What to include in a director's service agreement

With over 7.8 million directorships registered at Companies House, it's clear that appointing a company director is one of the most common — and most important — decisions a business can make.

Yet, despite how routine the process might seem, many companies still rely on vague or outdated contracts that don't reflect the legal and commercial reality of the role. A director's service agreement is more than just an employment contract. It sets out the expectations, responsibilities and protections on both sides — and plays a key role in safeguarding the business if things go wrong.

Getting it right matters. Below, employment solicitor Matthew Irvine looks at the key clauses every director's service agreement should include — and why they're worth taking seriously.

This article offers general guidance only. For legal advice tailored to your company, speak to our solicitors.

What is a director's service agreement

A director's service agreement is a legal contract between a company and a director who is also an employee — usually an executive director. It goes beyond a standard employment contract by setting out statutory duties under the Companies Act 2006 alongside commercial expectations linked to their position on the board.

Companies must keep a copy of each director's service agreement (or written terms of service) at their registered office or inspection location.

It's a vital document for governance, due diligence, and investor readiness — especially where directors are also shareholders or involved in the day-to-day running of the company.

Key clauses to include in a director's service agreement

Every agreement will vary depending on the director's role, level of responsibility, and sector — but several clauses should appear in most cases.

Appointment and duties

The agreement should confirm when the appointment starts, whether it's a fixed or rolling term, and the scope of the role. It should clearly outline responsibilities and reporting lines, and confirm the director's legal duties under the Companies Act — including the duty to act in good faith, promote the success of the company, and avoid conflicts of interest.

Remuneration and benefits

Salary, pension contributions, and benefits such as private medical cover or car allowance should be clearly set out. If bonuses or incentives are offered, the agreement should explain what these are based on  and whether discretion applies. Share options or Long Term Incentive Plans (LTIPs) are often referenced separately but should still be cross-referenced where relevant.

Working hours and location

This section should confirm whether the role is full-time or part-time, and set expectations around location, availability, travel, or hybrid working. If international travel or relocation is likely, this should be addressed upfront to avoid later issues.

Holidays and sick pay

Annual leave entitlements — whether statutory or enhanced — should be detailed, along with any rules on carryover. The agreement should also explain sick pay arrangements and what level of medical evidence may be required.

Confidentiality and IP protection

To protect the business, the agreement should include strong confidentiality clauses that apply both during and after the director's employment. It should also address intellectual property — making clear that any work created in the course of their duties belongs to the company.

Restrictive covenants

Post-termination restrictions are particularly important at board level, where directors typically have access to strategic information and key relationships. Common restrictions include non-compete, non-solicitation of clients, non-dealing, and non-poaching of staff. These must be carefully drafted to be reasonable in scope, duration and geography, or they risk being unenforceable.

Termination and notice

The agreement should set out notice periods required for both resignation and dismissal, whether the director can be placed on garden leave,, and any grounds for summary termination. It should also address what happens to shares or options on exit — either directly or by referencing related agreements such as the articles or shareholders' agreement.

Indemnities and insurance

Directors face personal liability for decisions taken on behalf of the company. The agreement may confirm that the company will maintain Directors' and Officers' (D&O) insurance and clarify whether it will indemnify the director for legal costs or liabilities — subject to the restrictions in the Companies Act.

Outside interests and conflicts

Directors often hold other roles, such as consultancy work or non-executive appointments. The agreement should require them to disclose any such roles and seek board approval where necessary. It should also confirm compliance with the company's conflict of interest policy and relevant legal duties.

Governing law and dispute resolution

The agreement should confirm the governing law — typically England and Wales — and whether any disputes will be resolved in court or through another method, such as arbitration. Including this upfront helps reduce the risk of jurisdictional issues later.

Alignment with other corporate documents

The service agreement should sit alongside — and not contradict — other company documents, including:

• the articles of association
• any shareholders' agreement
• share option or incentive scheme rules
• separate confidentiality or IP assignment agreements

This is especially important where the director is also a shareholder or option holder, as misalignment can lead to disputes on exit.

Working with a law firm that understands both employment law and corporate structures can help ensure the agreement fits cleanly within the wider legal framework — and avoids issues that often get missed when documents are drafted in isolation.

Avoiding common mistakes

Many businesses adapt a standard employment contract or rely on outdated templates. That rarely works for director-level roles. Common mistakes include:

• failing to include Companies Act duties
• missing clauses around share entitlements or restrictions
• using unenforceable restrictive covenants

Getting the terms wrong can create legal and commercial risk — and may make the agreement harder to rely on if the relationship breaks down.

Why it matters

A well-drafted director's service agreement protects the company's interests, provides clarity on both sides and gives you something solid to fall back on if things go wrong. It's also one of the first documents investors, auditors and buyers will expect to see.

Matthew Irvine, head of employment, says:

“A director’s service agreement is one of those documents that only becomes important when things go wrong — but by then it’s often too late to fix. We regularly see companies relying on contracts that don’t cover restrictive covenants, confidential information,  outside interests or even the director’s statutory duties. Taking the time to get the agreement right at the start protects the business, reassures investors, and avoids disputes if the relationship breaks down.”

Whether you're appointing a new executive director or reviewing existing arrangements, it's worth taking the time to get it right. Our solicitors advise clients nationwide, combining employment law and corporate law expertise to ensure your agreements are properly aligned with your company's wider legal framework.