D&O insurance in place and consider a Deed of Access and Indemnity to the extent permitted by law.
• For equity, keep terms consistent with your cap table and shareholder documents; avoid promising what scheme rules can’t deliver.
• Minute all approvals and retain signed agreements and policy acknowledgements centrally.

Common Pitfalls

• No written agreement: Verbal understandings are hard to enforce and rarely cover IP, confidentiality, conflicts or exit terms adequately.
• Copy‑paste templates: Generic templates often omit key UK requirements (like shareholder approval triggers) and poorly drafted covenants that won’t stand up.
• Mixing roles: Treating director removal and employment termination as the same thing - they are not. Follow the right process for each.
• Unclear authority: Failing to define decision‑making limits can lead to unexpected liabilities or binding commitments.
• Risky bonus clauses: Promises that create unintended entitlements or disputes. Keep bonus terms clearly discretionary (if that’s the intention), with objective criteria and governance.
• Over‑broad restrictions: Heavy‑handed covenants risk being unenforceable. Tailor them to your legitimate business interests.

If this feels like a lot to juggle, don’t stress - a short investment in a tailored contract and clean process can save you major headaches later. We help SMEs put in place proportionate, plain‑English agreements that work in the real world and align with your governance documents and practical board processes.

Key Takeaways

• A director’s contract sets day‑to‑day expectations, locks in confidentiality and IP ownership, and gives you practical levers (like notice, garden leave and covenants) to manage risk.
• Use a Directors Service Agreement for executive directors with employment terms, and a short appointment letter for NEDs. Be mindful of the different legal frameworks at play when someone is both a director and employee.
• Keep the contract aligned with your Articles of Association and any Shareholders Agreement, and record approvals properly through clear board resolutions.
• Build in sensible pay, bonus and equity terms with good governance, and stay aware of disclosure and approval requirements for directors’ remuneration.
• Protect the business on exit with notice provisions, garden leave, tailored restrictive covenants, and return‑of‑property and confidentiality obligations that survive termination.
• Consider D&O insurance and, where appropriate, a Deed of Access and Indemnity, within the limits of UK company law.
• Avoid DIY documents - a tailored, UK‑compliant contract will reflect your structure, sector risks and growth plans, and help you enforce your rights if things go wrong.

If you’d like help drafting a Director’s Contract that fits your business and aligns with your governance, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no‑obligations chat.